NEW YORK - J.P. Morgan Fleming Asset Management lost 17%, or 287, of its institutional clients last year, and executives are doing anything and everything to stem the exodus.
According to company data, the terminations include:
* 12%, or 151, of its corporate pension clients;
* 40%, 99, of its endowment and foundation clients;
* 18%, 29, public plan clients; and
* 19%, eight, Taft-Hartley plans.
Eve Guernsey, chief executive officer for the institutional business in the Americas, said the majority of terminations (53%) were for U.S. structured equity and U.S. core-plus fixed-income portfolios, "where we're causing clients the most pain."
To fix the problems, Paul Bateman, global chief investment officer, appointed a global head of equities, analyzed the investment processes to improve performance, and focused the marketing and client service areas on asset retention.
Still, Ms. Guernsey is resigned to the fact that it might take 18 months to five years before J.P. Morgan Fleming will be able to compete effectively in two former market strongholds - U.S. enhanced equity indexing and U.S. core-plus fixed income.
Total institutional clients dropped to 1,425 on Dec. 31 from 1,712 at year-end 2001 (excluding corporate and insurance company clients).
Total assets dropped 14.7% for the year ended Dec. 31, to $515.6 billion, according to data from the Pensions & Investments Performance Evaluation Report. Assets managed for institutional investors dropped 20% as of year-end 2002, to $324 billion from $405 billion the prior year.
Not much respite
2003 has not brought much respite. Among the institutional investors terminating J.P. Morgan Fleming so far this year are the $4.9 billion Rhode Island Employees' Retirement System, Providence, for a $215 million large-cap core U.S. equities mandate, and the $600 million Chicago Park District Employees' A& B Fund, for a $53 million Standard & Poor's 500 enhanced index strategy. The $15 billion Iowa Public Employees' Retirement System, Des Moines, placed the firm on watch in January for performance problems in a $624 million U.S. core equity portfolio.
Consultants said the high number of terminations isn't surprising, and has been in the making for some time - roughly from when Chase Manhattan Co. and J.P. Morgan Co. merged in 2000 and combined two different investment management departments.
"J.P. Morgan really did have a fabulous brand name. They were known as a really high-quality shop. But you can only go so far on a good name and when performance starts to falter, sponsors have to make a change," said Susan McDermott, a consultant at Stratford Advisory Group, Inc., Chicago.
Said Ms. Guernsey: "The bulk of our institutional business is in these enhanced equity index products, and clients want us to ride very close to the index. Their tolerance for risk is low and if we get too far away from the index, they figure they might as well just go and get an indexed product," said Ms. Guernsey.
According to performance data from Investorforce.com, the separate account composite returns for J.P. Morgan Fleming's U.S. Structured Stock Selection strategy did not even match the index for the one-, three- and five-year periods ended Dec. 31. That strategy returned -24.4% vs. -22.1% for the S&P 500 for the year; -15.5% vs. -14.6% for the S&P 500 for three years; and -0.9% vs. -0.6% for the S&P 500 for five years. Returns for periods of more than one year are compound annualized.
The Dec. 31 separate account composite returns of another enhanced index strategy, the U.S. Research Enhanced Index, were -23.1% for one year; -15.3% for three years; and -0.8% for five years. That strategy outperformed the S&P 500 for the 10-year period, but it did not compare well with peer institutional managers in the U.S equity universe of Investorforce.com, ranking in the 75th percentile for the one-, three- and five-year periods and in the 50th percentile for the 10-year period.
Year-end returns of the separate account composite of the Core Plus fixed-income strategy also lagged its index: 9.2% for one year, vs. 10.3% for the Lehman Brothers Aggregate Bond Index; 9.6% for three years, vs. 10.1% for the index; and 7.4% for five years, compared 7.5% for the Lehman index.
Michael Rosen, principal, Angeles Investment Advisors, Santa Monica, Calif., said the J.P. Morgan Fleming enhanced equity indexed products rely on the decisions of research analysts who overweight stocks within sectors in a discount-dividend model. Recent underperformance has come from the stock selection and overweighting decisions, Mr. Rosen said.
"It hasn't blown up completely on them. Performance (usually) is not abysmal. But performance is pretty consistently below the benchmark, which is not what you expect in an enhanced index."
Mr. Bateman said that after extensive analysis of the enhanced equity indexing processes, the firm's investment team is convinced the strategy isn't broken. He added, however, that the analysis did identify research analyst inputs to the dividend-discount model as the source of performance problems. As a result, analysts and portfolio managers now are required to increase communication and debate about individual stock selections, but no changes are planned to the basic investment process.
To put more focus on analysis of all of the firm's equity processes, Mr. Bateman last weekappointed Martin Porter global head of equities, a new position. He had headed equity and balanced investment management teams in London.
Consultants remain unconvinced these changes will solve J.P. Morgan Fleming's problems.
CRA RogersCasey, Darien, Conn., is recommending clients find other managers for fixed-income and enhanced equity index strategies, said Sheila M. Noonan, managing director and head of manager research. "J.P. Morgan ... has experienced some significant changes in leadership positions and investment processes. They as a firm are still evaluating areas they want to enhance. We believe some of the changes may be positive in the long term, but other changes still need to be made," said Ms. Noonan in an e-mail response to a request for comment for this story.
On the bond side, Ms. Guernsey said: "We shouldn't assume that clients will believe uswhen we say that Seth Bernstein (who became head of fixed income in October) has fixed the problems. ... They need to wait and watch over a reasonable time, which I would say is at least 18 months."
As for enhanced equity, Ms. Guernsey echoed Mr. Bateman: "Our process was OK here, but the execution was too loose. We have to put analysts under greater scrutiny and tighten the screws on them and have them debate their ideas. If everyone is singing in the same choir, it's hard to sing a different song. That is changing."
All in all, Ms. Guernsey said it likely will take anywhere from 18 months to three years before the firm can expect to become a competitor again for institutional core plus bond mandates and from three to five years for the U.S. enhanced equity indexed assignments.
On the bright side, consultants agreed with Ms. Guernsey that the firm's private real estate and private equity fund-of-funds businesses remain stable and are performing well. Ms. Guernsey said the firm is attracting considerable new business to its alternatives, cash and currency businesses, with 12 new institutional accounts won in January alone.