In the last two and a half years, Old Mutual's U.S. asset management group has divested more than half of its affiliates and quietly restructured, not only from the United Asset Management Corp. model it acquired in June 2000, but also from the original strategy laid out by the parent company, Old Mutual PLC. The chief architect of the redesign is Scott Powers, who became CEO of the asset management group in September 2001. In an interview with reporter Dave Kovaleski, Mr. Powers tells how the organization has evolved and explains why the roster of affiliates is largely set.
Q What was your focus when you became CEO?
A When I came in, Old Mutual already had begun to focus the organization through the creation of Old Mutual Asset Managers. That group, in conjunction with Pilgrim Baxter (& Associates Ltd, Wayne, Pa.), was intended to be the core to the strategy. We've been able to increase that focus over the last 15 months by evolving that original strategy into a group that has a broader representation from an asset allocation standpoint. So instead of 47 firms, we're now working with 20 firms and still have all the style exposures and asset class exposures that any sophisticated individual or institution would look for.
The second thing we've really paid attention to is improving the quality of the organization. When Old Mutual acquired UAM, 56% of strategies outperformed their benchmarks. Today, 80% of our strategies are outperforming their benchmarks (for five-year trailing periods).
Now we feel like we're positioned well for growth. The measure of health of any asset management business is their net cash flow. Negative cash flows were recognized in the market as a real problem for UAM. From 1997 to 2000 ... they had an average of negative $18 billion in net cash flow. 2002 marks our second year of positive cash flow. In 2001 we had $4.4 billion in net positive cash flow and (in) 2002 we achieved over $5.1 billion in net positive cash flow.
Q How is the structure different from the original plans for Old Mutual Asset Management?
A The original strategy has evolved. It's more of an evolution of the core strengths that we first identified. We've restructured the organization since Old Mutual acquired UAM. I think it's 19 firms that we've sold to third parties or restructured under their own management teams. We are largely done, but ... there are a couple of small remaining restructures that we need to do.
The core group has expanded from our original strategy to include a much larger group of firms. Our objective is to have high-quality investment affiliates who offer products in all the major asset classes and investment styles that our clients demand. We feel we have largely achieved that balance with our present group of firms.
We clearly believe that the PBHG fund platform gives us a solid entry into the retail investment space, and the platform can be strengthened by leveraging our other investment affiliates' capabilities into subadviser agreements with PBHG. We've done that with five new funds we launched in 2002 and we've had a lot of success with those funds.
Increasingly as we've restructured, we've taken advantage of the profit-sharing model. The old UAM model was exclusively a revenue-sharing model and we have adopted profit sharing as our primary model, but we still have certain firms that the revenue share is appropriate for. ... About 85% of our assets under management are with affiliates with the profit-sharing relationship.
Q What role does the holding company play at Old Mutual?
A We want to create an environment where our firms can do their best work. To augment that, we are investing actively in building resources that can support our firms in areas like technology, risk management, compliance and legal.
We're investing in distribution initiatives where the firms can benefit through a collaborative approach with the holding company. We are also going to be actively communicating with the consultant community from the holding company but it's complementary to what the firms do today.
We are encouraging our firms to cross-refer affiliated companies within their client base. We're not trying to create a single institutional sales force to try and sell all the products, it's simply to have our firms be aware of the capabilities that exist at affiliated companies and encourage them to make a referral when appropriate.
Q How have you managed to reverse the negative cash flow?
A The firms themselves have delivered strong investment performance. A couple of other things, one, as we restructured the firms, we have improved the balance between equities and fixed income so today, roughly 55% of our assets under management are in equities and 35% are in fixed income and stable value (the remainder is in cash and alternatives). So that asset mix has dampened the volatility that the overall equity markets have laid at our feet the last couple of years. The other thing we have done is create a linkage with our U.S. life insurance business (Fidelity & Guaranty Life Insurance Co., Baltimore). Our fixed-income investment management capability is leveraged by F&G so we manage the fixed-income portfolios on behalf of F&G. That's given us fairly significant cash flows over the last couple of years.
We also manage a portfolio on behalf of the South African life insurance business and we leverage multiple firms in that relationship.
Q Any new funds to be launched this year?
A We are actively assessing gaps and planning to fill those gaps with a best-of-breed offering from our affiliated companies. The expectation is that we'll launch fixed-income capabilities, which don't exist on the PBHG platform, and international equities. That will complement the growth and value styles we have.
Q Have you had to make any layoffs or cutbacks?
A When I came into the organization, I inherited the infrastructure UAM built up over the years to support a publicly traded company and the UAM mutual fund complex. Those levels of skill sets and infrastructure weren't necessary to support the holding company model here ...
At the holding company in 2002, we had a 30% reduction in head count. That was really a function of restructuring the old model to the current. As we've re-emphasized the focus on organic growth we've been able to take head count down, but at the same time, we've attracted talent to the organization.
Q What challenges do you face in keeping the affiliates happy?
A The challenge is in leveraging the great depth of experience and the strength of our first generation of investors and creating an environment where we can attract and retain our strong second generation of investors. I think it's a balancing act between each of the individual affiliates focusing on its own business and working to understand how each can potentially fit into the Old Mutual asset management family. By and large, it's been successful.
Scott Powers, chief executive officer, Old Mutual U.S. asset management group, Boston
Assets under management: $127 billion
Performance (as of Dec. 31): Return (benchmark)
Barrow Hanley large-cap value:
1 year -15.5% (-15.5%)
3 year 4.4% (-5.1%)
First Pacific small- to midcap value:
1 year -2.7% (-11.4%)
3 year 11.2% (7.5%)
Provident small-cap growth equity:
1 year -30.1% (-30.3%)
3 year -20.1% (-21.1%)
PBHG clipper fund:
1 year 5.5% (-15.5%)
3 year 12.7% (-5.1%)
Benchmarks (respectively): Russell 1000 value; Russell 2000 value; russell 2000 growth; russell 1000 value