Shortly after Jim McCaughan joined Principal Financial Group, Des Moines, Iowa, in March 2002, he rebranded the firm's different asset management businesses and formed Principal Global Investors to reflect an expanded global identity. Mr. McCaughan serves as both chief executive officer of Principal Global Investors and executive vice president and global head of asset management at parent company Principal Financial Group. He has spent nearly three decades in the asset management business, most recently as chief executive officer, Americas, at Credit Suisse Asset Management, New York. He worked there for 20 years in various positions, among them as a portfolio manager. He specialized in U.K., Japanese and diversified international equity portfolios, mainly for institutional clients. A native of Scotland, Mr. McCaughan began his career in 1974 as an actuary with Lane Clark & Peacock, London. He earned his bachelor's and master's degrees in mathematics from the University of Cambridge. Recently, he talked with P&I reporter Ricki Fulman about his goals at Principal.
Q What is your key role at Principal?
A To develop and oversee the asset management investments for Principal. That means providing good investment products to satisfy our clients. The clients can offer (to participants) products from any provider, so it's our objective to develop distinctive products that are so compelling they will choose those. We have been very successful gaining market share in our proprietary offerings. Around 70% of the money invested (for) 401(k) (clients) goes into Principal's proprietary products.
Q What are your goals for the firm?
A The main thing I need to do is to make us a top-tier investment manager in product and capability — one of the best in the industry. That coincides with Principal's goal to be an asset-accumulating asset management company.
Q How do you plan to accomplish this?
A No. 1 is through investment performance — how do we make it good? … The way research is organized and communicated is key to performance. About a year ago we put in an (information technology) system to analyze our equity analysts' research, to get the most out of it, and that made for a more seamless information flow around our people. You'd be surprised, but it's hard to get research communicated well in a firm. It could just be e-mailed, but we believe it's better to have people access it than to have it thrown at them, so organizing it is important.
Q How involved have you been in Principal's recent acquisitions? Do you expect to make more?
A I'm very involved. Most recently we acquired a 68% interest in MW Post (Advisory Group) from Metropolitan West (Financial). We had decided a high-yield fixed-income strategy would be a good product to offer because of the aging population. So we did a search for a firm that specialized in this and found Post. We're keeping the management intact. Many acquirers aren't sure what to change and what to leave alone. We leave the identity alone.
With Spectrum (Asset Management), which we bought from UAM in 2001, we did a number of things to speed their growth. We gave them client service and marketing support, also operational support plus access to broaden their information flow. Management tells us that by getting research from other areas they can expand their coverage more rapidly. Since the acquisition, they have grown from $1 billion to $11 billion in assets under management.
I could imagine acquiring other specialized firms in the fixed-income and international arenas. In fixed income, I can see some of the range of products offered here in the U.S. growing similarly in other countries, especially in asset-backeds and securitizations. We should be in a good position to be part of that.
We have demonstrated a skill in acquiring and nurturing teams from elsewhere. Recently we have made three acquisitions in Mexico as we build our retirement services business there, and one in Chile.
Q Will you be bringing any of the strategies used at CSAM to Principal?
A No, because my former employer catered to high-net-worth investors, focusing a lot on hedge funds and private equity partnerships. Principal is much more mass-market. We offer products with risk aversion or controlled risk that would appeal more to that market. Post has some hedge funds, but we haven't been offering them to the 401(k) market. We're not allowed to do that. We'd look at it if the rules were to change.
Q What part of the business are you growing these days?
A We're growing both the institutional and 401(k) businesses. The institutional has been growing very fast, thanks to improved performance and clearer presentations. In institutional so far this year we've added $4 billion from 61 new clients, divided between fixed income and real estate strategies. We took in more clients in real estate, but more assets in fixed income. The 401(k) business can be developed also. Our full-service business has been taking in $1 billion a quarter over the last few years. They have been focusing on clear communication and service.
Q How do you spend most of your time?
A I divide my time between New York and Des Moines. I have homes in both cities. I also travel around the U.S. and other countries developing our investment management business. … I spend my time making sure we're properly resourced and trained and can perform well to provide top investment performance; that we have the right incentive structure and clear communication. … We plan on building an emerging market research capability so that when emerging markets get more attention we will be in a good position to offer those strategies.
Q What is your biggest challenge?
A Getting the people to work together in a constructive way. They're motivated to do it. The important thing is that both incentives and communications are in place so they see that it's advantageous to work together. One of the positives is that most people understand that we have a common objective. We have to reinforce that, though. It's very people intensive. … One of the toughest parts is keeping all the moving pieces working together, but it's getting easier, because the teams are coming together nicely and I can delegate with a lot more certainty now than when I started here.
Q What have you been doing to guard against the late-trading problems that have occurred at other mutual fund companies?
A We have been thoroughly checking to ensure none of that has been going on. Also, we already have systems in place, so we know who's trading our funds. And our 401(k) clients are protected because the funds can be bought only by qualified plans. We're less vulnerable than other firms because most of our plans tend not to be in funds that are rapidly flipping. At CSAM we put exit loads on funds to prevent people from buying in overseas funds before the market opened. I'm somewhat shocked that other firms didn't do that, because to me it was clear you had a fiduciary obligation. You can't let people take advantage of investors.
Q Do you miss managing money?
A I miss the immediate competitive nature, because you could see your results quite soon. And it had an eclectic quality also … one day you're looking at airlines, the next day forest products. The intellectual side of portfolio management is quite appealing. Now that I manage people who manage money, I bite my tongue. I don't want to dictate or affect their carefully planned strategies.
Q And what do you do for fun?
A I like to play golf with my son, both in Scotland or in London, where he's a student, but I don't play well enough or often enough. I also like the opera and am a big supporter of the Metropolitan Opera Co.