Zurich Financial Services AG, Zurich, has stopped trying to patch up the tattered marriage of three merged asset management cultures by itself.
Together with its main investment management operation, Zurich Scudder Investments Inc., New York, the Swiss insurer has hired the investment banking units of Goldman, Sachs & Co. and Morgan Stanley Dean Witter & Co. to "assist the company in examining alternatives to enhance their asset management business," according to a statement.
Translation? Observers close to the situation said Zurich Financial is seeking to sell Zurich Scudder Investments or to merge it with another money management acquisition.
"It would be premature to speculate on what alternative we will pursue. Whatever action we will take will be predicated on providing more and better opportunities for Zurich and Zurich Scudder clients and employees," said Eleanor Mascheroni, a spokeswoman for Zurich Scudder.
Reports of yet another acquisition by Zurich Financial of a U.S. money manager to merge with Zurich Scudder had outsiders scratching their heads.
"It's a hodgepodge kind of shop now. They took several different cultures and tried to smash them together and it didn't work. If they buy yet another company, what are they going to do with it?" asked vendor consultant Fernand Schoppig, president of FS Associates Inc., West Orange, N.J.
Mr. Schoppig noted that even Zurich's first money manager acquisition, the 1996 purchase of Kemper Investments Inc., Chicago, seemed "opportunistic, rather than strategic" on the part of Rolf Huppi, the group's Zurich-based chief executive and chairman.
Zurich's lack of experience in running an asset management shop became more obvious with each successive acquisition - Scudder Stevens & Clark Inc., New York, in 1997, and Threadneedle Asset Management, London, in 1998, Mr. Schoppig said. "I don't know that they ever really fit together," he added.
There has been a battle of wills ever since among staff in New York and Chicago and the corporate headquarters in Switzerland, said U.S.-based consultants.
Rather than trying to buy performance and then struggling with yet another merger integration, Mr. Schoppig, other consultants and former staffers said the firm should focus on nursing its asset management operations back to health.
"This is a firm that has already spent a lot of time integrating its various parts with varying levels of success," said one consultant who asked not to be named.
As part of a last-ditch effort to mend fences and improve investment performance, Zurich Financial last year created a new unit - Zurich Global Asset Businesses - and named Stephen M. Gluckstern as chief executive, effectively demoting Edmond D. Villani, chief executive officer and president of Zurich Scudder Investments, confirmed sources close to the investment unit.
Mr. Villani now reports Mr. Gluckstern; previously, he reported directly to Mr. Huppi.
Messrs. Villani, Gluckstern and Huppi were unavailable for interviews, said Ms. Mascheroni.
Mr. Huppi was the impetus behind the new global business unit as well as the leadership change, said sources. It's common knowledge, said one observer, that Mr. Gluckstern has a closer relationship with Mr. Huppi than does Mr. Villani.
Zurich Financial's depressed stock price put Swiss execs under the gun, and they reportedly were looking to the company's asset management business for better revenue. Mr. Gluckstern's appointment to oversee global money management was considered by some as a sign that the company finally is getting serious about addressing Zurich Scudder's performance issues and improving revenue.
Now, it's anybody's guess as to what will happen to the asset management businesses.
It is still clearly an important business line to Zurich's top brass. Mr. Huppi said in a statement: "As we have stated, asset management is one of Zurich's core businesses. We're continually examining our options to enhance our competitive position. With a strong base in the U.S. and continued growth worldwide, we look for Zurich Scudder Investments to strengthen its position as a global asset management leader."
Mr. Villani is almost certainly going to be one of the first casualties, whether Zurich Scudder is sold or merged with a new acquisition, said one investment banker with knowledge of the company. "Ed is a really nice guy. He is very well regarded by the industry. But they have given him enough time to sort all this out and he just hasn't been able to do it."
Mr. Villani likely has at least a year to serve out in the Zurich organization: He is in the fourth year of a five-year contract, and sources said it might be too expensive at this stage for Mr. Villani or Zurich to break that contract.
`A real survivor'
At least one investment banker thinks Mr. Gluckstern "is a real survivor. He'll end up on his feet somewhere within Zurich when this is all over." Other observers, however, were skeptical as to whether he has sufficient experience to run an international money management house.
