CAPE TOWN, South Africa -- After months of speculation, officials at Old Mutual PLC finally named the six firms that will comprise Old Mutual Asset Managers U.S., Boston.
From the more than 40 affiliates acquired with the purchase of United Asset Management Corp., Boston, Old Mutual executives chose the following to be in its core group of managers:
* Analytic Investors, Los Angeles, U.S. quantitative core equity manager with $1.7 billion under management;
* Barrow, Hanley, Mewhinney & Strauss Inc., Dallas, U.S. value equity, $26 billion;
* Clay Finlay Inc., New York, international equity, $5 billion;
* Dwight Asset Management Co., Burlington, Vt., U.S. fixed-income, $14 billion;
* Provident Investment Counsel, Pasadena, Calif., U.S. growth equity $23 billion; and
* NWQ Investment Management Co., Los Angeles, U.S. value equity, $5 billion.
Industry mavens didn't expect Analytic to be on the A-team of Old Mutual managers. In August, investment bankers and strategy consultants thought Heitman, Chicago, a real estate manager; Sirach Capital Management Inc., Seattle, a growth equity manager; and OSV Partners, Greenwich, Conn., a currency manager, would be among the firms selected to be part of OMAM U.S.
$81 million group
The tapped managers had aggregate earnings of $81 million and combined revenue of $206 million year to date through Nov. 30. The formation of the new company is subject to regulatory approval.
Old Mutual always had in mind a tripartite division of the UAM managers, said Kevin Carter, chief executive officer of OMAM U.S.
Pilgrim, Baxter & Associates Ltd. would provide the platform for a mutual fund family, offering its own funds and those subadvised by other Old Mutual affiliates; OMAM U.S. would combine a group of about 10 managers diversified by asset class and management style to provide investment, especially in the United Kingdom and South Africa, where Old Mutual has a strong client base; and a holding company would comprise the rest of the 40 or so managers.
The managers in OMAM U.S. will remain autonomous with regard to investment process, operations and their existing clients. They will be linked by an executive committee made up of representatives from each of the six companies that collectively will control OMAM U.S. Mr. Carter said a team of about five Old Mutual senior executives in Boston will function as "a trusted set of consultants" to OMAM U.S. money managers to provide advice about new products and other support.
Many details remain to be decided, Mr. Carter stressed, but he said likely first steps will be mutual fund subadvisory assignments and cross-selling of affiliates' strategies into the wrap market by NWQ and Provident, which have a strong presence in the wire houses' wrap programs.
On the other hand, "I am convinced that centralized marketing on the institutional level won't work," said Mr. Carter, and affiliates will continue to work independently and directly with consultants, plan sponsors and other institutional investors and gatekeepers.
After eight months of negotiation, Old Mutual finally inked the deals that move each of the six investment affiliates to a profit-sharing model from a revenue-sharing deal, which is an attractive deal for each, said Mr. Carter.
Mr. Carter and heads of the affiliates in OMAM U.S. would not disclose the terms of the transactions, but Mr. Carter noted that because Old Mutual did not buy new streams of revenue income from each of the companies, as it did with Pilgrim, Baxter, the difference in the costs "was like night and day. These were completely different kinds of deals." It will cost Old Mutual $640 million over seven years to buy the revenue streams of Pilgrim, Baxter founders Harold Baxter and Gary Pilgrim (Pensions & Investments, Nov. 27).
The switch to a new economic model was enormously persuasive for executives of Provident Investment Counsel as they were deciding whether to accept Old Mutual's offer to join OMAM U.S., said Larry D. Tashjian, chief executive officer and executive managing director.
"OM bought into our existing compensation program and added a deferred layer. It provides an excellent long-term incentive for our employees, especially for the second and third generation. OM and UAM didn't control our destiny with regard to compensation or equity equivalents we offered, but this will enable our employees to earn a significant chunk of dough if we execute. This is a huge, huge issue in our minds," Mr. Tashjian said. Not only will the reward be bigger than under Provident's old compensation program, but it also will extend to more people in the firm, he said.
Michael Mendez, president and chief executive officer of NWQ, also likes the switch to profit sharing. He said, "It's very different and is a better alignment with our interest in reinvesting in the firm. After so many months of negotiations with OM and Kevin Carter, it was clear, over and over, that OM really understands succession planning."
Consultant Andrew Silton, president of AMS Financial Consulting Services, Chapel Hill, N.C., agreed that Old Mutual was smart to change the economic model of its core group of affiliates. And the idea of a smaller group of managers "conceptually makes sense, to move to a manageable group you can build synergies around. But the key question is, how excited are the six subsidiaries? There's got to be chemistry between them that works as they pool resources. Do they even want to work together? In addition to the financial incentives for each company, there should also be financial incentives based on how well they work together," he said.
While NWQ's Mr. Mendez would not elaborate on financial details, he said he is looking forward to working with other Old Mutual companies. For 10 years, Mr. Mendez said, he wished he had the resources to provide solutions-based marketing to institutional clients, beyond NWQ's relative-value investment style. NWQ already was among the most active of UAM affiliates in promoting the investment products of other UAM companies, referring more than $500 million to other affiliates over the years. Now, Mr. Mendez said, he is looking forward to "leveraging the sales force of Provident" and to "cross-selling and solution-selling more products. The consultants and the wire houses have been begging for this."
John K. Dwight, president of Dwight Asset Management, also said he likes the idea of formalizing and organizing the more informal marketing relationship the UAM affiliates had. "We will be more organized in how we approach consultants and clients. That ability to work together, to promote a single firm in the U.S. while preserving total autonomy on the investment side, was absent under the old UAM structure."
Executives at one of the smaller managers of OMAM U.S., quant manager Analytic Investors, with just $1.7 billion under management, are "really excited" about the asset gathering potential of being on the new asset management platform, said Harindra de Silva, president.
Analytic already had been re-equitized by UAM and was working closely with the corporate headquarters staff prior to the sale to Old Mutual, but "We felt that for us and UAM, distribution was always the challenge. All the scale advantage accrued to the large firms and there was not much chance for small firms, like us, to attract assets," Mr. de Silva said. However, the chance for global distribution through Old Mutual, "to get onto the global platform that Kevin (Carter) is building, is what tipped us to do this vs. staying independent, from the distribution standpoint."
Executives at the 35 or so Old Mutual affiliates left in the holding company without a clearly delineated future are probably a lot less happy right now than Messrs. de Silva, Dwight, Mendez and Tashjian and other OMAM U.S. executives, said Mr. Silton.
Mr. Carter said that the fate of each manager is being carefully reviewed. A few more may be added to the OMAM U.S. core group. Some might remain indefinitely in the third manager grouping, Old Mutual U.S. Holdings Ltd., under the leadership of Chief Executive Officer James Orr. Others may be sold to their management or outside buyers.
"It's rather a complicated undertaking to negotiate with 30-plus affiliates who are all talking to each other and know the terms of each other's deals. On the one hand, it's not surprising that OM is taking a slow and deliberate approach," Mr. Silton said. "On the other hand, until the ownership question is decided, it will be difficult going forward to attract new business and to keep existing clients. Being in that limbo for a protracted period will be tough for affiliates. They will likely lose business and personnel."