MINNEAPOLIS -- The new leadership team of Investment Advisers Inc. is determined to turn around the ailing firm, which has lost two-thirds of its managed assets in 24 months.
"We are definitely a different company," said Keith Wirtz, IAI's president and chief investment officer since March, when he joined from TradeStreet Investment Associates Inc., Charlotte, N.C.
His arrival was the most recent in a revolving-door management structure that saw CEO Roy Gillson depart on Jan. 31, five months after he took the reins from I.P. "Kip" Knelman, who had spent two months as president and chief operating officer.
Mr. Gillson's resignation was the last straw for several long-suffering institutional clients.
The $15.4 billion New York City Police Department pension fund pulled $363 million in active domestic fixed income away from IAI in February, and the $5.6 billion New York City Fire Department pension fund took away $125 million in the same asset class.
The $46 billion Pennsylvania Public School Employees' Retirement System, Harrisburg, terminated IAI shortly after Mr. Gillson's departure.
"That was one change too many," said John Lane, chief investment officer of the pension fund. "We had just gotten comfortable with Roy and that's why we were staying."
IAI had managed $675 million in international equities for the pension system since 1996. No replacement will be hired at this time; the money has been placed in an index portfolio, Mr. Lane said.
IAI now manages about $3.6 billion in separate account assets for tax-exempt institutional clients, compared with $9 billion in tax-exempt assets at year-end 1997 and $11 billion at year-end 1996.
Aware of concerns
Mr. Wirtz said he knows there is concern about the stability of leadership at the firm, and that consultants are watching IAI closely.
The firm will need time to regain its reputation, said Jeff Nipp, head of investment research for Watson Wyatt Investment Consulting in Atlanta.
"The turnover they've gone through is fresh in people's minds. No matter what they do, it will take time for it to pass. They've got their work cut out for them," he said.
While Mr. Wirtz and COO John Alexander solicited advice from outside consultants on some issues, such as long-term incentives, they said, plans to remake the business were left solely up to them. IAI is majority owned by Lloyds TSB Group PLC, London.
"Lloyds has been very patient," Mr. Wirtz said.
"One reason I took this assignment was the level of autonomy from the shareholder," said Mr. Wirtz, who was formerly CIO at TradeStreet, and prior to that had been head of global investment management at what was then Bank of America, Los Angeles.
Sources acquainted with Mr. Wirtz said a fix-it job is the kind of project he would relish -- full control with the owners far away in London.
"We have developed a plan. We're on a clean sheet of paper. We will do what we have to as an investment firm and hold onto the loyal book of client business that we covet. It's up to us to rebuild all confidence," Mr. Wirtz said.
One critical piece of the Wirtz-Alexander turnaround plan is to eliminate about a dozen minor strategies that contain few assets.
"We had developed some niche products, like a small-cap international, with just a small pool of clients, less than $10 million, in it, and we'll be de-emphasizing products like that," Mr. Wirtz said.
Other areas to de-emphasize include a Far East equity strategy and a global fixed-income offering.
Eliminating strategies has led to the elimination of the sales and administration staff that served them. Nineteen people in Minneapolis received pink slips; 16 people in IAI's London office have been laid off as well.
Another piece: Adjust the incentive compensation schedule for portfolio managers so it will more closely reward investment achievements.
"Culturally, the firm has approached compensation on a more subjective basis. For those (managers) with confidence and who are competitive, this is exactly what they want," Mr. Wirtz said.
In addition, IAI plans to outsource back-office work for its $650 million mutual fund family to Firstar Bank in Milwaukee.
Keeping to their knitting
IAI's mistake was trying to be everything to all clients, Mr. Wirtz said.
"Historically, the firm had approached the market providing solutions for clients, and we had a lot of clients with different objectives and 40 mandates that we've been trying to provide. In the 1990s, particularly, IAI was striving to have a broad product array," Mr. Wirtz said.
Messrs. Wirtz and Alexander said the firm now will focus on the 12 strategies it does well. In domestic equities, they are large-cap value; large-cap, midcap and small-cap growth; and small-cap core. In international equities, the strategies are EAFE, EAFE plus and emerging markets. In fixed income: core; high-yield; intermediate duration; and enhanced index.
Mr. Alexander said the firm already is moving ahead, and is "in a few finals for new business, in international equity and small-cap core."
Many institutional clients use IAI's international equity strategy, which was up 1.6% in the first quarter compared with 1.5% for its Morgan Stanley Capital International Europe and Australasia Far East index benchmark.
The one-year return as of March 31 for IAI's international equity was 2.7% compared with 6.4% for the index; annualized three years was 9.4% vs. 8.8% for the index; five years was 10.2% vs. 9.1% for the index; and the 10-year return for IAI was 10.3% vs. 6% for the benchmark.
IAI's small-cap core strategy was down 7.6% in the first quarter, compared with -1.7% for the Russell 2000 Growth index benchmark. IAI's small-cap core posted a -20.8% annualized return for one year as of March 31, compared with -11% for the benchmark. For the three years ended March 31, IAI was up an annualized 15.1% vs. 5.8% for the benchmark; and for five years IAI was up an annualized 18.9% vs. 10.8% for the benchmark.
Trouble began in '97
People close to the firm said trouble began at IAI in early 1997 when longtime CEO Noel Rahn, ready to retire, began to position the firm for the future. When he presented portfolio managers with non-compete contracts, lead small-cap manager Rick Leggett and midcap manager Suzanne Zak left and started their own firms.
Mr. Rahn retired in May 1998. Mr. Knelman took over firm leadership, but there was an internal rebellion against him; sources said staff opposed him because they felt he was responsible in part for the firm's misdirection, and that the emphasis placed on Mr. Knelman's role as chief marketer may have led to the troublesome situation of having too many products. He resigned and Lloyds sent two British executives -- Messrs. Gillson and Alexander -- to take control and settle the waves.
Mr. Gillson resigned after five months, saying he couldn't keep dividing his time between IAI's London office and the Minneapolis operation; he became CIO of London-based AXA Sun Life Investment Management.
