NEW YORK - Executives at Salomon Smith Barney have stripped the global equity index group of its independence and stopped the aggressive marketing of its indexes to plan sponsors and consultants - just as its primary competitor for such indexes has hired someone to strike back.
The SSB executives had received complaints from Patricia Dunn, chief executive officer of Barclays Global Investors, San Francisco, about the aggressive manner in which the equity index group marketed its indexes. BGI gives a lot of its institutional equity trading business to SSB's trading desk. Officials at Morgan Stanley Capital International, New York, the largest provider of global indexes with which SSB's indexes compete, also are grumbling, sources said.
According to an internal SSB memorandum obtained by Pensions & Investments, Ms. Dunn sent a letter to Michael Carpenter, chief executive officer of SSB, after Tom Nadbielny, head of SSB's global equity index group, was quoted in the Feb. 5 issue of P&I as criticizing a BGI report that said switching benchmark indexes would be more expensive than sticking with MSCI indexes as they change to free-float weightings this year.
According to the memo, which contains notes from a "relationship management meeting" between BGI and SSB executives, "the main purpose of the meeting was to seek to repair the damage done by the recent Pensions & Investments article featuring Tom Nadbielny, in which SSB contravened previous assurances to Blake Grossman (BGI's global chief investment officer), that while we would always wish to argue the merits of our indices versus MSCI, we would not go `head to head' with BGI in the marketplace."
In the story, an anonymous source said of the information in the BGI report, "Don't you think it looks a little fishy? Just being at the meetings and seeing what comes up gives these people privileged information. They know earlier than everyone else what is going to happen."
In the story, Steven Schoenfeld, managing director and head of international equity management at BGI termed the source's assertion "an incredibly blatant falsehood."
Sources said BGI had promised the Salomon trading desk many of the trades it will make when it reconfigures its indexed assets under management to match the revised the MSCI Europe Australasia Far East index in June. However, Minder Cheng, head of global trading at BGI, said the firm would reconsider its business relationship with SSB if another "incident" occurred, according to the SSB memo.
Last year, BGI paid more than $23 million in total equity trading commissions to SSB, according to the internal memo.
John Hoffman, global head of equity research at SSB, said in an interview he had called BGI's Mr. Grossman after the article came out "and apologized for criticizing them" over the BGI study. The two firms still disagree about the results of the study, Mr. Hoffman said.
He added he did not know of any letter sent to Mr. Carpenter by Ms. Dunn. However, he said he was asked to call Ms. Dunn to explain the situation.
Ms. Dunn was traveling in Asia and unavailable for comment, BGI spokesman Tom Taggert said.
BGI's Mr. Schoenfeld said he knew nothing about any pressure put on SSB's executives.
Henry Fernandez, president and CEO of MSCI, said he couldn't comment on reports of MSCI putting pressure on SSB executives to rein in the equity index group. He did say SSB "is a very good and important client of ours."
On April 10, SSB's global equity index group, which had reported to Mr. Hoffman, became part of the quantitative research group run by Deep Kapur in Singapore and Keith Miller in New York. Mr. Nadbielny's title remained the same.
The equity index group had been part of the quantitative research group until about two years ago, Messrs. Hoffman and Kapur said. The decision to bring it back to quant research followed an outside consultant's recommendations that the most profitable use of the group would be to focus it on custom indexing and that merging it with the quant group was the best way to accomplish that, added Mr. Hoffman.
Mr. Kapur said he's not aware of any pressure "being brought to bear" on executives at SSB, but acknowledged some controversy had arisen "from the aggressive marketing of our indexes."
MSCI, for its part, has taken a much more aggressive stance in its dealings with SSB's global equity index group. The firm hired Christopher Miller as principal in January to represent MSCI in its dealings with consultants and plan sponsors.
Mr. Miller has proved to be a pit bull in his dealings with SSB's global equity index group. Several sources who heard him speak at a recent indexing conference in Denver said he spent much of his presentation time attacking SSB's indexes and saying MSCI would put them out of business after its revised indexes are announced in June.
Herb Blank, an independent consultant, said Mr. Miller "spent about 23 or 24 minutes of a 30-minute presentation talking about Salomon, its indexes and its motives. It struck me as bizarre. If someone who's No. 3 or 4 takes a shot at someone who's No. 1, I understand it. But if I'm No. 1, why would I take shots at No. 3 or 4?"
In an interview with P&I, Mr. Miller denied having strongly attacked SSB's index group, saying he was just responding to Mr. Nadbielny's attack on MSCI.
"Unfortunately they decided to attack us," said Mr. Miller. "It's not counterattacks to explain our side of the story." He said he will be at other conferences at which SSB also is scheduled to make presentations and "if someone says something about us, there will be an answer."