MINNEAPOLIS - After a year of client losses over performance and the death this month of its chief investment officer, Zak Capital Inc. enlisted another money manager for help.
The midcap growth equity manager this month entered into an unusual contractual relationship with Eagle Asset Management Inc., St. Petersburg, Fla., for assistance in managing assets, following the death of CIO Suzanne Zak.
Ms. Zak died June 3 of cancer; she was 41.
Under the terms, Zak will obtain from Eagle the services of Todd L. McCallister, an Eagle senior portfolio manager, to help manage Zak's $682 million under management.
Mr. McCallister essentially will take over Ms. Zak's role, while keeping his duties at Eagle. He will oversee the third of the portfolio Ms. Zak had managed. He also will work with Nicholas Heyer and Cameron Johnson, both Zak vice presidents, who each will continue to handle a third of the portfolio, Mr. Heyer said.
Mr. McCallister will pick up Ms. Zak's role in analyzing and selecting technology and telecommunications stocks. Mr. Heyer will continue to oversee financial, industrial, energy and utility stocks and Mr. Johnson, health-care and consumer stocks. Mr. McCallister will assume the veto power Ms. Zak had over Messrs. Heyer's and Johnson's selections.
"We're making the best of a bad situation," said Mr. Heyer. "We could have hired an executive search firm for $100,000 and not come up with a better solution."
Similar styles
Mr. Heyer said Minneapolis-based Zak brought in Mr. McCallister because his money management style is similar to Ms. Zak's. The two had worked together at Investment Advisers Inc., Minneapolis.
The Missouri State Employees' Retirement System, Jefferson City - Zak's biggest tax-exempt institutional client - will evaluate Zak because of the changes. Zak manages $175 million for the $5.5 billion pension fund. That represents two-thirds of the $261 million Zak Capital manages for tax-exempt institutional clients.
Rick Dahl, CIO and deputy executive director at the Missouri fund, said system officials plan to meet with Zak and Eagle executives soon. "We are taking a look at the people there and will decide whether we are comfortable with the firm continuing to manage money" for the system, he said. "In the short term, we are comfortable."
Zak's new arrangement includes assistance by Eagle in marketing. Zak has had no dedicated marketing staff; Ms. Zak led the marketing effort while also managing money, Mr. Heyer said.
Under the deal, Zak will pay Eagle through a revenue-sharing arrangement. Mr. Heyer said Eagle will determine Mr. McCallister's compensation.
"It's in their (Eagle's) interest to help the assets grow," Mr. Heyer said of the marketing arrangement.
Terms of the Eagle deal are indefinite, although Zak can end the contract with a 60-day notice.
At Eagle, Mr. McCallister manages small-cap equity portfolios under a style he calls growth at a reasonable price. He runs $20 million in separate accounts for institutions and $200 million for high net worth retail clients.
Eagle has no midcap portfolio, Mr. McCallister said. But he also manages the $34 million Heritage Mid-Cap mutual fund, which is owned by Raymond James Financial Inc., St. Petersburg, Eagle's parent company.
"It's much like Suzanne's fund," he said. "It has very good downside risk."
Negative returns
Zak's assets under management for tax-exempt clients were down 45% as of Dec. 31 from $478 million a year earlier. The firm's total assets fell to $396 million as of Dec. 31, down 42% from $682 million a year earlier.
Zak's performance suffered in 1999, when the firm "wouldn't chase speculative stocks," Mr. Heyer acknowledged.
Zak ranked in the last decile with a return of -1% during the 1999 market boom - when the median return of its peer group midcap growth managers soared to 54.6%, according to Pensions & Investments' Performance Evaluation Report. The Russell midcap growth index returned 51.3%.
However, Zak's performance has rebounded relative to its peers. For the year ended March 31, Zak ranked in the top decile, returning 9.2%, when the PIPER median was -33% and the Russell midcap growth index returned -45.4%. For the two years ended March 31, Zak ranked in the fifth decile, returning an annualized 11.2%, while the median PIPER return was 8.7% and the Russell midcap growth index returned -1.7.
Mr. Heyer conceded Zak lost accounts last year because of performance.
Brockton (Mass.) Contributory Retirement System replaced Zak in September because of performance, said Harold P. Hanna Jr., executive director of the $200 million pension fund. It reassigned the $10 million portfolio to fellow midcap growth manager MFS Investment Management Inc., Boston.
The $3.1 billion Fairfax County Retirement System, Fairfax, Va., also dropped Zak last summer, moving to a Russell 2000 fund, said Jeffrey A. Willison, investment manager for the system.
Norfolk County Retirement System, Canton, Mass., dropped Zak a year ago over performance, replacing it with a midcap growth portfolio run by MFS, said Timothy Cahill, treasurer. Zak ran $25 million for the $400 million fund.
The Oklahoma Police Pension and Retirement System, Oklahoma City, hired Focus Investment Management last spring to replace Zak.
Under review
Aside from the Missouri system, other existing clients are reviewing Zak because of the changes.
Lufkin Industries Inc., Lufkin, Texas, which has a $190 million defined benefit fund, plans to meet with Zak executives soon to evaluate its portfolio management in light of the changes at the firm. "It's premature to make any definite decision at this time," said Paul Perez, director-human resources at Lufkin. He declined to say how much Zak manages for the fund.
Zak, an employee-owned firm, is buying Ms. Zak's majority share from her estate, Mr. Heyer said. It will lose its distinction as a woman-owned firm. But he said that no clients had hired it in an affirmative action category.
