CHICAGO - The departure of Stein Roe & Farnham Chairman Timothy Schlindwein is adding uncertainty to the firm's immediate ability to attract new business in the institutional investment community.
Mr. Schlindwein resigned Sept. 29. His move is the latest in a 21-month exodus of at least 15 professionals - including four who left in September and expect to take more than $1 billion in assets with them - in an industry in which significant employee turnover always raises a red flag.
"They've got to get their act together pretty quick," said Jack Marco, president of Marco Consulting Group, Chicago, a consulting firm specializing in Taft-Hartley funds, several of which use Stein Roe.
Any time there is significant changes in personnel, a consultant is going to track the performance of a firm a little more closely than it normally would, Mr. Marco said.
Mr. Schlindwein said he resigned because he has accomplished what he set out to do at Stein Roe, and it was time to move on.
Among those who have left within the past year are: Richard Press, senior vice president in insurance investment management, to Wellington Management Co., Boston; Mark Newlin, senior vice president in fixed income to Harris Investment Management Inc., Chicago; and three senior vice presidents - Ralph M. Segall, C. Alfred Bryant and Jonathan C. Hamill - who are forming an investment firm this month. The new Chicago-based company, called Segall, Bryant and Hamill, is being formed with the Voyageur Cos., Minneapolis.
Mr. Segall said the three could take $1.2 billion in tax-exempt and high-net-worth assets with them, although they will have to pay a negotiated fee to Stein Roe for those assets. Mr. Segall also may remain involved with the management of Stein Roe's Prime Equity fund, which he managed before he resigned.
Stein Roe's total assets as of Aug. 31, not taking into account the loss of any assets to Segall Bryant, were $26.6 billion, including $5.8 billion in tax-exempt assets, $6.9 billion in mutual funds, and $4.1 billion in high net-worth assets.
The $380 million University of Tulsa Endowment Fund is one client moving assets to Segall Bryant, according to Warren Henshaw, director, endowment and investment. Mr. Henshaw said a decision was made to move its $10 million in large-capitalization growth equities to the new firm before any knowledge of Mr. Schlindwein's resignation.
In addition to the departures, while Stein Roe's mutual fund performance has flourished, its separate account performance in equities has lagged. According to Pensions & Investments' Portfolio Evaluation Report, Stein Roe's large-cap growth equity separate accounts finished in the eighth decile for the first six months of 1994, and in the eighth, ninth, ninth and ninth deciles respectively for the one-, two-, three-and five-year periods ended June 30.
In addition, pension, insurance company and mutual fund clients have terminated Stein Roe, or reduced their allocations, in recent weeks, as reported in Pensions & Investments and P&I Daily. Included are:
The Los Angeles County Employees' Retirement Association, Pasadena, Calif., where $200 million was taken from a $600 million assignment, with the balance under review;
Corcoran Gallery of Art, Washington, which terminated Stein Roe for a $2 million account; and
United Financial Management, Toronto, which terminated Stein Roe as a subadviser for a $25 million (Canadian) mutual fund.
The number of departures "raises questions about the structure of the organization itself," said Michael Beasley, a former Callan Associates Inc. consultant now a managing director with Strategic Investment Solutions Inc., San Francisco.
But executives from Stein Roe and its parent, Liberty Financial Cos., Boston, say most of the turnover at the firm stems from the expiration of non-compete clauses among some of the firm's former partners, who sold out of the company in 1989 and 1990, but couldn't leave the firm until recently. Also, some of those same executives who have left the firm might not be comfortable with the new direction of the firm, which is more of a unified approach, they say.
The Stein Roe executives say Mr. Schlindwein's departure is not as noteworthy as when Hans Ziegler, president and chief executive of Stein Roe, replaced Mr. Schlindwein as chief executive in May. At that time, Mr. Ziegler took over the day-to-day operations of running the firm.
Kenneth Leibler, president of Liberty Financial, said most of the people leaving probably would have left during the eight-year period since Liberty made its first investment in Stein Roe had there not been non-compete clauses in place. Now that the clauses have expired, it seems like an unusual amount of employees are leaving, he said.
Mr. Ziegler said most of the shakeout has taken place. More importantly, he said, senior management in place - Mr. Ziegler; Timothy Armour, president of the firm's mutual fund unit; and N. Bruce Callow, president of the firm's high-net-worth division - is a cohesive group that isn't going to be leaving the firm.
Stein Roe also is searching to fill the new position of chief investment officer, looking for someone widely recognized and respected in the industry, Mr. Ziegler said. Russell Reynolds Associates Inc., New York, is assisting with that search.
Mr. Armour said the attitude of Stein Roe employees and their ability to adapt to change is much better now than it was when he joined the firm about two years ago.
He said the departure in December of Roger Bransford, who had been president of the institutional unit, probably was a result of Mr. Bransford wanting to effect change quicker than Stein Roe's employees wanted.
Mr. Bransford declined comment but said in December his departure was caused by a disagreement over the future of Stein Roe.
Mr. Bransford was the person who brought Mr. Armour to Stein Roe to work on mutual funds, an area that could be seen as a bright spot for the firm.
Attila Toth, executive vice president for mutual fund consultant Portfolio Evaluation Inc., New York, said Stein Roe's mutual fund performance has been impressive. He said the majority of the funds have outperformed peer group averages on a five-year trailing return with slightly more volatility as measured by standard deviation.
Stein Roe also participates in mutual fund retail distribution networks sponsored by Charles Schwab & Co. Inc., San Francisco, and Fidelity Investments, Boston. The move has boosted asset growth for Stein Roe, according to Mr. Armour.
In addition, Mr. Armour said the firm is getting a good response from its relatively new asset allocation service for defined contribution clients and mutual fund investors with more than $50,000 to invest.
Nonetheless, with personnel changes comes increased scrutiny from investment consultants, which can make getting hired or retained more difficult if performance is not up to par.
Mr. Beasley of Strategic Investment Solutions said the investment business is art, not science. A critical component of that art is the people involved in it.
And even if turnover at an institutional manager slows, Mr. Beasley said it's not unusual for it to take two or three years for a firm to get back on track, as far as potential clients and their consultants are concerned.