COLUMBUS, Ohio -- When Nationwide Financial Services couldn't get Paul Hondros by buying his old company, Pilgrim Baxter & Associates Ltd., it snapped him up when he was placed on paid administrative leave and charged him with setting up a new investment management company.
Mr. Hondros is building an independent subsidiary for NFS -- Villanova Capital Inc. -- a holding company that will combine two existing investment management businesses with as many as three still to be acquired institutional money management firms. The new entity will manage mutual funds for institutional and individual clients, and institutional separate accounts.
Mr. Hondros is Villanova's chairman and chief executive officer. He most recently was president and chief operating officer at Pilgrim Baxter and was head of Fidelity Investments' retail mutual funds until September 1997.
Villanova's stable initially will include Nationwide Advisory Services Inc., Columbus, with about $12 billion of in-house managed mutual funds, and its stable value manager, Morley Financial Services Inc., Portland, Ore., which manages about $8 billion in institutional separate accounts. Mr. Hondros said most of the 200 staff members working for these subsidiaries will remain in their respective cities.
The investment management of the general account assets of NFS' parent company, Nationwide Insurance Co., will remain at corporate headquarters in Columbus. The company had total assets of $55.6 billion as of Dec. 31, 1997. About $23 billion was managed for U.S., institutional, tax-exempt clients and about $12 billion of that was for defined contribution plans. About $500 million now managed in Columbus is in institutional separate accounts that might be moved to Villanova, said Mr. Hondros.
Villanova will be fully operational in March and located in a still to be determined suburb of Philadelphia. Mr. Hondros convinced NFS' president and chief operating officer, Joseph J. Gasper, to locate the new company in the Philadelphia area because there is such a large pool of talent there. More than $1 trillion is managed in the broad area around Philadelphia, including Wilmington, Del., and Princeton, N.J.
Villanova is actively reviewing acquisition targets and is concentrating the search in the Philadelphia area, where Mr. Hondros acknowledges there are "several attractive candidates." To round out its investment management capabilities, the company intends to acquire an active growth manager, an active value manager and, possibly, a quantitative equity manager.
The focus is on "style specific and benchmark cognizant" institutional money managers, said Mr. Hondros, which fits with his plan to form a new company that serves both the institutional and retail markets through separate account and mutual fund management.
Providing support, funds
Villanova will support the existing defined benefit plan business of newly acquired institutional subsidiaries and will develop mutual funds using the same style for distribution through NFS' existing captive sales force, in its Best of America defined contribution plan program and through new alliances with mutual fund supermarkets.
To date, Nationwide's family of 35 proprietary mutual funds has only been available through its captive sales force and in its defined contribution plan program. There are 15 retail mutual funds and 20 insurance funds; 18 are subadvised by external managers. Two funds in particular are expected to be very popular when they finally are opened to the public: the Nationwide Fund and the Nationwide Capital Appreciation funds both have excellent long-term track records and carry a five-star rating from Morningstar Inc., Chicago.
After Pilgrim Baxter cut 50 people and placed Mr. Hondros and several other senior executives on paid administrative leave last October, Mr. Hondros said he had been approached with several offers.
He chose Nationwide, he said, because "It is incredibly difficult to launch a startup now. You absolutely have to build scale. And when it takes between three and five years to accumulate a track record that anyone is interested in, it is important that we have an existing distribution channel that we can use to launch some of the new funds."
Success not guaranteed
While Villanova's executives certainly hope to carve off a significant slice of the 401(k) and 457 plan market through its new mutual fund offerings, huge success in Nationwide Advisory Services' own Best of America program is not guaranteed. The program has an open architecture design and even now, only 17% of asset flows from 401(k) and 457 plan participants goes into NAS' own proprietary funds.
"We're in an ideal position to leverage off the success of the Best of America program, but the commitment is to maintaining an open architecture," said Mr. Hondros.