BOSTON - State Street Global Advisors is launching a new emerging markets firm - the second in an expected wave of money management units in niche areas geared toward institutional and high-net-worth investors.
The new London-based firm, to be called King Street Advisors Ltd., will be headed by Ken King, former head of emerging markets at Kleinwort Benson Investment Management Ltd.
King Street's formation raises a serious question: Why is SSgA, one of the world's leading managers with $350 billion under management, tinkering with its proven formula of success?
John R. Snow, principal and head of the SSgA Global Alliance, a division formed in January to spin off new money management operations, said the issue is: "How do you sustain a high level of growth and investment energy once you reach $300 billion under management?"
SSgA Chairman Nick Lopardo said the bank is "doing the same thing that Norton Reamer (chairman of United Asset Management Corp.) and Bill Nutt (president and chief executive of Affiliated Managers Group) are doing" by diversifying their stable of managers.
Instead of buying managers, however, State Street is "attracting professionals to come in under the SSgA logo," he said.
Said Simon Hill, a senior investment consultant at William M. Mercer Investment Consulting, London: "Big monolithic companies have to do this sort of thing if they want to expand."
Higher margin products
The underlying motivation, however, is much more mundane: SSgA aims to have $500 billion in assets under management by 2000, of which one-third would come from non-U.S. sources. Also, a third of that $500 billion would come from high-net-worth and hybrid-type savings, such as 401(k) plans.
State Street still has a ways to go meet those targets. Now about 20% of its assets under management are from non-U.S. sources, while 25% comes from high-net-worth individuals, 401(k) plans and mutual funds. The rest comes from its traditional U.S. pension business.
Global Alliance companies could make a significant dent in those targets. In four or five years, Global Alliance companies could account for 10% to 15% of SSgA's assets under management, Mr. Lopardo said.
State Street officials believe there is a lot of money that can be lured to niche operations, some of which are at the opposite end of the investment spectrum from the manager's bread-and-butter indexed and semipassive business.
What's more, alternative investment shops offer much higher profit margins than indexing, where the bank is said to have cut fees to rock-bottom levels. Also, the alternative investment products appeal both to State Street's existing core clientele of U.S. pension funds, as well as to wealthy individuals, whom the bank has serviced since its beginnings in 1792.
Brian Hersey, director-investment manager research at Towers Perrin, Atlanta, said the new strategy offers "lots of specialty capability" and "more attractive profit margins," he said.
State Street hired Mr. Snow last year, after NatWest Investment Management closed the Boston-based unit. Mr. Snow oversees development of SSgA's high-net-worth individual and Global Alliance efforts.
Central European manager
The Global Alliance started quickly out of the box. In February, it announced a joint venture with Vienna-based Emerging Europe Asset Management to make direct investments in Central European markets such as the Czech Republic, Poland, Hungary, Slovakia and eventually Russia.
The joint venture, dubbed European Direct Capital Management, will take controlling interests in both listed and unlisted securities that offer private-equity type internal rates of return, on the order of 25% to 30% a year, Mr. Snow said. Sixty percent owned by SSgA, the new venture will be run by a former Creditanstalt Group team headed by Nigel Williams. The unit plans to start fund-raising for a $200 million limited partnership later this year.
While SSgA takes a majority stake in the new ventures, principals in the new firms invest hefty chunks of their own money, meaning they have even more on the line.
Meanwhile, the Global Alliance is close to announcing a second private equity-type firm, to be called Asian Direct Capital Management. The firm, which will be headed by Ray Hood, formerly chief executive, Asia, at Rothschild Asset Management in Hong Kong, will focus on smaller, illiquid securities. "In Asia, anything that moves is a listed company," Mr. Snow explained.
No formula for new firms
Starting up two regional direct investment firms and an emerging markets firm in the first year of operation is quite a beginning. Mr. Snow believes eight to 10 firms could fit under the Global Alliance umbrella.
Latin American private equity is an obvious candidate, but Mr. Snow is willing to consider any opportunity that would enhance State Street's investment management capabilities. Other firms, he suggested, could specialize in private equity in specified industries, or focus on absolute returns.
He does not expect the firms to fit one mode. For example, while the direct investment firms are as far away from State Street's SSgA's traditional structured business as possible, King Street Advisors is about midway between the two.
Mr. King was the first money manager to use an equally weighted benchmark in an emerging markets product. The effect is to diminish the influence of those countries that have performed most strongly and to provide a small-country bias. (He since has shifted to a two-tiered, liquidity-based structure for the 26 countries he follows.)
Mr. King will be joined by seven of his KBIM colleagues, but their numbers might grow to about a dozen by the time the firm - which is subject to regulatory approval - starts up around midyear.
Mr. King's departure followed an unsettling period at KBIM, as parent Dresdner Bank quickly acquired KBIM, Hong Kong-based Thornton Investment Management, and then RCM Capital Management, San Francisco. Those units, along with Paris-based BIP Gestion, now are being integrated under the global brand of Dresdner RCM Global Investors.
Of the differing global asset classes, emerging markets is undergoing the greatest changes, explained William Stack, global equity chief investment officer for Dresdner RCM, which is responsible for Dresdner Bank's $50 billion in non-German assets under management.
While retaining the fundamental structure of the KBIM product, Dresdner RCM officials want to enhance country allocation and strongly boost stock selection in KBIM's emerging markets product, he said.
In particular, they will use primarily Thornton specialists in Asia plus some of RCM's analysts elsewhere. "We're really becoming one team," Mr. Stack said. RCM's "Grassroots" network of 320 non-financial analysts around the world also feed in data on companies.
Those changes didn't sit well with Mr. King, who said he wanted to leave, Mr. Stack said.
Mr. King was unavailable for comment.
'Competition' with SSgA
SSgA also uses alternative benchmarks in managing $1.5 billion in emerging markets assets. While country allocation is active and 100% fundamentally driven, stock selection is entirely passive. Mr. King, on the other hand, picks stocks actively, and uses a blend of objective and subjective measures in setting country allocation.
SSgA executives believe King Street and SSgA will be able to compete against each other for pension fund clients, but Mr. Snow admits some confusion might be generated among those seeking to pigeonhole money managers. He thinks King Street is capable of amassing $5 billion in assets over five years.
Mercer's Mr. Hill thinks the two approaches will appeal to different audiences, in part because of the varied selling styles involved.
Mr. Snow also said the new units could be marketed in different ways in different markets. For example, the new managers generally would market directly in U.S. and U.K. markets, while they might be sold under the SSgA umbrella in other countries.