ATLANTA - Trustees for the $513 million General Employees' Pension Fund wanted to hire an emerging money manager as part of a $300 million fixed-income search.
They gave about $25 million to Peachtree Asset Management, a local firm managed by African-Americans with about $200 million under management. Two mainstream firms - Scudder, Stevens & Clark and UBS Asset Management, both of New York - received about $150 million and $130 million, respectively.
But Peachtree isn't a traditional emerging firm.
Indeed, it's a wholly owned subsidiary of New York-based Smith Barney Asset Management Group, a multibillion dollar investment adviser built on seven independent, wholly owned units; the largest manages $55 billion. The group is owned by an even bigger financial services company, Hartford-based The Travelers Corp. Peachtree's executives are Smith Barney employees.
Representatives of Peachtree and Smith Barney said they never represented Peachtree as a minority or emerging manager. But the city of Atlanta and its consultant, New Orleans-based Washington Hackett Poitevien & Co., did.
"There has been confusion in the way we've been described, and the fact that we are black throws people off," said Lamond Godwin, Peachtree's chief executive officer.
Mr. Godwin added to the confusion. He initially said that Peachtree wasn't selected by Atlanta as an emerging manager. Later he said the firm wants to be and should be viewed as an emerging manager, given its small assets base and short time in business.
Thomas Pulling, president of Smith Barney Investment Advisors, which oversees Peachtree, said the parent's ownership of the subsidiary is made clear to all.
"We didn't want to be in the set-aside business," he said. "If people want to look at us in that manner, that is their own perception."
Messrs. Pulling and Godwin made it clear Peachtree wasn't in business merely to pursue emerging manager business; its creation is consistent with the Smith Barney Asset Management Division business plan.
The emergence of ownership structures like Peachtree concerns many in the emerging manager community. They fear the spirit of emerging manager opportunities is being perverted. They wonder whether other large money managers will duplicate Peachtree's structure. They question who would staff these subsidiaries. Atlanta's trustees made no secret that Peachtree appealed to them because its management was black.
"From the perspective of (the National Association of Securities Professionals) that kind of structure clearly flies in the face of an emerging manager program," said Alphonso Tindall, NASP chairman. Mr. Tindall emphasized he was speaking about the structure and not Peachtree because he was unfamiliar with the company's ownership.
"That seems to be a way of getting in the back door when you couldn't get in the front door," said Mr. Tindall.
Edward H. Seidle, president of Anvil Institutional Services Inc., a New York brokerage firm, and a former Securities and Exchange Commission attorney, said: "As a legal matter, it's not an emerging firm. You have to attribute the assets to the parent, and it is not an emerging firm."
Christian Washington, principal with Atlanta's consultant Washington Hackett Poitevien & Co., agrees that Peachtree is a new development on the emerging manager landscape. But he considers the inclusion of Peachtree in searches for emerging managers to be legitimate.
"This is the first (wholly owned subsidiary) that is run entirely by African-Americans," Mr. Washington said. "It's commendable that they (African-Americans) can rise to big position and are not a front. We wouldn't shut them out of a search."
"Emerging has evolved."
Emerging manager searches evolved from pension funds that sought to hire money management firms owned by women and minorities. Emerging managers - distinct from woman or minority managers - developed in response to the perception that white males starting money management firms also faced the hurdle of too little assets under management and too few years in business. Mr. Washington, in fact, is credited with coining the term "emerging managers."
Peachtree, according to Mr. Washington, is at the vanguard of what emerging firms will become.
"They (Peachtree's principals) had an opportunity to do it on their own," said Mr. Washington. "They decided to do it as an entrepreneurial venture.
"I don't call them any less entrepreneurial because of their decision," said Mr. Washington, who recommended the firm, among others, to the Atlanta trustees.
The arrangement also presented no problem to the Atlanta trustees.
In a written response to questions, Atlanta trustee Mattie Thompson said Peachtree was considered an emerging firm.
Trustees found the company appealing due to a "combination of performance and the fact that they are a minority and a local company, which is precisely what the board was seeking in an emerging investment firm," Ms. Thompson wrote.
"I have no reason to doubt the legitimacy of the relationship," said Sheila Brown, chairman of the board and an Atlanta City Councilwoman.
Peachtree's evolution began 15 months ago, according to Smith Barney's Mr. Pulling. The firm offers large-cap growth and core fixed-income management. It received its first account in June 1994, he said.
Mr. Godwin, Peachtree's CEO, said Peachtree was started because its money management style differed from its Smith Barney stablemates. Chief Investment Officer Dennis Johnson's management style could be merged into any of the other units, but Mr. Godwin said Peachtree was started because of the parent's proclivity for small asset management groups.
"Studies have documented that small firms outperform the larger groups," said Mr. Godwin. "We like small collegial asset management groups.
"Peachtree was created as a standalone for that purpose," he said. "The reason consultants are interested in emerging managers is because they are trying to capture the small size advantage."