NEW YORK - In a significant strategy shift, Bankers Trust Co., which manages $180 billion and is known primarily as an index fund manager, has begun to boost its active management and the use of investments based on derivative securities.
The shift has resulted in movement of professionals previously involved with proprietary investment, trading or derivatives to the institutional investment management operation.
Others involved with traditional investment management and indexing - including H. Kent Atkins, managing director, who had headed the investment management group, and Kathleen Condon, managing director in charge of structured investments - have taken on primarily client relationship responsibilities.
The shift also entailed the merger of the investment management group and the funds management unit into one global investment management division, and the elimination of the London-based international active equity investment group.
The goal is to make Bankers Trust a top-drawer active manager without affecting its passive management, GIC management and reserve management operations, said Ivan Wheen, managing director and head of global investment management, New York.
The shift could be as important to Bankers Trust's investment management operations, and its investment management clients, as its adoption of index fund management in the late 1970s.
While Bankers was late to indexing, behind Wells Fargo Bank (now Wells Fargo Nikko Investment Advisors) and American National Bank and Trust, it became the second largest manager of tax-exempt assets with $130 billion under management at year-end 1993, a large part of it in passive products.
Bankers Trust is one of the world's leading money managers, with more than $180 billion total assets under management, about $76 billion of that in indexed products. Only $16 billion is managed in active equities, while $43 billion is run in reserve investments (cash holdings of corporations, central banks and pension funds) and $10 billion is in GICs.
Outside of institutional asset management, Bankers has been a leader in the development of derivative securities, arbitrage and proprietary trading strategies for itself and for institutional and individual clients.
Some of those securities and strategies now will lead to new investment vehicles - such as enhanced index funds - for pension funds and other institutional clients, Mr. Wheen said.
While such investments offer the potential of higher risk-adjusted returns for clients, they often involve upfront fees, performance fees and sometimes embedded options.
"We believe the (investment management) industry is going through a period of tremendous evolution," said Mr. Wheen, a 36-year-old Australian who previously headed Bankers Trust's global trading in Europe and the development of funds management worldwide from London.
The bank has identified investment management as an area in which it wants to grow, Mr. Wheen said, so it has started to invest a lot of time there.
He noted Bankers Trust has a strong reputation in proprietary trading, risk management and derivatives, and now has taken some of the best people out of those areas and put them into investment management. There is an opportunity for good ideas to migrate from those areas into investment management, he said.
Mr. Wheen said that by using new tools, some of which have come from the proprietary trading and derivatives areas of the bank, it is now possible to deliver a whole new family of investment vehicles.
He cited a convertible bond arbitrage hedge fund that came from the bank's global markets area. The fund uses derivatives to remove almost all of the systematic risk, he said. The fund will close in a few weeks "fully subscribed." He declined to say how much money would be invested through the fund.
A second new fund - world equities - uses an asset allocation process based on purchasing-power parities, with an active overlay. A lot of the trades use derivatives rather than actual stock purchases, he said.
Some investment experts worry that the push toward derivative-based strategies is backed by a more transaction-based approach that ignores the long-term relationships in the pension investment business.
One source, who asked not to be named, said Bankers' new management believes "product performance is almost the only issue a pension fund looks at." Bankers' management believes if they create a quality product, they can price it high, and it doesn't matter who runs it, the source said.
However, Mr. Wheen said: "We want to build a long-term reputation that's very strong in investment management, and that comes down to performance and client servicing. Client servicing is more than just selling. It's working out ways to help customers and coming up with solutions to their problems. We are very keen on providing performance in a context. People have been looking at performance without considering risk."
Trading has become increasingly important at Bankers, as it has at other banks. Bankers Trust reported $1.6 billion in revenue last year from trading activities, and $703 million from fiduciary and funds management.
The opportunity to integrate derivatives into investment management came last spring when Vice Chairman Edward Lesser, who had built Bankers' investment management operation, announced he would retire.
At the same time, Bankers merged two groups - investment management, which handled institutional investing, and funds management, which handled foreign exchange trading and cash management. The merger resulted in the shake-up in investment management responsibilities.
The key changes include the appointment of professionals with derivatives backgrounds to head key investment management slots.
Mr. Wheen, who joined Bankers Trust in its Sydney office in 1980 and later moved to London to oversee global trading and funds management, was appointed to head the new combined unit, called Global Investment Management. He also oversees equity investment management. Mr. Wheen reports directly to President Eugene B. Shanks Jr.
Win J. Neuger, managing director, a fixed-income derivatives expert who had headed all active management, now oversees fixed income, balanced and reserve investing. The change was Mr. Neuger's decision, said Mr. Wheen.
Lisa Polsky, managing director, remains responsible for derivatives and hedged products.
Meanwhile, traditional investment professionals were moved into client relationship areas.
Mr. Atkins now is managing director-global investment management; he had been chief investment officer. Ms. Condon, formerly managing director responsible for structured investments, is now managing director-strategic advisory group. And, Jonathan Lubran, formerly head of the London office, is now managing director-strategic advisory group, as is Rick Nelson, formerly in charge of global quantitative investments.
Also, Bankers merged its London-based international active equity team into its New York international portfolio unit, effectively eliminating the strong-performing London group. Tony Thomson, chief investment officer in London, left as a result. In total, about 40 positions have been eliminated, mostly in the London office.
Consultants familiar with the changes generally applauded. Mark Ahern, managing director-international investment group at SEI Corp., Wayne, Pa., said Bankers Trust has always had difficulty with synergy among its different groups.
Katherine Higgins, U.S. director of asset consulting at TPF&C, said Bankers Trust had been very smart to get senior people such as Messrs. Atkins and Nelson and Ms. Condon involved in introducing the new products to its current client base. "These people have wonderful relationships with their clients. Every door in town will be open to them."
