EDINBURGH, Scotland - The loss of top management and key investment staff at Dunedin Fund Managers Ltd. is threatening the firm's U.S. pension business and will stall marketing efforts for the foreseeable future.
During the past three weeks, the firm lost two of its top portfolio managers and a U.S.-based marketer.
Subsequently, the firm's chairman and deputy chief executive resigned under pressure from Dunedin directors in an attempt to end the internal turmoil.
But the damage with clients might just be beginning. Already, the firm has lost one U.S. pension account worth $250 million, and the loss of other accounts might well follow. Dunedin's U.S. clients account for $3 billion of the firm's $8.8 billion in assets under management.
Clients include such blue-chip names as NYNEX Corp., U S WEST Inc., and the California State Teachers, Pennsylvania State Employes and the Washington State public pension systems.
"When this kind of thing happens, it's one of your worst nightmares," said Philip Halpern, chief investment officer for the $30 billion Washington State Investment Board, Olympia. Dunedin manages about $250 million in Pacific Basin equities for the fund.
Daniel Stern, a senior associate with Wilshire Associates, Santa Monica, Calif., said it remains to be seen whether Dunedin can hold onto its existing U.S. clients.
The chain of events that afflicted the highly regarded money manager has shocked the usually staid Edinburgh money management community.
Dunedin officials say the problem stemmed from the management style of Hamish Leslie Melville, the firm's chairman. Brought in three years ago to manage the business, sources say his "autocratic" management style upset Dunedin's investment professionals, although he is credited with building up the firm's business.
What touched off the recent series of departures was the sudden dismissal last summer of Gordon Anderson, the firm's longtime investment director. Richard Muckart, formerly a portfolio manager at Edinburgh-based Ivory & Sime PLC, was named to succeed him.
Sources confirm Mr. Anderson had returned from vacation only to be summarily dismissed and told to pack up his personal belongings under supervision.
While the firm's investment performance had been lagging, primarily because of a heavier than average Japanese equity weighting, Dunedin professionals were appalled at how Mr. Anderson's termination was handled. Some thought he should have been offered another position within the firm.
Particularly troubled was Douglas Waggoner, Dunedin's U.S. marketing chief based in Chicago, who is said to be close to Mr. Anderson. Mr. Waggoner resigned Oct. 24.
The next day, two of the firm's top investment professionals, Nigel Barry, a director in charge of the Pacific basin department, and Peter Tait, another director overseeing continental European equities, said they planned to resign. Efforts to try to persuade the two to remain were unsuccessful.
(Sources say Messrs. Anderson, Waggoner, Barry and Tait plan to start up a rival money management firm and are searching for financing. Mr. Anderson declined to comment.)
Meanwhile, Dunedin directors took their concerns to the British Linen Bank, a unit of the Bank of Scotland, that owns 50.5% of the firm. The remainder of the firm is owned by four of Dunedin's investment trusts.
A shareholder meeting resulted in Mr. Leslie Melville tendering his resignation, effective year end, ostensibly to better fulfill his duties as chairman of the National Trust for Scotland. In addition, Alan Kemp, the firm's deputy chief executive, who observers say is closely tied to Mr. Leslie Melville, quit, effective immediately.
Mr. Leslie Melville declined to comment. Mr. Kemp could not be reached for comment.
Eric Sanderson, chief executive of British Linen Bank Group Ltd. as well as chairman of Dunedin's parent, has been named interim chairman and chief executive of the firm. Mr. Sanderson and Mr. Muckart flew to North America to try to calm Dunedin's nervous clients.
Mr. Muckart said he is trying to convince clients that it's business as usual at Dunedin, and the firm's 150-strong staff can handle the departure of a few investment professionals. He added the firm "had about 30% excess capacity, anticipating future growth."
But he openly acknowledges the latest flap "will take us right offside as far as the consultants are concerned."
As far as retaining the firm's existing client base, Mr. Muckart said all depends on investment performance and client servicing. The firm chalked up a 6.7% return in the third quarter, against 4.2% for the Morgan Stanley Capital International Europe Australasia Far East Index.
But Dunedin lags the benchmark for the first three quarters, returning 5.8% vs. 6.9% for the index. Dunedin's hedging against the yen "didn't do us any favors," he said. Longer term, the firm has returned a compound-annualized 15% over the three-year period ended Sept. 30 vs. 13.7% for EAFE. (Dunedin's recent composite figures are based on five accounts totaling only $53 million, while data from before April 1, 1993, is based on a taxable mutual fund for which Dunedin manages the non-U.S. portion.)
Mr. Muckart said the firm has lost one account valued at $250 million but declined to identify the client.
Investment professionals are sympathethic to Dunedin's plight. Washington State's Mr. Halpern said the changes are "heart-wrenching on a lot of levels."
He said Dunedin's investment style, which employs an econometric model to set country weights, fits well with the fund's other international managers.
While noting all of Dunedin's accounts are at risk, Mr. Halpern said the firm still might be to retain its existing clients. Mr. Muckart is "a very straightforward, talented individual," he said. "If anybody can pull it off, it's Richard Muckart."
Mark Amiri, director of treasury services, Daughters of Charity Health Systems Inc., St. Louis, said: "Obviously, this is a cause for concern when you hear of so many departures at the firm in a short time. We hired Dunedin because of their investment style, and we want to make sure that the style and its implementation have not been impacted by these departures."
Dunedin manages a $41 million actively managed EAFE mandate for the pension fund.
Pension officials at other Dunedin clients, such as the Pennsylvania State Employes' Retirement System and NYNEX, said they are reviewing the situation.
Part of Dunedin's problem, U.S.-based sources said, is that Messrs. Anderson and Waggoner were the main contacts for North American clients. Mr. Muckart said, however, that clients are familiar with other Dunedin investment professionals.
Dunedin's U.K. client base is more stable. The Bank of Scotland's 1 billion pension fund is the firm's main pension client. Its specialist management style, however, is better suited toward the U.S. market.
The firm also manages an array of investment trusts and unit trusts, as well as some assets for Far Eastern institutional clients.
Margaret Price contributed to this story.