Clients view money managers apart from tainted parents

Denise Nappier
Denise L. Nappier expects J.P. Morgan Chase to 'take concrete steps' to ensure compliance in the future.

Banks' admitted wrongdoing seems to have little to no effect on clients of their asset management businesses.

Banks such as Deutsche Bank AG, Credit Suisse Group AG, J.P. Morgan Chase & Co. and UBS Group AG have recently admitted to violating U.S. securities, banking or other laws. But while some critics and lawmakers are fuming over giving money managers affiliated with such banks free passes in the form of exemptions from the Department of Labor and waivers from the Securities and Exchange Commission, many clients are less concerned.

“From our perspective, these firms have various businesses within their corporations and they're separated,” said Vicki Hearing, spokeswoman for State of Wisconsin Investment Board, Madison. ”It's an individual section of their company.”

SWIB, which oversees $106.2 billion, in April committed $150 million to UBS Trumbull Property Fund managed by UBS Global Asset Management and $120 million to J.P. Morgan Strategic Property Fund managed by J.P. Morgan Asset Management (JPM). Both are open-end, core real estate funds.

In May, UBS Group AG agreed to pay a $203 million penalty after pleading guilty to manipulating the London interbank offered rate and other benchmark interest rates. Also in May, J.P. Morgan Chase was one of four banks that agreed to settle charges of conspiring to manipulate the price of U.S. dollars and euros exchanged in the foreign-exchange spot market.

In May 2014, Credit Suisse pleaded guilty to helping U.S. citizens avoid paying taxes. In April of this year, Deutsche Bank agreed to settle charges that it manipulated the London interbank offered rate.

Separate entity

Ian Toner, director of strategic research at Seattle-based consultant Verus, said unless there's evidence the money management division was involved in the wrongdoing the investment bank admits, institutional investors should treat the money management arm as a separate entity.

“The asset manager and investment bank are typically very separate,” Mr. Toner said. “The person who's trading foreign exchange is not the person who's worrying about foreign exchange for the asset manager. In many cases, they're in different offices, sometimes even in different countries.”

The asset owners that Pensions & Investments spoke with shared this sentiment.

David Peden, chief investment officer of Kentucky Retirement Systems, said in an e-mail “the unit of Deutsche Bank that was charged in the LIBOR scandal was DB Group Services U.K. To my knowledge, that is a separate group than the group responsible for the Private Equity Secondary Opportunity Fund.”

The $16 billion pension Frankfort-based fund in September committed $100 million to DB Secondary Opportunities Fund III, a private equity fund managed by Deutsche Asset & Wealth Management.

Mr. Peden added: “While we are not happy to see negative headlines associated with an affiliated entity of a business partner, as long as the decision makers we work with are not directly involved with the wrongdoing, we will put the situation into the appropriate context, and at this time we see no issues continuing to work with the Deutsche Bank business partners we have chosen.”

In June, Connecticut Treasurer Denise L. Nappier, principal fiduciary for the $29.6 billion Connecticut Retirement Plans & Trust Funds, Hartford, committed up to $150 million to Nutmeg Opportunities Fund II, a fund managed by JPMAM's private equity group that would target opportunistic private equity investments in Connecticut companies.

Ms. Nappier told P&I in an e-mail that although she was “acutely aware of the issues facing the bank, including the most recent revelations,” there “are no current plans to terminate our commitment or to place J.P. Morgan Chase on watch.”

She added: “We have engaged J.P. Morgan Chase over the past several years, raising serious concerns. We expect the firm to learn from its past mistakes and take concrete steps to ensure future compliance.”

Melissa Vince, a spokeswoman for Ohio Bureau of Workers' Compensation, Columbus, also said in an e-mail that J.P. Morgan's recent guilty plea to the currency-rigging probe charges will have no impact on the $23 billion State Insurance Fund's $725 million investment with JPMAM in active domestic core-plus fixed income.

“The mandate is for domestic bonds and does not include foreign-exchange exposure on equities,” Ms. Vince said.

Consultant Michael Rosen, principal and CIO of Angeles Investment Advisors, Santa Monica, Calif., told P&I that although he hasn't observed any repercussions to the money management arms from the violations that occurred elsewhere in those organizations, “these violations should raise questions about the nature of the partnership that investors have with managers.”

“To my knowledge, there's no evidence of wrongdoing within the asset management groups. So there's logic to separating the asset manager from the rest of the organization,” Mr. Rosen said. “But it's not completely apart. There is a connection.”

Mr. Rosen added that this connection “is providing profits to a larger organization” that has been involved in wrongdoing, which is another factor investors should consider when hiring a money manager.

“Asset owners need to ask: Will this impact the team I'm investing with, and is this a cultural issue?” said Tim Barron, CIO at consultant Segal Rogerscasey in Darien, Conn.

Mr. Barron added: “There is the moral element. If (the banking firm has) done all these terrible guilty things, doesn't that mean that (the) organization at its core is flawed? Truthfully, though, these organizations are so massive that I think it's exceedingly rare that one can translate this into, "OK, Firm X is bad.'”

This article originally appeared in the June 15, 2015 print issue as, "Clients view managers apart from tainted parents".