Observers keep eyes on turnover at National City

CLEVELAND — National City Investment Management Co.'s search for a new CIO for equities is the latest turn in a whirlwind year that has left observers struggling to keep up with the pace of change.

The Cleveland-based firm, with $27 billion in institutional and mutual fund money under management, announced recently that Donald L. Ross, president and chief executive officer, would resign effective March 31, half a year after the launch of an aggressive "hub and spokes" strategy aimed at acquiring established investment teams.

In the past eight months, parent company National City Corp. has:

• tapped Ted M. Parker, the head of its banking operations in Kentucky, to take over as head of the institutional asset management business from Paul Clark, who returned to the bank;

• brought in industry veteran John G. Abunassar for the newly created position of executive vice president of institutional asset management;

c hired Robert E. Joseph from Northern Trust Global Investments, Chicago, for the new position of head of National City's consultant relations efforts;

• lured Beth Hetzel from Banc of America Capital Management, Charlotte, N.C., to take the new position of senior vice president and managing director, product management;

• brought in Dave Vandergriff as director of institutional sales and Timothy M. Mahoney to head distribution for the Armada Funds, National City's fund family;

• lifted out the Pittsburgh-based large-cap growth and core equity investment team led by Christopher A. Wiles and Lawrence E. Eakin Jr. from Strong Capital Management Inc. to replace an existing team that had racked up weak performance numbers; and

• acquired a St. Louis-based small-cap value and all-cap value investment team led by Gordon Johnson, with National City Corp.'s acquisition of Allegiant Bancorp Inc.

Earlier changes included steps to rebuild National City's value equity investment lineup after three portfolio managers bolted in early 2003 to join startup Integrity Asset Management LLC, Louisville, Ky. National City hired Michael J. Chren last January from INVESCO, Atlanta, as a co-leader of its value equities team after picking up Richard Giesen from Munder Capital Management, Birmingham, Mich., in September 2003 as director of the firm's small-cap value equities team. Also in September 2003, the firm hired David Cooley from J.&W. Seligman, New York, as senior director of international equity investments.

All that change has left some observers scratching their heads. "There's been a lot of reshuffling of the deck," and that doesn't inspire confidence, said an executive with one corporate pension fund that counts National City among its equity managers, who declined to be named.

The titles of recent reports on various Armada funds by Morningstar Inc., Chicago — including "Changes at the helm have yet to pay off" and "Yet another manager change doesn't alter our opinion of this fund" — suggest retail analysts have also noticed the turnover.

"If this is 18 months of shifting stuff around and then everything's going to be in place, that story is fine," said Todd Trubey, the Morningstar analyst who covers National City. But it's "pretty rare that musical chairs over the period of several years is a good idea," he added.

Market players said they were especially surprised by news that Mr. Ross — who has been the public face of National City for the past decade — would be leaving.

Both Mr. Ross and National City executives said the decision to part ways was an amicable one. The firm's "hub-and-spoke" strategy is different "from what we've employed in the past, and Don elected not to be part of that strategy," said Mr. Abunassar.

One former National City portfolio manager, who declined to be named, said the new strategy "makes sense" because many of the firm's investment teams were "not putting up great numbers," and hiring the best people wherever they happen to be is one means of creating "an organization that could do a better job."

National City officials concede that the firm's equity strategies have room for improvement. The large-cap growth strategy that Messrs. Wiles and Eakin just took over has delivered returns around two points below the Russell 1000 growth index on both a three- and five-year basis, according to Morningstar's database. The firm's large-cap value and small-cap value portfolios, while beating or coming close to their benchmarks on a three- and five-year basis, have been lagging for the past year.

The firm's assets under management have slipped by roughly $1 billion in the past year, although National City officials said that reflected drawdowns of money market funds by corporate clients, offsetting net additions in fixed income.

For now, though, National City executives insist their firm is playing offense rather than defense: National City "has made a commitment to be great in this business," and is investing aggressively to get the right people and products, Mr. Abunassar said in an interview.

A strategic review completed midyear set the firm on a "centers of excellence" path of filling gaps in its product lineup by "acquiring firms and teams that aren't necessarily located in Ohio," he said.

Mr. Abunassar said National City appreciates the appeal of stability to clients and noted that the products the firm is excited about at present — including small-cap core, large-cap growth and core equities and fixed-income strategies of one- to three-years' duration — have had stable management teams for an extended period of time.

Another former National City portfolio manager who did not want to be identified said National City is prepared to plow a lot of money into acquiring investment talent while building up a first-rate distribution team, a potentially powerful combination. But the strategy is hardly a confidence builder for the remaining investment teams in Cleveland, who have to worry about being made redundant by the acquisition of better-performing teams, he said.

Asked whether Cleveland-based teams were on tenterhooks, Mr. Abunassar said investment teams that perform well are an important part of the team; those that don't, should not be happy. "That's life," he added.

The decision by National City Corp. to redouble its investment management efforts comes just as some industry observers are predicting that regulatory probes of firms that both distribute and "manufacture" investment products will prompt some financial conglomerates to get out of the money management business.

Mr. Abunassar said officials at parent National City Corp. believe that having a strong investment management effort is a key to being a top-tier financial services firm. "We believe in order for us to be relevant in this space, we have to combine manufacturing with distribution," he said. National City is positioning itself "to make a big charge for both institutional and retail distribution and asset management," he said.

Among the investment capabilities National City would like to add or beef up are small-cap growth equities, high-yield bonds and alternatives, including hedge funds and private equity, said Mr. Abunassar.

Industry observers said they see merit in the "hub and spokes" strategy. Managing autonomous investment teams in distant locations should become an increasingly important skill set in institutional money management, said Ron Petrie, director of public affairs with Cleveland-based Victory Capital Management.

The first former National City portfolio manager who spoke on condition of anonymity agreed, but said National City won't find it easy to compete for veteran investment teams with money management firms that boast more prestigious names and better distribution capabilities.

Mr. Abunassar said National City realizes it will have to compete hard to get the team it wants. But the firm has a very strong distribution network already and has made a commitment to grow its business that will attract investment professionals and clients alike, he said.

"It's a good approach. Time will tell if they can actually execute it," said the former National City portfolio manager.