NEW YORK -- Good thing for Deutsche Bank that it was Bankers Trust Co.'s index management team that walked out July 2, not an active equity team.
Good thing, too, that Deutsche Bank managed to hang on to Kathleen Condon, a respected, veteran Bankers Trust quant and index fund guru.
Otherwise, a good part of Bankers Trust's pension assets might have walked out the door with the staff.
U.S. pension fund executives dislike uncertainty and turmoil. But it's easier to accept turnover when it involves an indexed or quantitative approach -- unlike late last week, when Gregory Hopper, a Bankers Trust principal and senior portfolio manager, also left to join Harris Investment Management Inc., Chicago. Mr. Hopper oversaw about $800 million in investment-grade and high-yield corporate bonds, of the bank's total $3 billion in active bond management. He will start a high-yield bond operation at Harris.
As it is, some pieces are still in motion at the newly created Deutsche Asset Management, as evidenced by the unit's absorption last week of Bankers Trust's $220 billion indexing business.
When Deutsche Bank finishes pulling together its four disparate investment management businesses, it will have created an organization with $670 billion in total assets under management worldwide. Nearly $300 billion is from U.S. clients, predominantly institutional investors.
That makes the Frankfurt, Germany-based bank one of the five largest investment managers in the world.
"Deutsche Bank has size as an objective," said Bruce McEver, president of Berkshire Capital Corp., New York, an investment banker to money managers.
"Deutsche Bank is a very formidable institution and incredibly strong in Europe. I'm sure they have their hands full here, but they generally know what they are doing," Mr. McEver said.
Taking the name
All Deutsche Bank-owned asset management businesses will assume the Deutsche Asset Management name this year. Michael Dobson, head of asset management operations, will be responsible for $551 billion from these firms (the remaining $119 billion is private banking assets):
* Morgan Grenfell -- in New York, Philadelphia and London -- had $170.5 billion in total global assets under management on March 31, $236 billion for U.S. institutional tax-exempt clients. In addition to the $220 billion in indexed accounts, Deutsche Asset Management has taken over the $22 billion BT had in active management ($15 billion in stable value plus $7 billion in active quantitative accounts.) Additionally, $4.5 billion has been moved from BT's private banking area to Deutsche Asset Management, about $3.5 billion in structured products and $1 billion in alternative investments;
* Alex. Brown Capital Advisory & Trust Co. in Baltimore, whose ownership is split evenly between Deutsche and Alex. Brown principals. The firm has $7 billion under management, including a small amount of institutional money and the Flag Investors mutual fund family;
* Deutsche Bank's global mutual fund business, DWS. The funds had a total of $97 billion worldwide as of March 31. A common mutual fund brand name for Deutsche Asset Management is still being developed, officials said.
Deutsche Asset Management-Americas, New York, will be responsible for $295 billion in total assets for U.S. clients. Revenue-wise, about half is expected to come from institutional clients, said Richard Marin, managing director and head of the Americas operation. He formerly was a partner in charge of BT global private banking and vice chairman of BT Alex. Brown Inc.
The U.S. base will have more than 100 investment professionals, led by Chief Investment Officer Josh Weinreich, former CIO in BT private banking.
Deutsche Asset Management-Americas will offer active international and domestic equity investing, active domestic fixed income, stable value, alternative investing and structured portfolios.
Deutsche Asset Management's strategies worldwide will be offered to U.S. institutional clients.
The abrupt departure of BT's senior indexing team threw Deutsche Asset's new organizational charts into disarray.
BT's key five-person indexing investment team walked out July 2, lured by an offer from Merrill Lynch & Co., New York, to set up a quantitative business unit. Frank Salerno, Anthony Conroy, Phil Green, Sid Hoots and Rick Vella now lead Merrill Lynch Quantitative Advisors, headed by former BT Managing Director Dean D'Onofrio, who joined Merrill several years ago.
Bankers Trust is believed to have had 15 to 20 investment professionals in the indexing unit when the Deutsche deal closed. Mr. Salerno was the business leader for the unit. Of the $220 billion in global indexed assets they managed, $200 billion was passive and the remainder was enhanced index and other quantitative products.
Mr. Vella ran the global passive business, as well as some passive domestic investments. Mr. Hoots was a portfolio manager on structured products and had oversight for index optimization. Mr. Conroy was the trader for passive and structured products; Mr. Green was responsible for asset allocation within structured products.
The reaction of clients to the changing situation has been mixed.
A spokeswoman at Boston-based Fidelity Investments -- for which BT runs about $33 billion in passive equity investments -- said officials there are monitoring the situation.
"We've had conversations with Bankers Trust and have been assured that the people who manage the portfolios, handle custody, securities, lending and trading are all still in place," said spokeswoman Anne Crowley. "We have been assured that there will be no interruption to service for our accounts. We will continue to monitor the situation."
Ms. Condon, a Bankers Trust veteran, was put in charge of the indexing business. In an interview, she said she is spending much of her time calling clients.
"They need to know that the people running the money are still in place, and in most instances these are the people that the client has dealt with. And, by and large, they are the people sitting next to me," Ms. Condon said.
Said Jeff Nipp, head of manager research for Watson Wyatt Investment Consulting in Atlanta: "I've never seen a major departure by an indexing team. It will be interesting to see what happens, but you can't look at it as an active management departure."
Meanwhile, London's Mr. Dobson made some quick organizational changes.
Deutsche originally tucked BT's indexing business into Deutsche Bank's new institutional custody and trust business unit.
Insiders close to the asset management business complained it should have been placed inside Deutsche Asset Management, that such a grouping signaled a weak interest in what was the largest portion of BT's investment management assets. Following the exodus of the indexing team, Mr. Dobson swept the indexing business into Deutsche Asset Management, doubling the managed assets of the New York unit.
The passive and enhanced index businesses are very important to Deutsche's growth. BT had more than $156 billion in indexed institutional tax-exempt assets by year-end 1998, making it the third largest index fund manager for institutional investors.
"We have the commitment and in many ways, Deutsche Bank has a great deal to gain from the indexing business. It has the power seat to the asset management business in Europe and can open those markets and other markets for index opportunities. The commitment at the top of the institution is very strong. Everyone at the Deutsche Bank executive committee is aware of the problem we've had and have offered the support we've needed," Mr. Marin said of the departures.
The Deutsche empire
Deutsche Bank completed its $10 billion acquisition of New York-based Bankers Trust in June. After the closing, Deutsche Bank sold BT's Australian investment management operation to Principal Financial Group, Des Moines, Iowa. Deutsche Bank officials said the bank's current Australian fund operations were sufficiently strong for the organization.
Principal bought the entire group for $1.4 billion, but sold off the investment banking portion, keeping what it considered the jewel -- BT Funds Management's Australian and New Zealand businesses, with $26 billion in assets under management. The transaction is expected to close in the third quarter. Principal now has more than $84 billion in total assets under management.