Many Strong execs to stick with Wells

Key investment professionals at Strong Financial Corp. — including top portfolio managers Richard T Weiss and Thomas J Pence — have signed on to stay with Wells Capital Management Inc. now that Wells is buying Strong.

Last week, Wells Fargo & Co. officials announced the company's long-expected acquisition of Menomonee Falls, Wis.-based Strong's $27 billion in mutual fund assets and $7 billion in institutional accounts.

Recruiters and consultants said that for the merger to succeed, it's critical that Strong's top investment managers and client service executives stay on, in order to keep client assets.

Robert Bissell, president of Wells Capital, the asset management unit of Wells Fargo, San Francisco, said: "The top executives have been given contracts that are similar to what they had before, for a minimum of three years plus incentives beyond" what they currently have.

It could not be learned how many staffers are staying, but in a statement, Mr. Bissell said: "Wells has signed employment contracts with key portfolio managers representing the majority of assets managed by Strong."

Mr. Weiss, who has been named a senior member of the Wells investment team and a senior portfolio manager, said in an interview that his 16-person team, and the 11 members of Mr. Pence's team, are committed to staying.

Mr. Weiss and his team manage Strong's small-cap and midcap equity strategy, accounting for $6.4 billion as of April 30; Mr. Weiss is based in Chicago, while most of his team is in Menomonee Falls. Mr. Pence and his Indianapolis-based team manage $1.7 billion in fundamental growth.

Mr. Weiss added: "Several clients told me they were encouraged that Wells was the buyer because they have a good reputation in the business community, and of course (clients) were relieved that the uncertainty had been removed. The key to retaining clients is retaining the key investment people."

One recruiter who requested anonymity predicted nothing will change for a few months, but that over time key people might leave.

"Wells doesn't pay the way Strong does, which is incredibly generous," the recruiter said. "They (Strong) pay on the high end while Wells' salaries are mid to low end. But people who want to live in Wisconsin don't have many other options, so many will stay."

Mark Esposito, managing director in charge of financial services at executive recruiter Christian & Timbers LLC, New York, said he hasn't heard of many people running for the exits yet. "A lot have been checking their options with us, but many of the key investment executives seem to want to stay."

Another recruiter noted he knew of at least one team that had not yet signed a contract and was considering other options. He would not be specific. Neither Mr. Bissell nor Mr. Weiss could be reached to comment on this statement.

Two key Strong teams left before the sale was announced. The large-cap growth team led by Chris Wiles, Larry Eakin and Mike Halloran, left earlier in May to join National City Investment Management Co., Cleveland. They managed $200 million in mutual fund assets. And the leaders of the $2.9 billion fixed-income team — Ashok Bhatia, John Bonnell and Thomas Sontag — all resigned from the firm in April. They have not yet announced their plans.

The announcement of the acquisition follows Strong's agreement on May 20 with the Securities and Exchange Commission and the New York and Wisconsin attorneys general to pay $140 million in fines and restitution to settle allegations that Strong founder and former CEO Richard Strong had traded rapidly in and out of his firm's funds, hurting the fund's investors. He also permitted hedge fund Canary Capital Partners LLC to engage in rapid trading in Strong funds. Mr. Strong will pay $60 million of the $140 million total and also agreed to a lifetime ban from working in the securities industry. The firm also agreed to reduce its fees by at least $35 million over five years. The settlement paved the way for the acquisition to occur.

Mr. Bissell said Wells will manage the Strong acquisition the same way it managed previous acquisitions, allowing the different investment teams to continue to live in different cities and to operate independently. "We have a decentralized operating philosophy; we are really just a collection of investment boutiques. Eighteen months ago we purchased Montgomery Asset Management (LLC). We took the investment teams with those assets and gave them incentive relationships to keep them on board. We also kept the brand name. So today, the Montgomery core fixed-income team continues to operate out of Walnut Creek, Calif.; the small-cap growth team still operates out of Denver; and the emerging market equities team operates out of San Francisco. Another of our recently purchased businesses, the Benson small-cap value team, still operates out of Portland, Ore."

Observers expect that Wells will leave most of the Strong organization intact, once it determines where there's duplication. Mr. Bissell said the goal is to grow both the institutional and the retail businesses. Wells has $54 billion in institutional assets and $76 billion in retail assets as of March 31; Strong had $7 billion in institutional assets and $27 billion in retail.

Kirk Hartman, Wells' chief investment officer, said: "There is a modest overlap on the investment teams, but we won't look for efficiency. We're going to do what's right for the clients first. There is some overlap in money market funds and in fixed-income funds, but there is surprisingly little duplication considering the size of the two businesses."

Strong is known for equity while Wells is better known for its fixed-income strategies, said Gareth Lyons, an analyst at Morningstar Inc., Chicago, who follows both companies. He agreed that there is not a lot of overlap between the two firms' offerings, adding the merger will help Wells broaden its lineup.

Noted Mr. Bissell: "It hasn't yet been determined if the Strong brand name will be kept." He also said Wells is weaker in the sales area, while Strong has better client service.

Mr. Lyons and other industry observers had mixed views about the merger, which is scheduled to close in the first quarter of 2005.

"Their cultures are way different," Mr. Lyons observed. "Wells is a conservatively managed, respectable business, while Strong is an entrepreneurial, swashbuckling fund firm." Another observer said: "Wells is a banking culture completely different from the more entrepreneurial culture at Strong, where people live and die by investment management. They don't at Wells."

Yet Paul Schaeffer, managing director strategy and innovation at SEI Investments, San Francisco, called Strong and Wells a good fit. "This gives Wells an external distribution platform it didn't have before. Most of Wells' distribution is proprietary while Strong's was non-proprietary. Wells also gains a lot of good equity products. In addition, Strong has a good middle-market bundled 401(k) business, which offers Wells another opportunity.

"The Wells guys are very smart about doing mergers. They did a good job with the Montgomery acquisition, and left them intact. They will want to rationalize the Strong business, deciding how many and which brands they need to keep."

Michael Rosen, principal at Angeles Investment Advisers LLC, Santa Monica, Calif., said he wasn't so sure the deal would solve some of the basic problems he has had with Strong. "We haven't recommended Strong to our clients because we had concerns about the organization and they didn't have products we like ... For us to recommend them, we need to see world-class products, which Wells doesn't have either.

"It's not like Strong is being acquired by a BlackRock, Dodge & Cox or Capital Group. They've been taken over by a giant retail bank, not a world-class money manager. There are thousands of money manager firms out there to choose from; we want to invest with the very best in each product area. Being good or mediocre doesn't cut it."

Asked about Mr. Rosen's comments on the lack of world-class products, at Wells and Strong, Wells' Mr. Hartman responded: "Beauty is in the eyes of the beholder. We have a large institutional client base."