Mr. Gluckstern is a Zurich veteran with much of his career spent in the group's sizable insurance business. He first joined the firm in 1988 as head of Centre Re, Bermuda and New York. He left the group in 1998 when he was CEO of Zurich Re to launch Capital Z Investment Partners, a private equity money manager that was acquired by Zurich late last year.
At least for now, Mr. Villani's responsibilities have not changed; he remains on the Zurich Group Management Board as CEO and president of Zurich Scudder Investments, said Stephen Cohen, head of institutional business for Zurich Scudder Investments Ltd., London.
Mr. Cohen said the New York-based global asset businesses division was designed to allow cross-selling of Zurich's asset management products, which now include hedge funds and private equity. The internal restructuring stemming from the launch of the new division would have no impact on the investment process, he added.
The division was set up last October to "cluster the asset management businesses," Ms. Mascheroni said. These include Zurich Scudder Investments, Capital Z Investment Partners, Centre Solutions and Zurich Capital Markets.
The units manage a total of about $440 billion, of which $370 billion is managed by Zurich Scudder, Ms. Mascheroni said.
Thomas Weisel dissolved
What's not included in Mr. Gluckstern's new empire is Scudder Weisel Partners LLC, a joint venture between Zurich Scudder Investments and San Francisco investment banking boutique Thomas Weisel Partners to provide alternative investments for high-net-worth investors. That partnership was dissolved abruptly by mutual agreement April 6.
Mr. Schoppig of FS Associates said Zurich Financial Services is not offering a truly stellar investment team at Zurich Scudder to a potential buyer or merger partner. "Scudder has always been a bit of a run-of-the-mill manager. There's nothing glamorous about them," he said.
And performance has been less than glamorous for the past five years in Zurich Scudder's institutional mandates, according to data from the Pensions & Investments' Performance Evaluation Report.
Zurich Scudder reported returns for eight institutional equity separate accounts to PIPER and only two - the Emerging Markets Equity and Global Equity Management -made it into the first or second decile rankings among peers in recent years. The Emerging Markets strategy was in the first decile for the year ended Dec. 31, 1996, but dropped to the 10th decile for the year ended Dec. 31, 1999. (The firm did not report data for year-end 2000.) The Global Equity Management strategy was in the second decile for the year ended Dec. 31, 2000. All of the other equity strategies ranked mainly below the midway mark for the one-, three- and five-year periods ended Dec. 31.
Best-known as a value investor, Zurich Scudder didn't take advantage of last year's favorable market conditions to make much progress in performance of those strategies. The 17.8% composite return for the one-year period of the Contrarian Value Equity separate account strategy was good enough to put it in the third decile among peer separate accounts in PIPER, but the Core Value Equity strategy returned 5.1%, ranking in the seventh decile ranking. Neither strategy produced returns for three- and five-year periods that were above fourth-decile peer rankings.
Improving the performance of institutional investment mandates from around the world may well become critical for Zurich Scudder. The company reported to P&I that as of Dec. 31, about two-thirds of the $370 billion assets under management worldwide was from institutional investors. About $35 billion of that was for U.S. institutional, tax-exempt investors. About $94 billion was managed for European investors, of which $20 billion was invested for Swiss institutional investors, said Mr. Cohen.
In the past year, the firm has won new mandates in Europe worth $1.8 billion, but just more than half of these assignments have been for Japanese equity strategies.
U.S. investment consultants said the firm tended to be short-listed for managing portfolios pegged to the Morgan Stanley Capital International Europe Australasia Far East index and other international and Japanese equities, but not for U.S. equities, because of its weak performance. Few of the consultants interviewed for this story were recommending the firm for domestic U.S. equity mandates.
Charles Gregor, a principal and consultant at Yanni Partners Investment Consulting LLC, Pittsburgh, has several clients that use Zurich Scudder. He said he and fellow Yanni consultants are not dissatisfied with "the underpinnings of performance" of the company's strategies, so much as with "senior management mismanagement."
"There have been no major defections there. ... Our assessment of staff morale is neutral to positive. No one is running away," he said.