BOSTON - In Boston, it all depends on whom you know.
When Richard Mayo, a founding partner of Grantham, Mayo, Van Otterloo & Co., said he was leaving to start a hedge fund, Jeremy Grantham, another founding partner and the company's chairman, called Richard Dahlberg. The two have known each other socially for at least 20 years and served together on the investment committee of the Massachusetts Society for the Prevention of Cruelty to Children for 12 years.
GMO executives have been talking to Mr. Dahlberg for years about joining their value-oriented active equity team because Mr. Dahlberg's investment style is so similar.
"Dick Dahlberg is the closest of anyone I know to having the same investment philosophy and style as Dick Mayo," said Mr. Grantham.
Mr. Mayo's departure convinced Mr. Dahlberg to make the cross-town move from Pioneer Management Co., where he headed the value equity team and was portfolio manager of the $3.9 billion Pioneer Value Fund, said Scott Eston, GMO's chief operating officer.
Mr. Dahlberg will be a senior portfolio manager. But he's not a direct replacement for Richard Mayo. Mr. Mayo had passed some of the day-to-day responsibilities of the active U.S. equity division to Ed Choi, senior portfolio manager, but still was very active in portfolio management, said Mr. Eston.
Rather than name a single head of active equities, GMO is reorganizing the department to enable Messrs. Choi and Dahlberg to take a team approach. Mr. Eston said there would be no change in GMO's investment style as a result. Mr. Grantham said Messrs. Choi and Dahlberg already have had a few meetings and "get on like a house afire. Ed is very excited to be working with Dick."
Pioneer has named Andrew Acheson, a portfolio manager, as lead manager of the Pioneer Large Cap Value Fund, although the fund now will be team-managed, stressed Tara Pescatore, a spokeswoman.
Not a big impact
Consultants familiar with GMO, including Sheila Noonan, director of manager research at Capital Resource Advisors Inc., Chicago, said Mr. Mayo's departure shouldn't have a big impact on money management operations. GMO has a deep bench employing a strong process, and Mr. Mayo had drawn back from his oversight role, she said.
Kathleen Payne, director of banking and investment at University and Community College System of Nevada, Reno, agreed. "Mr. Mayo has been phasing out of the day-to-day operations for some time. His departure won't impact our relationship with Grantham Mayo at all." GMO manages $29 million of the system's operating fund and $34 million of the endowment in U.S. active equities. The operating fund and endowment each total about $225 million, Ms. Payne said.
The firm's three founders have been reducing their direct oversight, as well as their ownership, Mr. Eston said.
The foundingpartners began to annually recycle 3% of their ownership back into the firm about five years ago, freeing up ownership for younger employees. There now are 36 active partners in the firm. Each recycles 4.3% of his/her ownership back into the firm each year, and equity awards are then made based on merit, rather than purchased by the partner, said Mr. Grantham. "I think we have succeeded in bringing in a whole squad of very, very qualified younger people."
Eyk Van Otterloo, the third founding partner, began to transfer oversight of the international equity division to younger staff six years ago, but remains very active in the firm. Mr. Van Otterloo is working with colleagues in the international division to develop a global concentrated value strategy, for example.
Mr. Grantham, who headed the day-to-day operations of the quantitative equity division until about two years ago, now focuses about half of his time on the company's broad asset allocation and the other half on firmwide organizational issues, said Mr. Eston.
Mr. Grantham said he has no plans to retire. "I love this business. I can't think of anything else I would rather do. I have some very interesting hobbies, but that's how I want to keep them. As hobbies."
Mr. Grantham holds the spiritual reins of the company as the chairman of the seven-member board of directors, but Mr. Eston stressed: "Our culture is not really about following a spiritual leader, but rather, coming together as a team to solve problems and produce performance. Jeremy, Dick and Eyk really have developed a wonderful culture, centered on performance."
Part of the investment culture at GMO resulted in an aggressive new product development program that began at the end of 2000. Four quantitatively managed hedge funds introduced since then - the market-neutral/U.S. equity strategy, the aggressive long-short strategy, the tax-advantaged absolute return strategy and the market sentiment fund - have $600 million under management now. Another hedge fund, investing in emerging market debt, has been around since 1996. GMO managers are busy developing international equity hedge funds, Mr. Eston said.
GMO manages the asset allocation of all or significant parts of the portfolios of about one-third of its institutional clients, said Mr. Eston. There has been particularly high demand for customized asset allocation in alternative investments and global benchmarks.
The market has been kind to GMO and its value-biased strategies after 1998 and 1999, difficultyears for value managers.
All of the firm's 53 investment strategies are ahead of their historic "high-water marks" in performance over the past 18 months, Mr. Eston said.
The same market conditions that favored value investment are part of why Mr. Mayo decided to separate from the firm he co-founded in 1977. He has been incubating a value hedge fund for the last five years or so, he said, which has performed well in down markets. But by concentrating all of his energy on investment management, Mr. Mayo thinks he can produce even better returns, and he is excited about the challenge.
"I will be spending more time totally focused on investment management. It will put more fun back into it, getting back an entrepreneurial spirit in a smaller company, after spending time doing the things I had to do to manage a growing, large company," Mr. Mayo said.
Mr. Mayo will take his hedge fund, which has not been open to outside investors, with him to Mayo Capital Partners, along with a small amount of assets from clients he has worked with for up to 25 years, he said. A few support staff from GMO will move with him to vacant office space held by GMO in the same Rowe's Wharf building where he has worked for many years.
Mr. Mayo will be joined by his son, R. Scott Mayo, who was a portfolio manager at John Hancock Financial Services, Boston. One of Scott Mayo's co-managers at John Hancock, Timothy E. Quinlisk, will join the company at the end of the year.
Mr. Mayo and Mr. Quinlisk co-managed the $1.6 billion John Hancock Large Cap Value Fund, the $821 million John Hancock Small Cap Value Fund and the $33 million John Hancock Focused Relative Value Fund.
The third co-manager of the John Hancock funds, James Yu, will manage the funds until replacements are named, said Liz Kennedy, a spokeswoman.
CRA's Ms. Noonan said it's unusual for a named partner to break away from his or her firm to form a hedge fund shop. "Without a doubt ... this is unusual. The usual situation is that someone leaves a money management firm to start a hedge fund because they can't get sufficient equity in the company."
Since that is clearly not the case with Mr. Mayo, Ms. Noonan speculated Mr. Mayo also might be thinking ahead to succession plans for his son. "Dick Mayo is setting something up for his son, a company where his extensive contacts and experience will be a strong asset. He's leaving this for his son, who does have some investment experience. It's a great opportunity," Ms. Noonan said.
As for Mayo Capital Partners, "we are ready to roll," said Mr. Mayo. The doors will open for new business at the end of the year.