After suffering losses of clients and assets in the late 1990s, Forstmann-Leff Associates is coming back strongly. The rebuilding is based on a simple concept: Let the talented people be talented.
Forstmann-Leff Associates LLC, New York, is run by Richard Goldman, who was hired in 2003 after four years at Deutsche Asset Management as head of the Americas institutional business. Mr. Goldman had a mission: to rebuild Forstmann-Leff as a firm focused squarely on managing U.S. equities, one that is free of bureaucracy and gives employees ownership to keep them motivated to make it successful. He is on his way to doing that. In the past 18 months, the firm's parent, Refco Group Holdings Inc., loosened its purse strings: the firm added 18 portfolio managers and analysts, U.S. small-cap core and U.S. small-cap growth strategies, and four new marketing and client service executives.
What has been the key to rebuilding Forstmann-Leff? The key for us has been our focus on being investment-centric and client-centric. Our most valuable currency is our investment acumen and our people. We can break down the key building blocks to three things. One, to bring outstanding investment capabilities to our clients. We have three very focused and distinct investment teams. They are led in the large- and midcap growth space by Tom Galvin and Will Potter; in the small-cap growth space by Beth Dater; and in the small-cap core space by Nancy Tooke. They are small, focused teams that have worked together for a long time; they are institutionally oriented, specialize in intense, fundamental research, and, most importantly, they've demonstrated skill in being able to add a superior and consistent performance.
The second key has been to complement that investment quality with a superior operating platform. We need to be able to have a service standard for internal portfolio managers and traders, and to provide the highest quality service to our clients. That standard is universal across all of the support functions of our business: operations, trading, technology, client service and compliance. That allows our portfolio managers to focus on managing money without distractions, and it allows us to provide a high level of service.
The third key has been building a successful culture. We have re-equitized the ownership structure so that employees are excited to be here. They have substantial economic stakes in the firm, and incentives.
Could you go over the recent history of the firm? At its peak in the late 1990s, Forstmann-Leff had over half its assets in hedge funds. With the bursting of the bubble in 2000, and the change in marketplace conditions, a lot of those hedge fund assets left the firm. The market was tumultuous. The hedge fund assets went from about half of firm's total assets to about $350 million in a very short period of time. The focus then became to rebuild our business around our institutional platform with primarily long-only products. Today, we no longer manage hedge funds…
Additionally, we had a small core fixed-income product that we sold … to Pareto Partners well before I got here. We did that mainly because the business didn't make sense for us strategically, and there are much bigger fixed-income firms out there that are hard to compete with.
When I arrived here in the fall of 2003, we were able to retain most of the remaining institutional assets. That was about $2.5 billion in our large- and midcap growth products. And that's been the foundation upon which we have built the firm. We've grown to about $4.5 billion over the last 18 months. That was a result of focusing on our legacy clients and enhancing our relationships with those clients. In addition, the new small-cap teams and new products enhanced our growth.
How has REFCO been? REFCO has been very supportive of our efforts. They understand that this is about building a franchise. They also understand that the ability to compete successfully in the marketplace is about attracting and retaining the right professionals, and to create the proper incentive structures — thus the new equity ownership for our employees.
REFCO allows us to execute without disruption and without any kind of micromanagement, and that's also appealing to the people who are here and to our clients. They have supported us with capital and have allowed us to build a business. They also allow us to execute without any kind of artificial or financial hurdles that are created on a monthly or quarterly basis.
What lessons are you applying from your days at DeAM? What I learned from DeAM is that the key to success in this business is making the quality of your investment products the priority, and sticking to a focused execution plan. That's what the clients want. They want that with the proper incentives and alignment of the professionals that are delivering that to them so that there's longevity and viability for the firm. So that way, we can build long-term relationships.
Here, there's no interference in the portfolio managers' ability to deliver alpha. And that's what clients expect. The new teams we brought in complement that effort and they coexist in a very complementary way. There are no distractions, and no bureaucracy.
Since you joined the firm, you've hired several equity teams from other firms. In the small-cap growth space, we hired Beth Dater and her team from Credit Suisse Asset Management to help to create a research continuum in the growth space for us, from large down to small. The idea is for us to really be the experts in the entire growth spectrum, from small-cap to midcap to large-cap, with the idea being that in an optimal environment, the small-cap growth companies will eventually become the large-cap growth companies. The intellectual capital that we have derived from researching these names really creates a competitive advantage.
We also acquired Nancy Tooke and her small-cap core team, along with their track record, from Schroders. Their product started in 1990.
Today, Forstmann-Leff has about 25 people dedicated to investment research and portfolio management. There were about 12 when I got here.
The goal was to find teams that were small, had experience in working together, a sound investment process and a good following. And the goal was also to find people who shared the common values that we have here, which is about sticking to our knitting and not trying to be everything to everybody. They have their roots in small boutiques.
We also brought a number of marketing and client service executives to nurture relationships, with a heavy emphasis on the consulting firms and a direct calling effort. At the same time, we are working very hard to enhance the level and quality of service and the value we can provide to our clients.
We hired Robert Bernstein, who was working at REFCO; Joseph Germain, who worked as a marketer at both GMO LLC and Putnam Investments; Tom Pernice from JPMorgan, who runs client service; and Merik Sarmiento from Deutsche Bank, who acts as an information bridge between our prospects and clients and our portfolio managers, as head of investment services and marketing.
Are there other areas into which you would like to expand? We have no immediate plans to bring in other teams. If there's an opportunity to consider something that makes sense, we will. We've done a lot in a short period of time. We've diversified investment capabilities and we've done so in a way that we think allows us to be more of a solutions provider to clients and to the market. Right now, it's execution time.
What kind of marketing pitch do you give to consultants and plan sponsors? The message is that we have superior investment products, teams that are focused on delivering superior returns and that have a distinct process, and a process that is well understood and repeatable. We are a firm that is entrepreneurial in nature and has a culture where everyone comes in every day understanding the goals of the firm. People are highly motivated and empowered here. This is an environment that is efficient; where people can get things done in a way that enhances the quality of our products. That's our message, and it's very straightforward.