CHICAGO -- Gary Brinson, one of the world's most influential voices in investment management, is suffering through a long, sharp period of underperformance in the active value management style he pioneered.
And some clients are giving Mr. Brinson more time than they would give other managers to right the course. They're putting the firm on watch lists, but not terminating it.
But given the high price -- $705 million -- paid by Swiss Bank Corp. to get Mr. Brinson's company in August 1994, Mr. Brinson is expected to perform, said Peter Starr, a consultant at Cerulli Associates Inc., Boston.
"(Mr.) Brinson's ability to get himself (back) into the top quartile is expected. . . . If he can't do it . . . he'll likely be replaced by someone who is more of a growth-value hybrid," Mr. Starr said.
In an interview late last month at his UBS Brinson Partners office in Chicago, Mr. Brinson clearly was troubled by the performance of the firm's flagship domestic large-cap value equity strategy.
He attributed the poor showing to a growth-oriented stock market cycle that has been narrower and has lingered far longer than he had seen during his 30-year career.
The company's style is "out of favor, out of vogue and clearly an investment style that's not in sync with this current momentum myopia," Mr. Brinson said.
He oversees $280 billion in assets under management as chairman and chief investment officer of Brinson Partners in the United States and UBS AG's institutional asset management division. He also had been chief executive officer of the two units until September.
Brinson Partners' large-cap value style is underperforming peer strategies, not just the broad market and growth managers.
The composite return for Brinson's U.S. Equity (value) strategy was -13.7% for the third quarter of 1999, placing it in the bottom decile of large-cap value managers in the Pensions & Investments' Performance Evaluation Report for managed accounts. Its one-year return as of Sept. 30 was 10.1%, placing it in the ninth PIPER decile; over five years, its compound annual return of 19.8% was in the fifth decile.
More leeway didn't help
The Minnesota State Board of Investment, St. Paul, which oversees $40 billion in pension assets, has suffered five quarters of underperformance in the $658 million domestic large-cap value portfolio managed by Brinson Partners.
"We have given them a little more leeway than we would anyone else," said Executive Director Howard Bicker. "But we are extremely concerned about Brinson's performance."
Minnesota compares Brinson's performance with a customized value benchmark developed by Brinson Partners. All of Minnesota's active equity managers are compared with similar, customized benchmarks.
According to reports from the Minnesota board, the Brinson large-cap value equity portfolio returned -13.3% for the quarter ended Sept. 30, compared with -7.5% for the benchmark; it returned 10.3% for the year, vs. 27.3% for the benchmark; an annualized 15.5% for the three years, compared with 20.8% for the benchmark; and an annualized 19.3% for five years, vs. the benchmark's 21.5%.
Where the company truly has taken a beating is in its large-cap value strategy "with cash," said Andrew Rasmussen, director of manager research at Asset Strategy Consulting Inc., Los Angeles. "They were dead wrong on their take on U.S. equities vs. cash in this product."
Brinson's U.S. Equity with Cash composite portfolio returned -10.7% for the third quarter, putting it into the seventh decile in PIPER. For the one, three and five years ended Sept. 30, the strategy's returns were mired in the bottom decile.
Despite the poor performance on the value equity strategy, a spokesman for Brinson Partners said the strategy attracted $1.4 billion from new clients in 1999, as of Nov. 30. It also attracted $937 million in assets from existing clients. The spokesman said he did not have the number of clients that terminated Brinson for the value strategy, nor the amount of assets lost.
Yet clients are hanging on, in large part because they place a great deal of faith in Mr. Brinson's renewed commitment to investment management.
Mr. Brinson also seems relieved to have shed administrative duties that absorbed as much as 50% of his time after the merger of SBC and Union Bank of Switzerland. He gave up the job of CEO to Peter Wuffli Sept. 1. Mr. Brinson said he is now free to spend 80% of his time on investment management.
Mr. Brinson serves on executive committees for equities and fixed income. He has a huge influence on the investment process and on what stocks are bought and sold.
"It's safe to say that when pension fund sponsors say Gary Brinson is their portfolio manager, it is true. He is the CIO and he is very involved in any decision involving the portfolios. His ideas shape the portfolios, his ideas reverberate throughout the firm," said Kevin Quirk, a managing director at BARRA Strategic Consulting Group Inc., Darien, Conn.
Mr. Brinson's personal involvement in portfolio management and clients' faith in his judgment might be the strongest reasons for not terminating Brinson Partners, said Joe Fratto, executive director of the $660 million Chicago Park Employees' Annuity & Benefit Fund.
Brinson Partners manages $65 million in large-cap value stocks for the fund.
But with quarter after quarter of underperformance, Mr. Fratto said his board will "at some point have to sit down and decide how long this can go on."
The fund's trustees have been rebalancing gradually, trimming the Brinson account in the process.
The board's trustees and consultant Ennis, Knupp Associates Inc., Chicago, have been "looking for something organizationally that was a problem, post-merger (between SBC and UBS), but we really didn't find anything. Same people, same processes. . . . We can't explain it," Mr. Fratto said.
"Our findings are that these are the decisions of Gary Brinson and that he is not going to waver. He's been very successful. There have been a couple times when he was high in cash and did well when the market didn't. But the question is: Can he pull it off this time? Or is he missing the boat with these stock convictions of his? We can't afford to do that," Mr. Fratto said.
These are questions of which Mr. Brinson is well aware.
Brinson Partners management has spent an enormous amount of time in the past 24 months thinking about performance problems, Mr. Brinson said, "not something we've had to do much of in the company's history." He acknowledged that as a value manager, the company has suffered through other cycles of relatively lackluster performance, which is not surprising, he said, given the strategy's focus on fundamentals.
He admitted there had been some "flawed analysis; we didn't do everything perfectly." He did not elaborate, but said, "We have not incurred serious damage with the mistakes we made -- no more so than hitting other potholes in the past."
In addition to stepped-up client visits and his own renewed involvement in the investment process, Mr. Brinson said the executive team for equities is "doubling, even tripling" the amount of analysis performed on stocks and is doing so within a global context. Increased internal debate about processes and stocks and new checks and balances should improve stock analysis, he said.
What Brinson Partners will not do is waver from fundamental analysis, he said. Nor will managers succumb to the lure of growth stocks to help performance.
"I don't want to tamper with and, just for the sake of commotion, do something that will harm us when the market returns to normal. There's great danger in changing investment processes to fit an unusual market when the market finally does return to normal," Mr. Brinson said.
Predicting a debacle
Before that happens, Mr. Brinson predicted, the market cycle "will end very badly, when the Internet bubble bursts."
He couldn't say when the market will undergo a correction, but said his company is staking its position on his prediction of a debacle in the stock market.
One consultant, who declined to be identified, noted there are different kinds of active value managers. Those that track the standard value indexes more closely are likely to do better in the current market, because the indexes themselves are more growth-oriented.
Brinson Partners, he said, is usually classified as a conservative value manager, one that is as far away from index tracking as a value manager can be. The consultant pointed out that about 30% of the Russell 1000 Value index is growth-oriented "and that 30% is what a real value manager wouldn't touch. But that 30% is where is the performance has been."