Deutsche Asset gets hit

LONDON — What started in 2003 as a wave of U.S. client defections from Deutsche Asset Management has turned into a tsunami of further departures striking the company in the United Kingdom and Europe.

In the quarter ended Sept. 30, Deutsche Asset Management lost €11 billion ($14.3 billion) in worldwide assets, most of it from institutional clients. Officials wouldn't give a regional breakdown of assets under management and client outflows.

A statement from Deutsche said the losses "were largely in the U.K. institutional business" as a result of poor performance in U.K. and European equities, rapid turnover in senior staff and the trend for pension funds to move from balanced mandates — until recently Deutsche Asset's core business — toward specialist money managers.

Over the last six months, Deutsche Asset has lost 10 executives from its U.K. operation, including Chief Investment Officer Karl Sternberg, who left in July.

Recent U.K. client losses include:

• Orange Group, London, which terminated Deutsche Asset from a £20 million multiasset portfolio managed for the £135 million Orange Pension Scheme defined contribution plan;

• The £500 million London Borough of Lewisham Superannuation Fund, which earlier this month dropped DeAM from a balanced portfolio of undisclosed size;

• The £111 million Avon Cosmetics pension plan, Northampton, which dropped the firm from a balanced portfolio of undisclosed size; and

• The £1.8 billion Lothian Pension Fund, Edinburgh, which terminated DeAM for poor performance of a £170 million U.K. equity portfolio. Baillie Gifford & Co., Edinburgh, now runs the assets.

German-based consultants report the firm has also struggled to maintain clients in its German business, where it has lost market share as local institutions switch to specialist money managers from balanced firms.

"They used to be a strong domestic player, but across all their strategies it's hard to find products where they are really good," said a German investment consultant who asked not to be named.

Large German pension plans and insurers began appointing specialist money managers and dropping balanced managers in the late 1990s, said Hans-Juergen Reinhart, a partner at Risk Management Consulting, Frankfurt. He noted Deutsche isn't alone among large domestic money managers that have more than 50% of their business in balanced mandates. He wouldn't name any others, however.

In the United States, U.S. client departures include the $2.2 billion Dallas Police & Fire Pension Plan, which last month terminated Deutsche Asset from a $100 million U.S. microcap equity portfolio, and the $200 million Brockton (Mass.) Contributory Retirement System, which dropped DeAM from a $9 million U.S. small-cap growth equity portfolio in July.

Doug Davies, Amsterdam-based vice president of funds management at Wilshire Associates Inc., said the U.S. operations were affected by specific regional factors exacerbated by poor global oversight.

"The perception among U.S. consultants and clients is that German banks and insurers are not good parents of assets managers." Mr. Davies said. It appears difficult to fit an asset management business into the German corporate model with its structure of dual management and executive boards. He conceded that DeAM rival Allianz Group, Munich, had been relatively successful in integrating its U.S. money managers, but said the German group had given its underlying managers autonomy and allowed them to be run outside of Germany.

Paul Manduca, DeAM's London-based executive head for Europe, would not comment on regional client outflows. He said the firm had had strong recent inflows with a multiasset mandate of €24.7 billion for Zurich Financial Services' German subsidiary, Zurich Group Invest Europe Deutschland GmbH, Frankfurt, and a €460 million U.S. large-cap value equity mandate from the €17 billion Fonds de Reserve pour les Retraites, Paris.

He admitted U.K. and European equities had been performing poorly over the last two to three years. But performance had improved in the last quarter or two following the appointment of Peter Harrison, former chief investment officer for global equities at JPMorgan Fleming Asset Management, London, as chief investment officer to replace Mr. Sternberg.

According to performance data published by Russell/Mellon Europe Ltd., Leeds, England, Deutsche Asset's U.K. alpha equity fund returned an annualized 2% for the three years ended Sept. 30, ranking it 49th in a universe of 78 funds. However, the fund's return of 8.3% for the year ranked seventh among 98 funds. But performance tanked again during the quarter, dropping to 1.2% and placing it 81st among 100 funds.

Performance in European equity barely fared better. Russell/Mellon reported that DeAM ranked 43rd out of 44 for the three years ended Sept. 30 with an annualized -0.9% return, and ranked 44th with a -1.1% return for the year.

Still, a number of U.K. pension plans are sticking with the firm.

Geof Pearson, secretary of the £2.7 billion J Sainsbury PLC Pension Scheme, London, said the plan and its investment consultant, Russell Investment Group, London, were generally happy with the performance of DeAM's £250 million global bond portfolio. The £14 billion Railways Pension Scheme, London, in September cut a Deutsche £1.7 billion assignment, but retained the firm to run £700 million, at least part of which will be run in global bonds. Plan officials did not return calls for comment.

The £357 million London Borough of Newham Superannuation Fund and the £465 million London Borough of Southwark Pension Fund continue to use Deutsche Asset to run a large portion of their assets, but officials there would not comment further.

But these clients may be a drop in the ocean compared with the firm's recent client outflows.

Global consultants and money management analysts say they are exasperated by several U-turns made by Deutsche Asset in recent years, alternating between regional approaches and global approaches. They question whether Kevin Parker, DeAM's recently appointed global head, is the most effective leader for Deutsche Asset Management. Mr. Parker, who was head of equities for parent Deutsche Bank's corporate and investment bank, replaced Tom Hughes, who left the firm in September to take a "sabbatical leave of absence" to deal with family matters.

DeAM refuses to comment on future corporate and investment strategy until Mr. Parker unveils his plans for the firm next month.

Staff turnover has been Deutsche Asset's biggest problem in the last few years, said Wilshire's Mr. Davis. "At the moment, (Deutsche Asset's) clients need three years of organizational stability more than three years of stellar performance," he said.

The anonymous German-based investment consultant said clients and consultants had no clear picture of where the firm was headed.

Mr. Davies believes DeAM needs to be given greater autonomy from the parent and should be given stronger executive leadership by appointing someone from outside the group and free of internal political allegiances. It is also important to retain key fund managers.