CHICAGO -- Brinson Partners Inc. clients are jumping ship, often on the advice of their investment management consultants.
David Fialkowski, a research consultant with Capital Resource Advisors, Chicago, said: "We are recommending that our clients terminate their relationships with Brinson for domestic equities." About 10 CRA clients use Brinson for domestic equities.
Mr. Fialkowski also said the firm is examining Chicago-based Brinson's international equity portfolios because of recent organizational changes at the firm.
In addition, Wilshire Associates, Santa Monica, Calif., is advising most of its clients to consider terminating Brinson, said Wilshire client Duane H. Smith, director of global benefit financing for the $5.7 billion pension fund of The Goodyear Tire & Rubber Co., Akron, Ohio.
"When you see that their performance is not good and then someone like Gary Brinson retires, you get concerned," said Mr. Smith.
Brinson manages a $74 million domestic large-capitalization value portfolio for the fund and is now on its watch list.
But Steve Nesbitt, senior vice president at Wilshire, said: "We don't issue blanket recommendations on managers. The information is incorrect." However, he acknowledged that Brinson is on Wilshire's watch list.
At Hewitt Associates, Lincolnshire, Ill., all Brinson portfolios are on a watch list, said Westin Tompkins, an Atlanta-based consultant for Hewitt.
"There are clients who will terminate them," Mr. Tompkins said. "There are a lot of things going on there, and they're not good."
And, at least three well-known Swiss consultants said they had not put UBS Asset Management onto manager search short lists since Brinson and Swiss Bank Corp. merged with Union Bank of Switzerland in 1998.
"Clients want continuity, and they cannot get that if there is a reorganization," said Hans Neukomm, senior consultant for Ecofin Investment Consulting AG, Zurich.
"Several of our clients have fired them and others are thinking about it," said a consultant with another worldwide consulting firm, who declined to be named.
The reorganization announced in March by UBS -- Brinson's parent -- appears to have hurt Brinson more than helped it, creating more uncertainty among consultants and pension funds.
In the reorganization, Brinson Partners and Phillips & Drew Ltd. will be combined. This was precipitated by the departure of Tony Dye as chief investment officer of Phillips & Drew. Gary Brinson also will retire toward the end of the year. UBS will scrap the use of the Brinson name internationally. UBS Asset Management will integrate Brinson's and Phillips & Drew's value investment styles and the staffs of other asset management portfolios.
Gary Fencik, managing director and head of business development at Brinson Partners, responded to the concerns, saying, "We have relationships with 82 different consultants in the U.S., and we had a range of responses (to the restructuring) ranging from very concerned to it not being a concern to clients. We've tried hard to inform them and be as transparent as possible with the changes so they can provide meaningful feedback and we can continue a dialogue with them."
Ben Lenhardt, CEO of Brinson Partners, added, "When the reorganization occurred, we extensively communicated with our clients and explained the rationale for this."
Performance at the firm has been dismal for the past three to four years.
Among the terminations:
* The $168 billion California Public Employees' Retirement System, Sacramento, terminated Brinson for performance reasons in March. Brinson ran $1.1 billion in domestic equities and $967 million in a global asset allocator portfolio.
* The $2.2 billion Ventura County (Calif.) Employee Retirement Association fired Brinson, which had been running a $150 million international equity portfolio for the fund. Performance and organizational changes were the reasons.
Executives at other funds are watching and waiting:
* At the $80 billion New York State Teachers' Retirement System, Albany, Brinson is on the watch list for possible termination of a $409 million international equity mandate.
* The $10.5 billion Indiana Public Employees' Retirement Fund, Indianapolis, while it lacks a formal watch list, is monitoring the firm closely, said William Butler, executive director. Brinson manages $200 million in an enhanced index strategy.
* The $620 million Chicago Park Employees Annuity & Benefit Fund is waiting for a report from consultant Ennis Knupp, Chicago, before deciding whether or not to fire Brinson.
* The $8.5 billion Chicago Public School Teachers Pension & Retirement Fund last week received a recommendation from its consultant, William M. Mercer & Co., to terminate Brinson as manager of a $235 million large-cap value portfolio.
Mr. Lenhardt acknowledged "when people say Brinson Partners, they think of us as an equity-oriented firm," he said. But he pointed out that of $160 billion in assets, Brinson managed $60 billion in equities as of Dec. 31.
"We've got many cylinders here," he said, referring to private equity, fixed income, timber and oil and gas.
Several executives from big Swiss pension funds are examining whether to continue to use Brinson as an equity manager, sources said.
The 6 billion Swiss franc ($3.2 billion) Pensionskasse Schweizerischer Elektrizitatswerke, Zurich, will review this summer its $40 million small-cap mandate managed from Chicago by Brinson. Franz Winkler, PKE's head of portfolio management, said officials would consider terminating Brinson if performance doesn't improve.
According to PKE's latest figures, the portfolio underperformed its Russell 2000 benchmark by 18.95 percentage points during 1999 and 6.93 percentage points so far in 2000. But a similar portfolio managed for PKE to an identical benchmark by Prudential Investments, Newark, N.J., outperformed during 1999 and 2000 by 89.14 and 7.52 percentage points, respectively.
"Looking at these figures, it is very hard to keep the money with Brinson," said Mr. Winkler.
Brinson's client losses accelerated in Switzerland last year as pension funds became increasingly fed up with the firm's performance record, said a former Brinson insider who asked not to be named.
Now working for a rival Swiss bank, he said clients' patience had been tested since the 1998 merger, but finally snapped during the second half of last year as the firm's value approach cost it dearly in performance.
In 1999, Brinson's value equity style had a terrible year. Its large-cap value strategy returned -3.8% and ranked in the 10th decile of Pensions & Investments' Performance Evaluation Report. Its small-cap value strategy returned 2.9% and ranked in the seventh decile.
Brinson's large-cap growth equity strategy outperformed the median manager, returning 34.6% and ranking in the fourth decile.
Its small-cap growth strategy underperformed peers, returning 46.8% and ranking in the sixth decile.
Mr. Fialkowski said his clients, whom he declined to name, hired Brinson as a "core manager."
"We expected them to find the best stocks in every company in every sector," Mr. Fialkowski said.
His clients also expected Brinson to have "a forward-looking perception, but instead they got the impression stocks were bought based on historical valuations, not future growth prospects," he said.
Mr. Fencik countered: "That is categorically not a true statement.
"We always base our work on future earnings. Our analysts put together (indicators) such as future cash-flow estimates and earnings of companies." The decision to purchase stocks is made from these forecasts for companies' futures, he emphasized.
However, Mr. Fialkowski believes his analysis is part of what led to the firm's poor investment performance.
Mr. Fialkowski said with the merger of Phillips & Drew and Brinson, "there's a lot of redundancy" in terms of personnel. He expects to see a "flattening" of the management layers that made up the organization when Gary Brinson ran it.
Diana Cohen, a spokeswoman for Brinson, responded: "In a combination like this, there will always be some redundancy."
However, Brinson expects it to only be a factor in London, where both Brinson and Phillips & Drew have offices.