SAN FRANCISCO - Growth manager Dresdner RCM Global Investors is retooling its investment processes following staff departures, modest client terminations and shaky performance in some strategies.
In the past 21/2 years, at least 15 investment staffers have left, including William Stack, chief investment officer, who left in 2000 and took a year off before joining George Soros' investment management operation. Upper-level departures in 2001 included senior institutional marketer Joseph Rusbarsky, who crossed town to a much smaller manager, Husic Capital Management, and Matt Blazei, co-CIO of the small-cap team, who has not yet taken a new job.
And, as a growth manager, Dresdner RCM was especially vulnerable to analysts and portfolio managers, succumbing to what Chairman and CIO William L. Price calls "the heady seduction of hedge funds."
Meanwhile, Dresdner RCM is reviewing all its investment strategies, starting with its active U.S. small-cap growth strategy.
In just the past three weeks, by way of "upgrading" its talent on the small-cap team, Dresdner released Timothy Kelly, who was co-CIO of the U.S. small-cap growth equity team; his co-head, Thomas Ross, assumes sole control of the team. Dresdner also replaced Paul Dravis, who headed the technology research team and has left the company, with Steve Berexa, an analyst on the small-cap technology team. The small-cap technology research effort, which was separate, is being integrated with the rest of the firm's technology research platform.
"What we needed for this strategy were people who could come in and focus on process and discipline in a tough market, and also to satisfy institutional investment consultants," said Mr. Price.
Mr. Dravis was "a good stockpicker," Mr. Price said. "But Steve (Berexa) is a better player-coach on the research side and can better integrate portfolio managers and analysts."
Mr. Price said he would be Mr. Kelly's "first reference." Mr. Kelly had organized the small-cap growth equity team into a silo approach, which paired portfolio managers with specialist analysts assigned to work just with one manager or team. Dresdner RCM executives have replaced that system with a flatter structure in which portfolio managers are supported by generalist analysts, who work with any number of portfolio managers. Mr. Ross is more process-oriented and was picked to head the newly reorganized small-cap team, Mr. Price said.
In an earlier switch, Christopher Moshy's job as head of U.S. research was eliminated last year, when Ian Vose came to San Francisco to head the firm's new global research platform. Mr. Vose headed a small research group in the company's London office.
Not making cuts
Mr. Price said the firm will carry out a product-by-product "optimization of resources. This is not cost-related. We aren't trying to make cuts. We're working on analyzing and improving performance for all strategies."
"Consultants have told me that other money management companies are doing similar things. It's easier to upgrade talent in this kind of market," he said.
Mr. Price will have more time to devote to reorganizing the firm's investment platforms once he gives up his dual role as a global CIO of equities for Allianz Dresdner Asset Management, the equity arm of Allianz, at the end of 2002. (A search for a successor has been undertaken; the job isn't expected to be filled until later in the year.)
Challenging markets that require a "return to basics" and a relatively young staff convinced Mr. Price that he needed to focus on Dresdener RCM to provide perspective as an elder statesman.
"We're moving into a new era or, rather, back to old markets. I can't mentor at 35,000 feet. For my own psychic satisfaction and to be of more value to the firm, it seemed better to pass the (global) baton on to someone else and concentrate on the U.S. and managing money, staying in the same time zone," he said.
It remains to be seen whether consultants and clients will be calmed by the changes. They are wary of the large number of departures, coupled with fairly dismal performance of several institutional strategies.
The firm's active U.S. small-capitalization growth composite returned -0.83% for the year ended March 31, compared with 4.95% for the Russell 2000 Growth index, and an annualized -1.81% for the three-year period, compared with 0.16% for the benchmark. For five years, the small-cap growth composite returned an annualized 2.27% vs. 4.76% for the index.
The global small-cap strategy also badly trailed its benchmark with a -1.77% return for the year, compared with 11.34% for the Morgan Stanley Capital International World Small-Cap index. The strategy also trailed the index with an 8.78% return for three years vs. 9.72% for the index, but strongly outperformed the index over five years, 12.64% vs. 4.99%.
The international equity strategy also badly underperformed, returning -14.98% for one year, compared with -9.79 for the MSCI EAFE Growth index. It beat the index for the three years ended March 31 with a -5.58% return vs. -9.2%, and for the five years with 2.28% vs. -1.14%.
The $22 billion Teachers' Retirement System of Illinois, Springfield, terminated DRCM in February as manager of a $553 million active international equity mandate. Callan Associates Inc., San Francisco, recommended the termination because of poor performance and organizational instability. In March, the $80 billion New York State Teachers' Retirement System, Albany, terminated the firm for a $190 million active domestic small-cap equity portfolio because of poor performance.
The $308 million defined benefit plan of Alameda-Contra Costa Transit District, Oakland, Calif., also dropped DRCM for a $10 million domestic small-cap growth account in April.
The impact of Mr. Stack's departure probably went deeper than Mr. Price and his colleagues will admit.
"The bleeding of client assets and terminations is the typical deal when the CIO leaves," said Michael Beasley, managing director and a consultant at Strategic Investment Solutions Inc., San Francisco, in reference to Mr. Stack's departure.
"Dresdner was hired by many clients because of Bill Stack's efforts and accomplishments. The terminations are the result of a combination of Bill Stack leaving and the poor performance of growth stocks in the U.S. market," Mr. Beasley said.
Despite these setbacks and the uncertainty surrounding its 2001 merger with the investment operations of Allianz AG, Dresdner RCM had a strong net new business flow of about $5.1 billion last year, said Dawn Vroegop, director of marketing. Dresdner RCM managed $42 billion in the United States as of Dec. 31 and $20.3 billion from its London and Hong Kong operations.
Clients and prospects may be persuaded by Mr. Price's explanation that coincidence was more to blame for many of the departures from DRCM than dissatisfaction with the company or its impending acquisition by Allianz.
Mr. Price said most departures since 1999 were a result of a generational change and subsequent retirements, and the lure of hedge funds and dot-coms. Also, five analyst positions were replaced or eliminated in 2001 after DRCM experienced lower-than-expected revenue in challenging markets last year.