So intense is the competition for pension fund dollars that many money management firms have turned their attention to gathering individual investor assets to manage - assets they wouldn't have touched a decade ago.
Many firms are actively seeking to manage the assets of high-net-worth individuals. As part of that strategy, some have joined the wrap-fee account programs offered by major brokerage firms.
Others thinking of taking the same approach might want to talk with Charles Hickox, co-chairman and chief executive officer of Ashland Management Inc., New York.
"It was getting to be profitable, because we had doubled the amount we managed over the past three years," Mr. Hickox said. "But a lot of the time the brokers would say, `We're giving a seminar for our clients. Can you come and make a presentation?' They didn't want a marketing person; they wanted a money manager, and it really began to eat into the managers' time." In addition, Mr. Hickox found that those attending the seminars weren't even clients, or prospective clients.
So Mr. Hickox decided the wrap-fee business was not worth the effort and recently sold the $600 million of assets his firm managed through Merrill Lynch's wrap-fee program because he found it too labor-intensive for the financial return.
Mr. Hickox is not afraid to go his own way. Once part owner of a major charter airline, he sold his share when he disagreed with the way it was being run and turned his attention to money management, starting Ashland Management.
The firm grew out of research Mr. Hickox and Parry Jones, an investment banker, did when they joined forces in 1972, seeking money management firms to manage their assets and those of friends and some charitable foundations. During the search they interviewed 75 managers in depth and began to identify the characteristics that made the successful managers successful. One key, they decided, was that the best firms followed strict buy and sell disciplines.
But they wanted to do deeper analysis and hired Joe Davis, a 30-year veteran of portfolio management, to analyze what factors were key in valuing stocks. The five factors Ashland uses today were the results of Mr. Davis' research, although they have been refined over the years. "We did a 20-year back test of the screens Joe developed and the results were extraordinary," Mr. Hickox said. As a result, he and Mr. Jones formed Ashland Management and began managing money themselves in 1977.
The company, he said, screens the large-cap universe for companies that pass five screens. The companies must have above-average returns on equity. They must reinvest in the businesses at a substantial rate, as evidenced by high retained earnings. They must have consistent positive earnings growth. They must have strong financials with low leverage. And finally, they must be selling at a significant discount to what Ashland believes is their fair market value. The company's sell discipline is a corollary of the buy discipline, he said. It sells a stock if the company's earnings are no longer growing, or if any other characteristics that led to its purchase changes.
Ashland's growth equity accounts have beaten the Standard & Poor's 500 and the Russell Growth 1000 indexes over one, three, five and 15 years, and beat the Russell index and equaled the S&P 500 over 10 years through Sept. 30.
The firm has $1.2 billion under management for tax-exempt investors. The growth of assets hasn't been spectacular, but Mr. Hickox's goal has been to achieve steady long-term investment performance. So far it has worked. Going your own way can pay off, as long as you do your homework first.