Upheaval at Mount Lucas Management Corp., Princeton, N.J., has set back the firm and the managed futures industry in their efforts to garner institutional assets.
In the course of weeks, Mount Lucas lost its most visible marketing person, Alan Kaufman; its flagship client, Eastman Kodak Co.; and a much smaller but respectable account with Federal Express Corp. Coincidentally, Edward Baker, a key person in a Mount Lucas managed futures joint venture with BARRA Inc., Berkeley, Calif., left BARRA for Alliance Capital Management Inc., New York.
Not only did Mount Lucas lose what industry sources say was $300 million in assets under management from Kodak, but also, from a marketing standpoint, it lost a respected, long-term client - an ideal model for selling managed futures. (While Federal Express officials in Memphis, Tenn., declined to comment, Grant Schaumburg, president of Mount Lucas, confirmed FedEx had terminated the firm.)
Mr. Schaumburg said the firm will survive without Rochester, N.Y.-based Kodak and Mr. Kaufman, who was a partner. "We will be in business for the foreseeable future. We are obviously trying to fill a pretty big divot," Mr. Schaumburg said, referring to Kodak's decision to limit its derivatives exposure (Pensions & Investments, July 10). Ironically, the loss of Kodak comes at a time when other solid prospects are materializing, he said.
Mount Lucas is left with about $45 million under management, which, with leverage, controls between $150 million to $200 million, he said. Mr. Schaumburg said additional, unleveraged allocations totaling $100 million are under contract, although he declined to say which investors signed them.
While the loss of Mr. Kaufman is significant, Mr. Schaumburg said the parting arose from differences in business philosophy, and was an amicable one. "Alan is a brilliant man, with unbelievable energy, (and) great resources," he said. To go into more detail regarding the split would be beyond what Mr. Kaufman would want, he said. Mr. Kaufman also declined to comment beyond saying his departure was related to a difference of opinion regarding the direction of Mount Lucas.
Mr. Schaumburg said the founding partners of the firm are still in place at Mount Lucas, as are other employees with several years of experience.
Gary Robertson, head of alternative investments for Callan Associates Inc., San Francisco, said that given the unique nature of managed futures, the loss of a big client at a firm like Mount Lucas shouldn't greatly affect its ability to do business. "They are a big fish in a small pond," he said. Any firm considering managed futures would have to consider Mount Lucas, taking into account its situation with Kodak, he said.
But there doesn't appear to be a lot of money going into managed futures; although Callan is contacted probably once every two weeks to provide different types of information on managed futures, full-blown searches are rare, he said. With the Virginia Retirement System ending its $640 million managed futures program about a year ago, and now Kodak's pull-out, it seems more money is going out of managed futures than going in.
Industry data regarding the amount of tax-exempt assets under management in managed futures is not complete. Firms said to have a significant amount include commodity trading advisers such as Campbell & Co., Baltimore, and RXR Capital Management, Stamford, Conn., and managers-of-managers such as Glenwood Trust, Chicago, Hart-Bornhoft Group Inc., Denver, and Kenmar Institutional Investment Management L.L.C., Rancho Santa Fe, Calif.
Plus, both the U.S. and Canadian money management operations of SEI Corp. Wayne, Pa. are continuing with marketing products tied to the BARRA/MLM Index, an index that uses a simple trend following futures system to try to replicate the returns of managed futures. Neither of those efforts has produced clients yet.
Many in the industry wonder why Mount Lucas was unable to use its relationship with Kodak to get hired more than it did. Mr. Schaumburg said: "It's a long, hard process to jump-start a market that did not exist."
He said that when Mount Lucas first got the Kodak account, the partners naively thought others would steadily sign on.
"There are a lot of hurdles to be overcome because it (managed futures) is so different from stocks and bonds," said Callan's Mr. Robertson. "How do you measure performance?" What controls do you use, he asked. "They have to be tougher than for a traditional stock and bond portfolio."
On top of all that, "returns haven't been that good lately," Mr. Robertson said.
Others in the industry disagree that managed futures growth has stalled. They say that despite, similar claims made in past years, institutions increasingly are interested in managed futures.
Richard Pike, president of RP Consulting Group Inc., St. Petersburg, Fla., a managed futures consultant, said: "I'm not that concerned" about Kodak's exit from managed futures. The Virginia Retirement System's killing of its managed futures program, of which Mr. Pike was the consultant, didn't affect the industry or his firm severely, he said. Mr. Pike is the managed futures consultant for the San Diego County Employees' Retirement Association, which is going ahead with the expansion of its managed futures program to about $110 million in assets (P&I, June 12).
"I'm sure it will have a negative impact on Mount Lucas Management, and I don't like that," he said. But it won't affect what RP Consulting does, he said.
Mr. Pike said he couldn't name names, but there are some potentially large requests for proposals that are likely to be going out soon for managed futures managers. Meanwhile, a prominent managed futures firm, John W. Henry & Co. Inc., Westport, Conn., just stepped into the institutional market with its offerings of low-fee, unleveraged managed futures products (P&I, July 10).
One thing holding back the flow of assets from institutions is the booming stock and bond markets, said David Love, president of Kenmar.
"It's hard for the managed futures industry to defend itself" when stocks and bonds consistently produce strong returns, he said. If the market suffers a severe downturn, such as when stocks fell almost 43% from January 1973 to September 1974, the value of managed futures will be seen, he said.
Another problem is fees, perceived to be higher than for traditional managers. Mr. Schaumburg said the industry has not done a good job of conveying what fees for managed futures are in terms that are standard to the pension market.
He noted that, for Mount Lucas' active leveraged product, fees are about 25 basis points on the total investment exposure plus 20% of any profits beyond the returns in the BARRA/MLM Index. But within the managed futures industry, he said, that fee would be conveyed as a 1% fee (based on the amount used for margin requirements) plus the 20% performance fee. Mount Lucas offers a so-called passive managed futures product, based on the BARRA/MLM Index, and an active product that uses eight in-house systematic trading systems.
He said Mount Lucas' approach to managed futures combined with its experience managing institutional assets makes it best suited to succeed in the institutional arena.
Without the large Kodak account, the firm has less time to find out if that's true.
