Money management executives are taking off their kid gloves and making bold, abrupt changes to save their businesses.
During the height of the bull market, money managers had such fat profit margins they could afford to be tolerant of poor performers. But after three years of bad markets, managers have stopped pussyfooting around the issue of retrenching their businesses. For example:
* Loomis, Sayles & Co. LP, Boston, gave its Chicago-based core bond managers six to 10 days to decide to move to Boston, where all bond strategy investment staff is being consolidated. Of the 35-member Chicago office, three key portfolio management and business management employees quit rather than move; six portfolio managers and two traders agreed to move; and 15 staffers were instructed to find jobs elsewhere in the company or leave. Nine client service, consulting relations and support staff will remain in the Chicago office. The consolidation was on top of an early retirement program in September through which Loomis cut 28 investment positions, six of them portfolio manager positions;
* Without warning, Lend Lease USA fired the top management of its U.S. subsidiary, which wrote down its portfolios by $300 million and put its global CEO David Ross in charge of U.S. operations (see story on page 4);
* Neuberger Berman Inc., New York, fired the U.S. growth equity team it lured five years ago from Putnam Investments, Boston, and replaced it with a better-performing seven-member team lifted from Northern Trust Global Investments, Chicago;
* Allianz Dresdner Asset Management, Frankfurt, announced in December that it will sell U.S. subsidiary Cadence Capital Management, Boston, as soon as valuations improve. Cadence is on the block because its growth equity strategy duplicates better-performing strategies in other Allianz subsidiaries, said Joachim Faber, chief executive officer. Allianz also reportedly leaned on another U.S. unit, Nicholas-Applegate Capital Management Inc., San Diego, to cut costs. Nicholas-Applegate responded by laying off 5% of its investment staff as part of an overall 15% staff reduction;
* International equity manager Edinburgh Fund Managers, Edinburgh, pulled the plug on its North American operations late last year, closing offices in Toronto and Atlanta. Company executives said they are refocusing on the U.K. institutional market;
* Janus Capital Corp., Denver, last year cut 140 positions - mainly from Stilwell Financial Inc., Kansas City, Mo., and Berger Financial Group LLC, Denver - when it merged the investment operations of the three companies into Janus Capital Management Inc.; and
* Putnam Investments, Boston, beset by big market losses, client and personnel defections and style drift, brought in turnaround specialist Charles E. Haldeman to co-head investments with Steven Oristaglio. Mr. Haldeman earned a reputation as a fixer-upper after cleaning up problems at Delaware Investments, Philadelphia. He spent his first few months at Putnam evaluating processes, said spokeswoman Laura McNamara; she said to expect changes in the second quarter.
The message from industry observers is crystal clear: You ain't seen nothing yet.
More moves expected
Industry strategists, executive recruiters and even money management execs expect similar retrenchments, rejiggerings and reconfigurations by asset management companies this year.
"I've talked to management at about 250 money management firms in the last six months, and there's not a single organization I interviewed that was not examining its business models," said Paul Schaeffer, managing director in the San Francisco manager support division of SEI Investments, Oaks, Pa.
"The floodgates are just beginning to let water through. Few companies have actually made the tough decisions yet, but they will have to. ...People will be deconstructing business models at all levels of the company," said Mr. Schaeffer.
Said Jane Marcus, partner in charge of U.S. asset and wealth management, Heidrick & Struggles Inc., Chicago: "Investment management firms have just lifted their heads from the sand, and the response is `Oh my god! What can we do?'
"It's a take-no-prisoners mentality out there. The recent growth team replacement by Neuberger Berman with a liftout from Northern Trust shows that it's an all new game. This is a market that requires action. We'll see far more drastic measures than have been seen in the last five years," Ms. Marcus said.
There's a simple reason for this new mentality - the bear market of the last three years, said merger and acquisition consultant Frank Kettle, managing director, Colchester Partners LLC, Boston.
"This business has been undermanaged for years. When margins were better, you could afford to be a little sloppier. But clients and consultants are far more demanding than they were, and their insistence on institutional products that are disciplined, with repeatable, demonstrable performance, is driving change throughout the industry," Mr. Kettle said.
`Balance has changed'
Debra Brown, managing director in the investment management practice at Russell Reynolds Inc., New York, agreed. "The supply-demand balance has changed and in this kind of buyer's market, money managers are being forced to do things more abruptly."
Ms. Brown and others agreed that huge pressure from parent companies to contain costs and improve performance means top brass at money management subsidiaries is a lot quicker to pull the trigger on underperformers. "If you're the CIO or the CEO of an asset manager and you're not getting it done, there's a new willingness to change the team," Ms. Brown said.
John Webster, managing director at consultant Greenwich Associates Inc., Greenwich, Conn., noted with profitability down by as much as a third last year, "big is no longer beautiful and management companies are bringing it back to core competencies. They are making sure portfolio construction is up to snuff, segmenting clients, cutting strategies that do not play to what they do best."
"The focus on the bottom line means focusing on what best-in-class strategies you manage," said Glenn Davis, partner at strategy consultant Eager & Davis LLC, Louisville, Ky. That focus on core competencies means many money management companies likely will consolidate investment management, back office, technology and marketing resources, Mr. Davis said.
Observers said a few money management firms are ahead of the pack, including UBS Global Asset Management, Chicago.
UBS, punished by institutional investors who defected during the bull market because its value slant underperformed, has emerged from its period of retrenchment, said Brian M. Storms, president and chief executive officer of UBS Global Asset Management, Chicago.
4 years of refining
Investment teams spent four years refining risk controls and processes, and performance now is up in most strategies and is in favor in the current market cycle. Mr. Storms' challenge has been to improve distribution and client service; he wasted no time last fall removing several marketing and customer service staff who "were stuck in the old ways of doing things," he said. He brought in Frank Pfeffer from J.P. Morgan Fleming Asset Management, New York, to head institutional marketing, and plans to hire as many as six new marketers as part of the company's new distribution push.
