Bill Ricks is AXA Rosenberg LLC's chief executive officer and chief investment officer for North America. Previously an associate professor at Duke University in Durham, N.C., Mr. Ricks relocated to California in 1989 to join what was then Rosenberg Institutional Equity Management, Orinda, as a research associate. The firm was founded in 1985 by industry legend Barr Rosenberg, a former efficient-markets guru at the University of California at Berkeley, who later also started his own consulting firm, BARRA Inc. In 1999, French insurance giant AXA SA acquired a 50% stake in Rosenberg Institutional, which was renamed AXA Rosenberg. In early 2002, AXA exercised its option to boost its ownership to 75%. Mr. Ricks spoke with Joel Chernoff on the current market-timing scandal, the money manager's relationship with its parent and what Barr Rosenberg is up to.
Q Are you vulnerable to market timing?
A When we launched our first international funds in 1989 — these were off-shore mutual funds — we were dealing with this issue of market timing. … One of the most obvious ways to get around it is to have an exit fee. Several years ago, we instituted a redemption fee of 2% (for our international funds). It seems to have kept away market timers.
What's amazing to me is the scope, the scale of market timing. I can understand that it goes on, like any bad business practice or anything unethical, it goes on here or there. ... But in so many of these large mutual fund complexes, it's been allowed in quite an open way, in a way that says, ‘OK, you do this for me, and I'll do this for you' — an obvious quid pro quo, which is clearly illegal. And it's so harmful to the individual investor, because you're really making a deal that's going to lower their return.
Q What do you think of late trading?
AIt's unconscionable that you could have a system that allows people to trade after a cutoff time. Because now, you're into not only international funds … but now you open it up to U.S. funds. … But if you're allowed to wait, whether it's an hour or two hours or half a day… a tremendous amount of news comes out intentionally after the close of trading. That I would have to say should almost never be allowed.
Q What would be an appropriate penalty?
A For the late trading, you basically have to ban people from the business. You have to say it's so egregious that it's not a question of being gray areas, like you might argue market timing is, though I think market timing is just as obviously unethical and late trading is just even more blatant. So I think the penalties should be very severe.
Q What has been AXA's influence on the firm?
A I'd say very little has changed, in that we totally and completely control our research process, our stock selection process, the building of our models, the day-to-day investment process. … They have remained very true to the contractual agreements that we signed at the beginning of 1999.
The positive things have meant that we have grown the business a great deal globally. Right away they helped us just by the weight of their name in Europe to increase visibility of AXA Rosenberg. Over the years, they've helped us with seed money for new portfolios. Right away, we started mutual funds in Europe, called UCITs. They seeded 17 different strategies. There is over $2 billion in those European collective vehicles.
The other thing AXA has done is to bring us their own insurance money. When they first purchased an interest in us, we were under $5 billion or $6 billion. We're now at $35 billion. At this point, a little less than half of our assets under management come from AXA, and a little over half from third parties.
Q What does your recent deal with Charles Schwab offer to your firm?
AWe currently have about $1.5 billion U.S. mutual funds, and our expectations over the next four to five years were to double it. What the relationship with Schwab does, of course, is to really raise that expectation potentially to a higher number.
They're the 10th or 11th biggest mutual fund complex in the country. They've got about $150 billion, most of which is money market funds and index funds. So to take on $1.5 billion in actively managed equities is a big increase in that business to them. For us, it doesn't change our day-to-day investment process. The only thing it does operationally for us, it gets us out of the administration of mutual funds business, which always was a sideline to our real business.
Q How do you see your market-neutral business developing?
AIt's a natural extension of our process because we have an opinion on every stock. It lends itself very nicely to long-short. … We expect that to be a growing part of our business, but it's a very small part of what we do. … It's not now a big contributor to our bottom line. If you looked at five years from now, we hope it's bigger. It's under 5% now, we hope it's as much as 10% some day.
Q What are your thoughts on portable alpha strategies?
A I tend to think of it as being part and parcel of alternative strategies. If you're doing long-short or if you're doing any kind of hedge-fund type of investing, that's only part of your investment decision. So if I give a manager $600 million of long-short, I still have a decision to make: do I put something on top of that or let it be stand-alone. If I decide to put equities on it, it's really an equity product. If I decide to put bonds on top of it, it's really in the bond category.
The fact that you've decided to hire a long-short manager or a hedge fund or hedge fund-of-funds strategy, that's the major decision. Whether you decide to make it portable by putting something under or over it really is a separate decision.
Q What's Barr Rosenberg working on now?
ABarr Rosenberg works only on the things he wants to work on. That's the good news. When I joined the firm 15 years ago, Barr Rosenberg had to work on everything. … Now, his sole focus is on the activities of the Barr Rosenberg Research Center. … He's been able to focus on his greatest love, which is data and research and building models. The other thing that Barr has worked on a lot in the last couple of years is essentially re-writing the entire expert system from the ground up. The key word there would be "object-oriented programming." … With object-oriented programming, the idea is instead of having one massive block of code, you've got components or modules that you can plug into each other.
That project was started about four years ago. It's now about 90% complete. So, a year from now, when we have to start re-writing certain portions, it will be much easier to do. So being in this new object-oriented world has allowed us to do things more quickly going forward, and to always stay at the cutting edge.