DUBLIN -- Frank Russell Co.'s metamorphosis into a manager of managers -- with a sideline in consulting -- is nearly complete.
As proof, look at Russell's latest and most important deal, with leading French bank Societe Generale. Russell and the bank's money management arm, Societe Generale Asset Management, will offer Russell's multimanager funds to institutional, high net-worth and retail investors across continental Europe under an exclusive joint venture.
The 50/50 joint venture, called SG/Russell Asset Management, will offer a variety of pooled products, initially in international asset classes. Over time, all asset classes will be included.
The move marks a major step forward in Russell's development of its multimanager fund business. The backing of one of Europe's leading banks provides enormous distribution capability for Russell's fund business.
Consulting is "a flagship, it's not the core of our business any more," said Michael Phillips, president and chief executive officer of the Tacoma, Wash.-based firm.
About 75% to 80% of Russell's profits are derived from investment management, Mr. Phillips said. But those assets are nearly all U.S.-sourced: some $35 billion of its $38 billion in multimanager pooled funds are from U.S. investors. Russell officials project European-sourced assets will nearly double to $2.5 billion by the end of the year from $1.3 billion now, while total assets are projected to push $50 billion by then.
Over the long haul, Europe promises greater growth.
"Our expectation is our non-U.S. net cash flow will equal or dominate cash flow we get from the U.S. business," said Len Brennan, head of Russell's international operations, London.
SG/Russell will help fuel the growth. The joint venture will market across continental Europe except for Holland, where Russell already has a significant presence.
Russell officials are working on similar distribution deals in the United Kingdom and Japan, and will consider other opportunities in continental Europe.
The firm also has distribution agreements in Canada, Australia, South Africa, Kuwait, Hong Kong, Barbados, Guernsey and France.
Managers for the SG/Russell funds -- which will operate under a Dublin-based umbrella fund -- have not been named, but are expected to include many of the same managers in Russell's existing funds, such as J.P. Morgan Investment Management, New York; Capital International Ltd., London; Schroder Investment Management Ltd., London; and Fidelity Investments, Boston.
At first, eight funds will be made available to European investors. Six are stock funds: U.S. large-cap and small-cap funds; Japanese equity; Pacific Basin (ex-Japan) equity; emerging markets equity; and European small-cap equity. The other two are global and high-yield bonds.
COMPETING WITH ITSELF
Observers clearly view the venture as a way for Russell to build its higher-fee investment management business. But some wonder why Paris-based SGAM would offer Russell's products in competition with its own capabilities.
In the past two years, SGAM has been expanding globally, attempting to build a money management business in Europe, the United States and Japan.
Key moves include the purchase of an 85% stake in Tokyo-based Yamaichi International Capital Management following the collapse of the manager's parent, and formation of a London-based operation with star managers Nicola Horlick (formerly of Morgan Grenfell Asset Management) and John Richards (previously with Mercury Asset Management) as joint managing directors.
"I'm a little puzzled (as to) what they're achieving," said Jacques Cacheux, deputy general manager for BNP Gestions, Paris. "On the one side, they are saying they want to develop their own product. On the other side, they will sell Frank Russell products."
Added one consultant, who asked not be to be named: "I just don't get what SocGen is up to."
Others, however, think the strategy could work. "I think the marketing people at SocGen are quite happy to have a lot of options to pull out of their kitbag," said another consultant. Another source suggested making Russell products available to clients could encourage SGAM portfolio managers to perform well.
Officials from SGAM did not respond to requests for comment.
In a news release, Philippe Collas, SGAM's chairman and chief executive officer, said: "Our clients will have access to a unique and specialized range of products, enabling them to gain both from our expertise in terms of asset allocation and from the performance of the world's best managers in each asset class."
RUSSELL'S GROWTH AREA
For Russell, the European joint venture is the latest effort to expand its multimanager fund business. The idea is simple: to make the best money managers, with consistent superior performance and controlled risk levels, available to a wider audience by obtaining economies of scale.
