SAN FRANCISCO - The departure of four key employees in just more than a year combined with poor performance in some investment strategies and a failed management buyout have clients of Progress Investment Management Co. terminating the firm or watching it closely.
Progress has been rocked by the resignations of Clayton Jue, chief investment officer who left Oct. 31, 2001; Rick Yamamoto, managing director involved in the manager selection process who left in November 2001; Chris W. Fong, senior vice president-investments in charge of the firm's database of emerging and women- and minority-owned managers and its large-cap value manager-of-managers portfolio who left in July 2002; and Marx L. Cazenave II, co-founder, chairman and chief executive officer, who left in October.
Compounding the difficulties is a precipitous $1 billion drop in assets so far this year, down to $3.4 billion as of Sept. 30. The decrease stems from client departures, poor performance and the poor markets.
Donna C. Gilding, formerly CIO of the New York City Retirement Systems, replaced Mr. Jue late last year. Thurman V. White Jr., president, succeeded Mr. Cazenave.
Partly to replace Messrs. Fong and Yamamoto and as part of an attempt to improve performance and to expand capabilities, Columbia Management Group Inc., New York, Progress' parent company, has engaged several executive recruiters to search for more investment staff. Ms. Gilding told clients in a letter provided to Pensions & Investments that she sought a senior investment professional with "strong quantitative and analytical skills that will be a part of the senior investment team. We hope to add at least one additional analyst."
But some clients have had enough. Among those that have terminated Progress:
* The $84 billion Florida State Board of Administration, Tallahassee, cut Progress in November as manager of a $189 million U.S. core equity portfolio. Florida staff said the termination was part of routine manager turnover, but sources said the real reason was organizational changes at Progress.
* The $25 billion Maryland State Retirement System, Baltimore, terminated Progress in November for a $71 million portfolio for performance reasons, said Joseph Coale, a spokesman for the plan.
* The $2.5 billion Denver Public Schools Retirement System terminated Progress in the summer for a midcap U.S. equity portfolio. Assistant Chief Investment Officer E. Albert Thomas declined to give the size of the portfolio. He said staff and trustees weren't comfortable with how the mandate fit in with the rest of the fund's small-cap to midcap allocation. "If Progress had been an exceptional performer, we might have looked at them more carefully," Mr. Thomas said.
Other pension funds are keeping a close eye on the firm. The $73 billion New York State Teachers' Retirement System, Albany, put Progress on watch for a $440 million equity portfolio, citing the organizational changes.
The $9.4 billion State Universities of Illinois Retirement System, Champaign, which has $86 million in four Progress investment strategies, is watching the firm closely. Two strategies have struggled since they were added by the university fund in 1997, one has done well and one has had returns close to its benchmark, said CIO John R. Krimmel
"Progress plays a critical role for the board in identifying smaller, emerging managers and the board remains committed to the firm. All these organizational changes have been distracting (to investment staff) and our hope is that they well get through it and that performance will come back. But if it doesn't, the board has a decision to make about terminating them," Mr. Krimmel said. "We're being patient about this strategy, but our patience is running thin," he added.
Other pension funds have met with Progress officials and feel confident about retaining their services.
The $128 billion California Public Employees' Retirement System, Sacramento, is Progress' largest client, but it uses Progress not as a money manager but as gatekeeper for its manager development program, said Brad Pacheco, CalPERS spokesman. CalPERS staff has been monitoring events at Progress carefully, and after meeting with Mr. White and others responsible for the private equity program, the CalPERS staff "felt very optimistic that we can have a successful partnership with them," Mr. Pacheco said.
The $1.3 billion Milwaukee County Retirement System, Milwaukee, uses Progress for a $5 million venture capital portfolio co-managed by Adams Street Partners LLC, Chicago. Trustees met with Mr. White and discussed organizational changes and now "feel comfortable with the situation," said Jac Amerell, executive director.
Mr. White said Progress' 21 clients are taking a wait-and-see approach to the company and that terminations are part of the normal business of a money management firm.
Mona Williams, senior vice president of marketing, said the new-business pipeline for Progress is robust, with two clients of significant size expected to hire the firm by the end of the first quarter.
The problems at Progress largely stem from the yearlong uncertainty about a possible management buyout and its ultimate failure, sources said. Progress was purchased by Liberty Financial Cos., Boston, in 1998. Liberty then was acquired by FleetBoston Financial, Boston, in 2001.
Sources with knowledge of the negotiations between FleetBoston and Progress, who requested anonymity, said Mr. Cazenave set high growth projections for Progress over the five years (reportedly from $4 billion under management to $12 billion) that would follow the MBO. That optimistic expectation for growth placed a high price tag on the firm. The impact of the Sept. 11, 2001, attacks; the bursting of the technology bubble; and the stagnant economy made it unlikely Progress could reach such lofty goals.
Sources said Progress employees were unable to persuade Columbia Management Group to lower the price for the company and the MBO deal fell through. Columbia Management Group is FleetBoston's asset management division, of which Progress is a part.
Mr. Cazenave did not return calls seeking comment.
Mr. White would not comment on the MBO.
Columbia is fully committed to Progress, said Roger Sayler, head of equities at CMG. Now that Progress' ownership question is resolved, CMG has been pumping resources into the 30-person shop, he said.
Central to Progress' revitalization is a new employee compensation scheme that Mr. Sayler and Mr. White would not detail.
CMG's renewed commitment to Progress clears up the ownership question, but it's not clear whether it will improve ongoing performance problems, said consultants and clients.
"There is a constant battle within Progress. What comes first? Performance? Or the focus on investing in minority-owned and emerging managers? From a fiduciary standpoint, you hope clients say performance, but that's not what's really going on. What clients want are minority-owned funds of funds," said a consultant who works closely with Progress. The consultant requested anonymity.
"The situation at Progress is that client objectives often get in the way of investment objectives, and that's exactly why the returns of individual portfolios managed by Progress can vary so widely in performance. While the composite returns may look quite good, there is a great deal of implementation timing risk - when the client gets into a strategy - as well as returns dispersion caused by the extremely customized separate accounts Progress has to create to meet individual client objectives," said the consultant.
Mr. White declined to provide separate account composite returns for Progress investment strategies. Instead, he said that of four commingled funds, two have outperformed their benchmarks from inception, and seven of 11 separate account strategies have outperformed their benchmarks since inception.
"We are always trying to improve performance," Mr. White said
Ms. Williams provided performance for the company's four commingled funds, two of which - The Progress 21st Century Fund and the Progress Non-U.S. Equity Fund - outperformed their customized benchmarks over most time periods ended Sept. 30. The Progress CAT Fund underperformed for the year ended Sept. 30 and outperformed for the three- and five-year periods. The Progress Mid-Cap Equity Fund, however, has underperformed its benchmark over all time periods.