MINNEAPOLIS -- After losing $2 billion in tax-exempt assets and posting weak performance last year, Investment Advisers Inc. is restructuring to take advantage of being owned by one of the world's largest banks.
Sources close to the firm say IAI has internal cultural problems that have caused poor morale and led to low performance.
Two senior fixed-income managers -- Scott Bettin and Tim Palmer -- left last week to start their own hedge fund business.
That makes seven portfolio managers who have left the firm in a little more than a year.
In addition, IAI's chief marketer, Jeff Applebaum, resigned earlier this month, as did Chief Financial Officer Archie Black.
Meanwhile, IAI announced last week it would lay off 24 people, including three portfolio managers and small-cap growth equity manager David Himebrook.
Sources say portfolio managers at IAI become discouraged because the key decision-making roles in the firm are held by marketing executives, not investment professionals. Consequently, the culture of the firm doesn't support investment professionals adequately, according to people close to the firm.
IAI President I.P. "Kip" Knelman admits the firm has lost money, but he denies there are internal problems. The layoffs are needed so IAI can restructure and take advantage of the distribution channels of parent Lloyds TSB Group PLC, London, company officials say.
Money from a Lloyds South American asset management unit will be transferred to IAI. The firm won't say how much, but it surely will buoy IAI's drooping total.
IAI had $9 billion in U.S. institutional tax-exempt assets under management as of Jan. 1, according to a questionnaire the firm completed for Pensions & Investments's upcoming money manager directory. In its questionnaire last year, IAI reported about $11 billion in U.S. institutional tax-exempt assets.
Mr. Knelman said IAI won $500 million in new business in 1997, primarily in international and domestic equity, with a small amount of fixed income. Since January, the firm has gotten $200 million in new mandates from three U.S. pension funds, he said.
Client terminations in the past year were believed to be primarily for poor performance, particularly in IAI's small-cap product. According to the Pensions & Investments Performance Evaluation Report, the IAI Small Cap Growth Equity portfolio returned -0.88% for 1997. The Russell 2000 benchmark returned 22.36% for the year.
Among the clients it lost, IAI was terminated in February because of an "extended period of underperformance," according to officials at St. Olaf College's $105 million endowment fund in Northfield, Minn. IAI had managed $10 million in core international equity.
Mr. Knelman said IAI has been a bit too focused on specialized strategies.
One example Mr. Knelman cited was small-cap core growth, which returned 19.68% in 1997. By contrast, the Russell 2000 Growth benchmark returned 12.95% for the year.
As part of the restructuring, the firm intends to focus more closely on large-cap and midcap equity and to provide U.S.-denominated asset management for Lloyds customers. International equity and domestic fixed-income management will continue to be offered as well.
"We've been working with our Lloyd's colleagues for the last half year to see how we can all better leverage" Lloyds distribution system and IAI's abilities, Mr. Knelman said.
Lloyds' worldwide clients are interested in fixed-income and equity investments, he said.
IAI's current asset mix is 60% equity, including international, and 40% fixed income.
Meanwhile, Mr. Himebrook, the small-cap growth manager just laid off from IAI, has been hired at Arbor Capital Management LLC in Minneapolis.
Arbor is the small-cap firm run by former IAI portfolio manager Rick Leggett. The firm has about $175 million in assets under management.
Mr. Leggett left IAI in January 1997. Shortly thereafter, midcap manager Suzanne Zak left to start her own firm, and small-cap manager R.J. New followed Mr. Leggett to Arbor. IAI's small-cap team essentially has been re-formed at Arbor.
Sources close to the firm say that, while Mr. Himebrook tried to keep IAI's business, small-cap assets dropped to $300 million from about $2 billion.
In the midcap area, at least five clients followed Ms. Zak to her firm, Zak Capital Inc. in Minneapolis, where she manages about $600 million. About 95% of the assets she manages are on behalf of former IAI clients.