NEW YORK - Morgan Stanley Investment Management is changing its compensation structure.
Now, compensation of investment unit staff is based on performance of the parent company, Morgan Stanley Dean Witter & Co., New York. A revised compensation program, which staff will review in the early summer as the basis for portfolio manager compensation in 2002, will use assets under management and performance by individual asset classes, said Joseph J. McAlinden, chief investment officer.
He wouldn't elaborate on the proposed changes.
But the problems at Morgan Stanley's asset management division, which manages $400 billion, run deeper and are more complicated than a mere compensation disagreement.
Executive recruiters said more defections are likely across all areas of Morgan Stanley's asset management unit, based on dissatisfaction with the compensation structure as well as culture clash.
"We hear that the firm is being `Dean Witterized' ... With the retail people calling the shots, it's not a place the institutional people want to stay. And it is puzzling why (Chief Operating Officer) Mitch Merin isn't making it worth people's while to stay," said one recruiter, who requested anonymity.
The culture clash/ compensation issues have caused at least 15 investment staff members and five senior marketers or heads of business units to quit since the end of 2000, when MSIM merged the operations of its four investment management divisions. Most came from the West Conshohocken, Pa., offices of the former Miller Anderson & Sherrerd LLC, which Morgan Stanley & Co. acquired in 1996.
Some of the marquee names who left are:
* Portfolio manager Stephen Sexauer, who came from Morgan Stanley and managed large-capitalization U.S. value equities in institutional separate accounts and an institutional mutual fund. Mr. Sexauer, who is seeking a new position elsewhere, was replaced by Rick Behler, managing director and head of U.S. value equities;
* Ex-MAS staffers Arden Armstrong and Steve Chulik, U.S. midcap growth managers, who started a hedge fund;
* Ex-MAS veteran Gary Schlarbaum, lead manager for U.S. small-cap value equities, who started a hedge fund;
* Philip Friedman, co-head of U.S. growth equities in separate accounts and mutual funds, who went to John A. Levin & Co. Inc.;
* Ex-MAS fixed-income portfolio managers Angelo Manioudakis, Benjamin Gord and Charles Moon, who joined OppenheimerFunds;
* Richard De Martini, chairman and chief executive of Morgan Stanley's international private client group, who now heads Bank of America's asset management unit; and
* Marna C. Whittington, president of Morgan Stanley's institutional business, who became president of Nicholas-Applegate and chief operating officer of Allianz Dresdner Asset Management.
These departures were in addition to about 100 layoffs, the result of the consolidation of the asset management areas.
Consultants and executive recruiters noted that so many MSIM voluntary departures in such a short time raised red flags for them with regard to compensation and the less definable notion of "culture." Further alarms went when prominent MSIM people - like Mr. Sexauer and Ms. Whittington - left without other jobs lined up.
Consultants at Stratford Advisory Group Inc., Chicago, weren't surprised that Mr. Schlarbaum left, because he was near retirement age, but "what shocked us was all the other people who left - most of the old Miller Anderson people," said Susan McDermott, principal.
Ms. McDermott explained the culture at the "old" Miller Anderson was that "rewards lined up equitably with performance." Now, all portfolio managers are compensated on the basis of performance of all of Morgan Stanley, not just their own strategy. MAS fixed-income managers had a great year in 2001, which wasn't reflected in their compensation, Ms. McDermott said. That probably contributed to their decision to leave the firm.
Ms. McDermott said consultants at her firm will evaluate the promised MSIM compensation scheme and may recommend that clients take action if it is inadequate or is not implemented.
Consultants and their clients have watched MSIM's consolidation carefully during the last 18 months.
Every aspect of the operation's of four investment management companies is now integrated onto a single global platform from investment management to trading, research, sales and marketing, corporate governance and client service for Morgan Stanley Asset Management, MAS, Dean Witter Intercapital (acquired with Dean Witter, Discover & Co. in 1997) and Van Kampen/American Capital Management Inc. (acquired in 1996).
