NEW YORK -- At least $40 billion is on the line as pension executives and subadvisory clients review their passive management contracts with Deutsche Asset Management Americas.
Deutsche lost -- to Merrill Lynch & Co. -- 11 senior executives who had formed the core of the former Bankers Trust Co.'s passive management team.
More Deutsche Americas staffers allegedly are thinking about leaving, although, as one client put it, the managers who have remained at Deutsche have been "secured" with promotions and cash.
A Deutsche spokeswoman, who asked not to be named, said the company is actively recruiting to fill vacancies in the passive management area, both internally and from the outside. Deutsche named passive management veteran Kathleen Condon to head the indexing unit in July.
Among the former Bankers Trust clients uneasy with the situation:
* The $90 billion New York City Retirement Funds issued a request for proposals this month for a domestic equity index fund manager to take over a $40 billion portfolio now managed by Deutsche. The search was prompted by the departure of key staffers at Deutsche, said Alan Hevesi, New York City comptroller. The Deutsche spokeswoman said the company will re-bid.
* Georgia-Pacific Corp., Atlanta, with $2.2 billion in defined benefit plan assets, is already gone. It followed the former Bankers Trust indexing team to Merrill Lynch Quantitative Advisors, New York. Georgia-Pacific moved a $57 million enhanced indexed separate account, managed at Bankers Trust Co. by Frank Salerno and Rick Vella, to a commingled fund with a similar investment mandate the pair is managing at Merrill, said John Stettler, vice president-benefit investments.
* AMR Investment Services Inc., Dallas-Fort Worth, Texas, is "watching Deutsche real carefully, considering the options," said William F. Quinn, president. Deutsche subadvises a $400 million Standard & Poor's 500 indexed mutual fund for AMR. Mr. Quinn said AMR staff has been talking to Deutsche continuously over the past two or three weeks and "are looking at other alternatives. There are two or three other logical (subadviser) choices if we make a decision to change vendors."
* The $5 billion Missouri State Employees' Retirement System, Jefferson City, had named Deutsche a finalist in a search for a $400 million enhanced international index fund an EAFE indexed portfolio Deutsche now manages.
Although Peter Kuntz, the lead manager for both strategies, is still at Deutsche and was recently promoted to managing director, Missouri has extended its finalist list to include Merrill Lynch and is starting due diligence this week, said Rick Dahl, chief investment officer.
"My opinion is that they will come through this. They might lose clients along the way -- I don't know if we will be one of them. But I think they will weather this," Mr. Dahl said of Deutsche.
Mr. Dahl said he just met with the remaining members of Deutsche's passive team in New York.
Problems for consultants
Some consultants have been wary of Bankers Trust, now Deutsche, for the past few years because of recurring problems such as fraud allegations and master trust and custody difficulties.
"There was a sequence of events that always made it tough (as a consultant) to do business with Bankers Trust. When something like master trust problems are going on at a company and when you're considering them for passive (rather than active) management, well, you usually decide to pass on them and wait until the trouble passes," said Lawrence Davanzo, managing director at Asset Strategy Consulting, Los Angeles.
Also, Bankers Trust wasn't as competitive on fees as rivals Barclays Global Investors, San Francisco, and State Street Global Advisors, Boston, Mr. Davanzo said. None of his clients is a Deutsche passive management client, he added.
It's unclear how many clients and how much money have left the company. But sources say Deutsche's chief rivals in passive management -- BGI and SSgA -- are winning mandates coming from Deutsche clients.
Neither BGI nor SSgA would comment on new business wins.
As of June 30, Deutsche managed $214 billion in passive accounts worldwide and $204 billion for U.S. clients, $175 billion of which was for tax-exempt, institutional investors.
Merrill Lynch officials won't say they are actively pursuing former clients of its new passive management team. But Christine Walton, a spokeswoman, admitted, "Since the expertise in this field (passive management) has moved from Bankers Trust to Merrill, to the extent that clients want to follow that expertise, we're happy to help them."
Merrill Lynch will launch, this fall, retail mutual fund versions of the "plain vanilla" indexed strategies managed by the quantitative team, she said.
Not very traumatic
Other Deutsche clients are less concerned about the staff departures because losing a passive management team is much less traumatic than losing active portfolio managers.
Fidelity Investments, Boston, which as of June 30 had $33.2 billion managed by Deutsche in six mutual funds, continues to monitor the situation closely, said a spokesman, Vic Laportchio. "There's no change in our relationship. We have been in regular contact with Bankers Trust (Deutsche)," he said.
Deutsche also subadvises $845 million for two mutual funds for Scudder Kemper Investments, Boston. A spokesman said Scudder currently has no plans to change subadvisers, although it is also monitoring the situation carefully.
Deutsche manages three passive commingled funds for institutional clients of American Express Retirement Services, Minneapolis, said Nancy Walstrom Aadalen, manager of fund analytics and investment relations.Staff is comfortable with the situation at Deutsche. "We don't automatically jettison one of our alliance partners if a portfolio manager leaves. And it is passive management, not an active strategy, which is less of a concern if a manager leaves."
One client questioned how much value a portfolio manager adds to the passive process. The answer, said consultant Glen Davis of Eager Manager Advisory Services, Louisville, Ky.
"At face value, it's easy to dismiss passive management as a pretty simple commodity business. But once you look into it more deeply, the closer you get to the inside of the process, the more apparent it becomes that it is very complex. You see that a lot of specialized expertise is needed to run a passive business -- for consultation with clients, for customization and selection of appropriate benchmarks, for investment management solutions and for technology."
