Baseball's Alex Rodriguez may have opted for New York over Boston, but money management's William F. Glavin Jr. made the opposite choice, leaving his post as president of the New York-based Scudder Funds to become chief operating officer of Boston-based David L. Babson & Co. Inc. in April 2003. Bringing more than 20 years of sales and marketing experience to his new job, Mr. Glavin says one of his goals is to broaden Babson's image from a traditional value manager to an entrepreneurial company with creative professionals generating products that can meet the evolving needs of clients. Mr. Glavin told P&I reporter Douglas Appell that Babson will continue its focus on traditional investment products, but alternatives — such as structured funds and, more recently, hedge funds — which account for roughly 15% of the company's assets under management today, could expand to a quarter or more of the total over the next three years or so.
Q Why are you pushing into alternatives?
A We have a fair amount of emphasis on alternatives already, but we see the marketplace itself focusing more on alternatives, and we see tremendous opportunity going forward as well.
Q What sort of products are we talking about?
A When we talk about alternatives, we talk about a fairly broad range of products. Part of that is hedge funds. We also have a number of mezzanine debt and equity funds, and a slew of structured funds that will be a fair portion of the growth that we expect over the next three to five years.
Q How much do you have in the alternative space now?
A About $13 to $14 billion, I think The bulk of that would be structured funds, probably about $10 billion, and then mezzanine funds would be another $1 billion to $1.5 billion. And then a little under a half a billion dollars in hedge funds today, although that's the newest piece of our business.
Q On what do you base your bullish projections? Conversations with institutional investors?
A It's not just institutions, but also insurance companies, private clients and high-net-worth individuals and family offices. There's a variety of target markets that we see. Clearly the institutional space is one where we see a lot of interest, not just hedge funds but a variety of product needs. There's been a significant awakening in the institutional market around the need for absolute returns as opposed to relative returns. That's an area where we have a lot of experience, a lot of products, and we expect to see a fair amount of growth in assets over the next three to five years.
Q Did the market's rebound weaken interest in absolute return strategies?
A Certainly the pressure is off a little bit after last year's results. But I think (institutional investors) will continue to pursue looking at how do we better understand the asset-liability match, and the issues we have around making sure we're appropriately funded to fulfill our pensions obligations of plans, be they public or private. That didn't evaporate last year just because some of the markets returned pretty healthy returns.
Q Does the end of that contribution holiday make this a golden moment for money managers?
A There are always opportunities to attract new assets. It depends a lot on product innovation and product performance; being in parts of the market where there is increasing interest by plan sponsors to invest. One of the things that distinguishes Babson from many of our competitors (is) an extremely entrepreneurial culture (that is) constantly trying to create new product ideas, new innovative ways to structure products. We think the marketplace is getting more and more interested in those kinds of capabilities as it is moving away (from) having all of their assets benchmarked to indices.
Q What new products are you offering?
A We have six hedge funds currently. Two or three years ago, we didn't have any. (They are) a good example of us taking pre-existing investment skills and applying them in a different way to create a product that we think has a lot of appetite in the marketplace today.
Q In three years, would your alternatives lineup have the same focus?
A I think so. Keep in mind, we also have a very strong and growing traditional business. That is a very important business to us as well, one we're investing heavily in, and we see lots of opportunities there. So it's a balancing act. In three years, I think we'll still focus on the three structures that we have in alternative funds (but) we'll have different product capabilities that are embedded in those various structures. That will come through the entrepreneurial culture we talked about, (or) it may come about through acquisitions. We will do acquisitions, some of which bring assets along, but they're not typically done for the assets, as much as for a unique investment capability that we would like to add to our set of skills and competencies. We expect that we will do more of those going forward in the next few years.
Q What sort of capabilities are you shopping for?
A We're fairly opportunistic. We very rarely go out and shop for something. A lot of people approach us on a periodic basis to inquire about interest in various businesses that might be available. We look at a lot of those. What we look at is, do they have a unique investment capability that we're interested in adding to our skill set? Those are the kinds of acquisitions that intrigue us the most.
Q Hasn't your push into alternatives been low profile?
A We're in the process of ramping up our external efforts. The traditional institutional space didn't have a huge appetite for some of these capabilities until very recently. But we are very much in the process of trying to expand our marketing, our distribution. (We've hired) Marty McDonough, our new director of corporate communications. We never had somebody in that role before. His role is to really work on the external messaging about who and what Babson is, trying to change that image of us as a traditional value manager, which is still very prevalent in a lot of markets.
Q Are your hedge fund managers getting the traditional 20% of gains that the industry awards?
A Our hedge fund managers don't get 20% of the gains in a hedge fund. Our fee schedules vary by product, so we don't necessarily even get 20% and in most cases we only get a portion of the gain over a specified threshold. Managers of hedge funds do have the opportunity to participate in a portion of the performance fee but that replaces their opportunity to earn a more traditional cash bonus, not in addition to a bonus.
Q How do you compete with smaller, more nimble specialists?
A One of the things we see is that, as institutions begin to look at the alternative space, they want that to look as much like the traditional space as possible. They want to look for people who have transparency, client service, risk management, compliance and controls. In many cases, a lot of the industry doesn't have those capabilities.
We have the entrepreneurial bent as an organization of a lot of small boutiques, coupled with infrastructure that is organized around and able to support institutional clients.