Opening its doors in 1980, Frank Russell Trust Co. directly markets pooled funds to tax-qualified pension funds. Those pension funds generally have been smaller than Frank Russell's consulting clients, although some pension clients now are heading toward $1 billion in assets. The average account size is about $65 million.
Frank Russell Investment Management Co., offering mutual funds to high-net-worth individuals and marketed through intermediaries, started up a year later. At year-end 1997, directly marketed accounts totaled $20 billion, while brokered accounts were about $16 billion.
While consulting -- as well as performance measurement and brokerage -- still are important businesses for Russell, the biggest growth clearly comes from selling funds to retail investors.
"The fastest growth in our business is individual investors buying the multimanager investor concept through Russell managed funds," Mr. Brennan said.
Noting there are more mutual funds than stocks listed, he added Russell has pulled in $2 billion from retail investors around the world during the past 12 months.
"Individuals are gravitating toward this as a smarter way of running their money," he said.
Europe has been a tough sell for Russell, but the SGAM joint venture promises to change that. Access to the bank's 2,600 French branches and 5 million individual customers, as well as SGAM's European marketing staff, will help Russell reach deep into France and across the Continent.
"We feel so good about Europe, because, frankly, we have been beating our head against a brick wall, especially in the U.K.," Mr. Phillips said. Traditional balanced management still dominates U.K. pension fund investments, although signs are that specialist management might gain favor.
Some outsiders suggest Russell should quit consulting altogether. Roger Urwin, head of Watson Wyatt Worldwide's global investment consulting practice, said the deal with SGAM "begs a question or two about their future interest in the consulting business."
Adds one money manager: "If they got out of consulting, it would be a hell of a lot easier to talk to them, because then you would know what you're talking to them for."
Mr. Phillips rejects any notion of abandoning consulting. Being able to claim the firm consults to clients with more than $1 trillion in assets "gives us enormous credibility" in new markets, he said.
Consulting clients also push Russell's manager research, and research and development capabilities, he said. Its multimanager funds business contributes heavily toward Russell's 50 manager research analysts and 15 capital markets analysts, which in turn benefit consulting clients.
Mr. Phillips envisions developing "strategic relationships" with pension funds, in the $1 billion to $5 billion range, where corporations might decide investment of the pension fund is outside their expertise.
In that situation, Russell would become a co-fiduciary to the plan. "We're moving up from being an adviser to an implementer," he said. Funds between $5 billion to $10 billion might use a combination of consulting and outsourcing to multimanager funds.
Still, the funds business has built up resentment among many money managers. While Mr. Phillips said "the money management community doesn't win or lose a cent" because managers end up running the same amount of assets, he admits Russell pays lower marginal investment management fees because of its size.
Observers also point to Russell's potential conflicts of interests in serving both as creator of multimanager pools and as consultant.
If Russell's consulting side is seeking global equity managers and J.P. Morgan and Capital International are in their pooled vehicle, "how do they recommend everybody else?" asked one expert.
Another competitor questioned whether Russell would be inclined to favor its pooled funds over consulting clients in a capacity-constrained asset class, such as small-cap stocks, because pooled-fund performance is much more visible.
Money managers -- particularly in Europe, where the multimanager fund concept is much newer -- also worry about competing against a Russell product. They worry Russell marketers might have insight on competitors' products or Russell consultants might favor Russell pooled products.
The deal with SGAM might be even more troublesome. "As soon as a consultant gets into bed with one particular institution, others might say, 'Why should we work with Frank Russell?' " one consultant speculated.
But Mr. Phillips said Russell keeps clear divisions between units. The funds division receives research at the same time as consulting clients, and no sooner, he said.
"What is inappropriate is abusive conflict," Mr. Phillips said. "It sometimes gets me unhappy that so many regulators perceive conflict as the same as potential conflict. If you have a conflict, you are perceived to abuse it."
He also noted consulting clients often don't take Russell's advice.
"In practice, our clients don't do what we tell them to do," Mr. Phillips said.