NEW YORK - The well-known institutional money manager, Jennison Associates Capital Corp., quietly has been becoming a mutual fund manager.
Since May 1990, when Jennison won its first subadvisory appointment from Harbor Capital Advisors Inc., Toledo, Ohio, mutual fund assets under management have swelled to about $3 billion in eight mutual funds.
The growth is fairly impressive for a company that doesn't have a marketing department, doesn't advertise and doesn't have a name well known in American households.
New developments at its parent company, the Prudential Insurance Co. of America Inc., Newark, N.J., might significantly pump up the amount of assets Jennison manages for both mutual and commingled funds next year.
Additionally, one of the funds Jennison manages for Caterpillar Investment Management Ltd., Peoria, Ill. - the $397 million Preferred Group Growth Fund - will reach the magic five-year mark in June, which will bring it more attention from investment management consultants and financial planners. Lulu Wang is the fund's manager.
"Magical things start happening when a mutual fund finally gets a five-year track record. You finally start making the cut into consultant databases and you begin to see the assets really grow," said P. Michael Pond, who recently resigned as president of Caterpillar Investment Management.
Jennison is a significant player in the institutional market, with $30 billion under management overall as of Sept. 30. About $20 billion of that was from institutional investors.
Unlike many institutional money managers, which set up mutual fund families of their own or are thinking about it now, Jennison principals decided to take a different route. Back in the mid-1980s, Jennison principals took note of the corporate shift to defined contribution plans and saw that it would be necessary to add the capability to manage defined contribution plan assets, said John H. Hobbs, chairman and chief executive officer.
"At that time, we saw that we couldn't manage defined contribution assets without mutual funds. At this point, we had three choices. We could have then become a financial services company in order to service mutual fund shareholders. We could have gone public to raise capital. Or we could do what we did - sell out in 1985 to a much larger financial services company, Prudential, which would provide the infrastructure and administration that would leave us free to do what we do best, manage money. Prudential packages up our money management, leaving us free to manage money," Mr. Hobbs said.
Harbor Capital Advisors, the investment management subsidiary of Owens-Illinois Inc., decided in 1990 to create its own mutual funds using managers from its defined benefit plan stable. Jennison was one of the first managers to be hired, for the Harbor Capital Appreciation Fund, a large-capitalization equity fund with $1.5 billion as of Sept. 30. Later, Harbor hired Jennison for a second fund, the $436 million Harbor International Growth Fund, managed by Howard Moss and Blair Boyer.
Harbor is able to offer its mutual funds at an advantageous fee because it was able to average the fees paid to Jennison for investment management of the Owens-Illinois defined benefit plan portfolio and the mutual fund. Because the investment style for the mutual fund and the separate account is the same, the average front-end fee is just 0.75 basis points, said Spiros Segalas, president and chief investment officer of Jennison and the portfolio manager of the Harbor Capital Appreciation Fund.
Mr. Segalas said there isn't a great difference to him in managing a mutual fund and any other pension fund separate account.
"There are some differences in the perception of relative performance that I do find interesting, however. If we reach a 25% return in a year and the market returned 35%, a pension fund will have us out on the floor, demanding to know why we underperformed. But our mutual fund shareholders seem to be pretty pleased with a 25% return. To them, performance is taken in the absolute, not the relative sense. And it does amuse me when I visit institutional clients to talk about the performance of their separate accounts only to have them ask me about the perfromance of (the) Capital Appreciation (fund)," he said.
Caterpillar Investment Management established its Preferred Group Growth Fund in 1992, and the Preferred Group Balanced Fund last year, which had about $43 million under management as of Sept. 30. Brad Goldberg is the lead manager of the investment team of the Caterpillar balanced fund.
Both Owens-Illinois and Caterpillar offer the mutual funds of their investment management subsidiaries to employees in their own defined contribution plans, ensuring a steady internal cash stream.
To further its reach into mutual fund management, Jennison broke the mold when it went to its parent and suggested Prudential needed Jennison-managed mutual funds. Generally, large financial services companies tend to buy investment management boutiques with the idea of using them to provide mutual fund management.
But Mr. Hobbs said Prudential had not really thought about Jennison mutual funds until the subsidiary brought it up with the parent company's management.
The $695 million Pru-Jennison Growth Fund was established about a year ago, managed by David Poisez, and the Pru-Jennison Growth & Income Fund was established in October. Mr. Goldberg is the lead manager of the G&I fund, as well as the $154 million Prudential Institutional Active Balanced Fund.
Mr. Poiesz also manages the Pru-Jennison Series fund, with $184 million, which is used only by annuity programs.
Both Mr. Segalas and Mr. Hobbs see Prudential as Jennison's main source of defined contribution plan and retail investments.
"Prudential is a powerhouse. We really expect that they will push these funds through to waiting investors, particularly since its network of agents is so wide. Jennison probably won't become a household name, but Prudential may very well pull it off on the 401(k) plan side," Mr. Hobbs said.
In further pursuit of institutional assets, Prudential is working on a series of commingled funds, using Jennison and some of its other managers to provide a more cost-effective investment vehicle for both defined benefit and defined contribution plans, said Mr. Hobbs, who also is the president of Prudential Asset Management. Details are sketchy, but Mr. Hobbs anticipates commingled pools would be available early next year that will allow smaller pension plans of both types access to high-quality institutional investment management.
"Providing commingled trusts is yet another evolution for Jennison and Prudential. Our strategy all along has been all about providing the best performing investment management to institutional clients in the form they want it. Jennison was early in the game providing defined benefit plan investment management as a boutique. It expanded into mutual fund management which helped DC plans gain access to our management. Commingled funds are the next phase, providing a cost-effective vehicle for investment management. They are very cost competitive compared to mutual funds and can now be daily valued for defined contribution plans. They will have a lower minimimum floor than is typical, so smaller DB and DC plans can have access to it, too," he said.