The consolidation eliminated duplicate processes and resources and 100 people, leaving investment management teams to concentrate on managing money, said Mr. Merin.
More to come
The job cuts may not be over as the firm continues its integration process, said Mr. McAlinden, who now oversees 500 people. "We still have a long way to go. We're not quite done deciding who is staying and who is going."
About 40% of assets under management at MSIM are from institutional investors, 42% are invested in retail mutual funds and 18% are in money markets. Despite the predominance of retail assets at the firm, Mr. McAlinden said, Morgan Stanley "built a new model based on its institutional legacy" and deliberately appointed institutional managers as heads of asset class teams.
There now are seven investment teams, which report to Mr. McAlinden, who is based in New York.
U.S. value equities are headed by Rick Behler, who came from MAS and is based in West Conshohocken. Mr. McAlinden is acting head of U.S. growth equities and is searching for a head of that area. Dominick Caldecott heads one international equity team from London; it manages international value, Japanese, emerging markets and Asian equities. Jeremy Lodwick heads another international equity team that covers European growth, value and core equities, global value and core stocks and international small-cap stocks from London. Barton Biggs, in New York, heads global asset allocation strategies. Thomas Bennett heads global fixed-income from West Conshohocken. Jonathan Page heads money market strategies from Jersey City, N.J.
Each of the four investment units operated semi-independently and had different cultures. "We're not quite at one culture yet, but everyone knows what that culture should be," Mr. Merin said.
Messrs. McAlinden and Merin agree it wasn't especially surprising that some MAS portfolio managers left in the early part of this year. Some simply were anxious to go out on their own, as Ms. Armstrong and Mr. Schlarbaum did, Mr. McAlinden said.
Plan sponsors and their consultants are still assessing the integration and manager changes.
"People are looking for an underlying theme at Morgan Stanley, but I don't think there is one. People looked for departures last year when Miller Anderson contracts were up, but that didn't happen. Recent departures show that it isn't really a contract-related problem," said Jeffrey Nipp, director of investment manager research at Watson Wyatt Investment Consulting, Atlanta.
Morgan Stanley - and the Miller Anderson unit, particularly - was always team-oriented, with deep "benches" of portfolio managers. Thus, for many strategies, the departure of one person won't make a difference. But Ms. Armstrong was a high-profile manager, well-liked by her clients and backed up by a much smaller team, which makes consultants more nervous, Mr. Nipp said.
Mr. Nipp said Watson Wyatt has not put Morgan Stanley on watch and is paying close attention.
Assessing the situtation
Consultants at CRA RogersCasey, Chicago, met with Morgan Stanley staff on April 24 to assess the situation, particularly in fixed income and small-cap to midcap growth, said Sheila Noonan, director of manager research. She declined to say whether the firm has put Morgan Stanley on watch or is recommending terminations in certain asset classes.
Some plan sponsors weren't slow to take action. The $22.6 billion Teachers' Retirement System of Illinois, Springfield, replaced Morgan Stanley for the small-cap growth mandates managed by Ms. Armstrong and Mr. Chulik, and the $6 billion Teachers' Retirement System of Oklahoma, Oklahoma City, now is deciding between two finalists. More terminations are likely, consultants said. Consultants also are concerned about the reduction in bond manager bench strength and are evaluating changes to the small-cap value team.
The $9.3 billion Kansas Public Employees' Retirement System, Topeka, on the other hand, remains committed to Morgan Stanley's international active/passive equity asset allocation strategy, to the tune of a $400 million mandate.
Robert Woodard, chief investment officer of KPERS, said portfolio managers Barton Biggs and Anne Thivierge have a long tenure and a long track record of solid performance. "We like the fact that it's a big organization, with a lot of resources and good client service, to the extent we use it. We remain very pleased with them," said Mr. Woodard.