Individual managers and even entire management teams left their employers to start up more than 30 new money management companies, according to data from Investment Counseling Inc., West Conshohocken, Pa.
In two cases entire management teams left firms to strike out on their own. StoneRidge Investment Partners, formed by staff who left Meridian Investment Co., has attracted more than $700 million since Oct. 1. Agincourt Capital Management LLC, founded by the entire fixed-income investment team of Sovran Capital Management Corp., has brought in more than $2 billion from 40 clients since the company opened in late September.
A few other managers left to form their own traditional institutional investment management companies, such as Arrowstreet Capital LP, Bourgeon Capital Management, NewBridge Partners and Murray & Co. Asset Management.
To the Net
The latest crop of investment management firms is sprinkled with Internet companies aimed mainly at on-line, retail consumers, among them mutual fund managers MetaMarkets.com Inc., X.Com Asset Management, Stockjungle.com and Internet 100 Advisors LLC.
Others, such as Jacob Asset Management -- a mutual fund company formed when tech stock specialist Ryan Jacob left Kinetics Asset Management -- offer their investment management products on the Web, but retain more of a bricks-and-mortar approach.
Other newcomers to the mutual fund world include Aesop Capital Partners, Viking Fund Management LLC, Eastbourne Management, Choice Investment Management LLC and Ingenuity Capital Management.
Pruning their hedges
The siren's call of high management fees lured some into starting hedge funds. Among the new-in-1999 hedging ventures, according to Investment Counseling's list of 1999 who's-who of startups, were Mezzacappa Berens LLC, Bookbinder Capital Management LLC, Sagamore Hill Capital Management, Sirios Capital Management, Discovery Capital Management and Global Fixed Income Advisors.
Joseph Stocke, chief investment officer of StoneRidge Investment Partners, Malvern, Pa., said he thinks "we will see a lot more start-ups on the horizon. Big firms . . . tend to pull the identity away from the management team as the company strives for so-called global branding, and this will give rise to even more entrepreneurial spirit in portfolio managers and teams of portfolio managers.
Mr. Stocke formed StoneRidge in October with Lester Rich, Philip Brown II and Daniel Cook. They were essentially the core of the equity management team of Meridian Investment Co., Philadelphia, a subsidiary of First Union Corp. The team had worked together for 10 years. Christopher Thorsheim joined StoneRidge from Deutsche Asset Management Inc., New York, to head marketing.
Since its doors opened Oct. 1, 15 clients with a total of $700 million have moved over to StoneRidge. About $300 million is managed in balanced mandates for Taft-Hartley plans, about $25 million is managed in a small-cap strategy, $25 million in fixed-income and about $350 million in large-cap equities. The company has three mutual funds -- large-cap, small-cap and fixed-income -- and manages separate accounts in each strategy and in a balanced approach.
StoneRidge encountered many of the problems faced by most start-up money managers -- from office space to technology concerns to staffing. The partners were scrupulous in leaving Meridian Sept. 30 "without our Rolodexes, without so much as a scrap of paper," Mr. Stocke said, which meant the first weeks of the company's existence were spent getting old client's phone numbers from directory assistance and building an infrastructure to manage the company's multi-factor equity approach.
Mr. Bogle and his three partners own the firm equally and will share in all its future profits.
Mr. Bogle intends to hold to one of his most fervent beliefs -- that portfolio size must remain small in order to preserve performance and to keep trading costs low. Therefore, the company will cap its small-cap, long-only mutual fund and separate accounts at a total of $200 million and cap the long-short strategy used in its soon-to-be opened hedge fund and separate accounts at $200 million.
The initial decision to offer the small-cap strategy in commingled fund vehicles was deliberate, as the firm won't have to spend a lot of time servicing a lot of separate portfolios, Mr. Bogle said. By keeping the separate account minimum high -- $20 million -- Mr. Bogle said he expects to have a limited and manageable number of client relationships.
The company began managing its first separate account Jan. 1 -- a $30 million small-cap equity mandate from the pension fund of Kimberly-Clark, Dallas.
When all eight members of the bond management team from Sovran Capital Management Corp., Richmond, left to form Agincourt Capital Management, Richmond, they had to deal with more than a shortage of office furniture: They were sued almost immediately by their previous company, Bank of America Investment Management (P&I, Oct. 18, 1999). The departing Sovran team included Bradley Coats, Patrick Kelly, Lewis Duncan Buoyer, Patrick O'Hara, William Armes, William Putnam, Laura Haynie and Brian Scott Marshall. The legal case is pending.
The Agincourt team set up shop in September. The business plan is to remain focused on serving a limited number of institutional clients in focused management of fixed-income, said Mr. Kelly, a portfolio manager and managing director. The manager puts a heavy emphasis on sector rotation and fundamental, credit-intensive research. Clients are asking for a high-yield strategy, said Mr. Buoyer, managing director and portfolio manager, and Agincourt likely will oblige next year.
More than 40 clients with more than $2 billion in assets followed the team to Agincourt within its first three months of operation.
Extra alpha at Arrowstreet
HighCrest Capital Partners made another minority investment of 15% in a start-up manager in June last year -- Arrowstreet Capital LP, Cambridge, Mass. The institutional equity management firm was founded by Bruce Clarke, formerly chief executive officer of PanAgora Asset Management, Boston, and Peter Rathjens, who had been PanAgora's chief investment officer. John Campbell, the Otto Eckstein Professor of Applied Economics at Harvard University, also came in as a founding partner.
Mr. Clarke said Arrowstreet's business model combines a narrowly focused investment strategy that seeks excess alpha from international and global equity investment with what he calls "non-investment alpha." The latter refers to the intensive consultative services Arrowstreet's principals will offer clients, sharing some of the company's detailed research on markets in a given quarter and showing clients how that research may affect their investment programs.
Internal staff at the firm's one current client, a public fund that Mr. Clarke declined to identify, is building its own international country allocation and using Arrowstreet's research in building its model.
The intensive nature of the client service Arrowstreet offers will necessitate limiting the number of clients to about 100 institutions and less than $10 million in international and global equities.
"We want to stay small so our alpha doesn't degrade from high trading costs. We aren't worried about having 20% revenue growth a year. We want to have controlled growth with a definite cap limit," said Mr. Rathjens. "The industry is littered with companies that had a great idea and couldn't manage growth. There are a lot of famous flame-outs."