In the bull market of the 1990s, distribution was king in the money management industry; but in the bear market of the 2000s, it's all about manufacturing.
That means many larger firms are getting back to basics: investment performance.
This is in stark contrast to three years ago, when a booming stock market raised all boats.
Now there is a premium on good performance and investment quality, more so than there was in the bull market, when "everyone was a genius," said Christopher Acito, partner with Casey Quirk & Acito LLC, Darien. Conn.
"There is a recognition that investment quality will be a defining element over the next few years," said Mr. Acito.
According to Mercer Investment Consulting's Tracker database, 71% of separate account mandates went to 25% of the managers in 2002. In contrast, 61% of the mandates went to 25% of the managers in 2000. Consultants are raising the bar significantly, said Mr. Acito.
David Hammerstein, chief strategist at Yanni Partners Inc., a Pittsburgh-based investment consulting firm, said money managers that have demonstrated the ability to manage risk effectively have fared better. "We see mandates being won by firms that can explain their processes well and can explain that they have retooled and re-evaluated their processes." Mr. Hammerstein called it "a healthy development."
And in their efforts to shape up, firms that have struggled in recent years are not afraid to go under the knife.
Putnam Investments Inc., Boston, has hunkered down in recent years to retool its investment management operations.
Because some Putnam growth portfolios have lagged the benchmarks over the past three years, Putnam officials made changes to the firm's growth teams. They hired Brian O'Toole to head large-cap growth and named Justin Scott to lead the specialty growth team. The firm also incorporated a blend of quantitative and fundamental investment styles into all its portfolios, including growth, said Stephen Oristaglio, co-head of investments.
Another firm hurt by the bear market, Janus Capital Management Corp., Denver, has restructured under new Chief Executive Officer Mark Whiston. The firm broadened its investment capabilities by acquiring quant shop Enhanced Investment Technologies LLC, Palm Beach Gardens, Fla. - a former Berger affiliate - and value shops Bay Isle Financial, Oakland, Calif., and Perkins, Wolf, McDonnell & Co., Chicago. The firm has already launched a risk-managed stock fund from INTECH and value funds managed by Bay Isle and Perkins Wolf.
Gartmore Global Investments Inc., Conshohocken, Pa., began rebuilding its investment management shop over the last three years, and now it's starting to pay off.
Overall, the performance of the complex has improved from the bottom quartile in 2000 to the top quartile in 2002, according to Lipper Inc., Denver. Young Chin, chief investment officer, said the improvement stems from focusing on risk management and absolute return, and strengthening the fundamental research team. Mr. Chin said Gartmore wants to be recognized as an "all-season" provider.
On the mergers and acquisitions front, there is more interest now in acquiring manufacturers than distributors, said Joseph Ramrath, partner at Colchester Partners, a Boston-based investment bank.
Product over distribution
"People are buying product," he said, compared with several years ago when there seemed to be more acquisitions for the purpose of expanding distribution. Among the recent transactions based on manufacturing, Mr. Ramrath cited the acquisition of Boston Partners LP, Boston, by Robeco Group, Rotterdam; the acquisition of Montgomery Asset Management by Wells Fargo & Co, both in San Francisco; and New York-based Lehman Brothers' purchase of Lincoln Capital Fixed Income Management Co., Chicago.
Money management firms are also shifting their distribution strategies, added Mr. Kowarski.
"In the 1980s and 1990s, it was about getting any and all assets. Grab more slices of the ever-increasing pie" and build distribution on as many platforms as possible, said Lee Kowarski, senior consultant at Kasina LLC, New York, a management consultant for the financial services industry. Over the last two years, the pendulum has swung back to a focus on manufacturing, along with the market's shift from bull to bear, he said.
In the bull market, firms tended to focus on market share and not profitability, leading them to overlook where their profitability was actually coming from, he said. Now they are making more of an effort to identify their profitable markets. "Firms are re-evaluating all of their relationships through the lens of profitability," said Mr. Kowarski.
In addition, firms are rationalizing their mutual fund lineups across the industry. In 2002 there was a record number of fund mergers and liquidations, according to Morningstar Inc., Chicago.
"There are too many products chasing too few assets," said Mark Simons, partner at Basis Point Group, a Boston-based money management consultant. "There are more mutual funds than stocks on the New York Stock Exchange."
It's increasingly difficult to create shelf space in this market, said Jeff Keil, analyst at Lipper. He expects to see increased rationalization of portfolio lineups as a result.