Udo Frank came to San Francisco from Frankfurt in 2003 to oversee RCM Capital Management LLC. While the firm struggled with performance in the past, he is encouraged by RCM's recent progress.
RCM is trying to bounce back from a difficult 2004 by overhauling its performance and investment process. Part of the Allianz Global Investors platform, RCM has made personnel shifts in areas such as midcap growth, as well as changes in portfolio construction.
Udo Frank, chief executive officer, acknowledged in a recent interview with Pensions & Investments that the firm needed to put enhancements in place "because we didn't deliver to our own standards, as well as to what the clients expected from us."
Institutional clients, including the $12.7 billion San Francisco City and County Employees Retirement System and the Florida State Board of Investment, Tallahassee, severed ties with RCM last year. Between January and April 2004, RCM lost $1.3 billion in client accounts. As the company implements its changes and communicates them to clients and consultants, the pace of defections is slowing significantly. So far this year, RCM recorded a net account loss of $180 million.
Mr. Frank declined to say how many defections have occurred overall. But he was quick to point out he is encouraged by the progress RCM is making. The company is currently a finalist in several searches, including a high-yield search being conducted be the $814 million Tacoma (Wash.) Employees Retirement System.
Mr. Frank, who also is CEO of global equities at Allianz Dresdner Asset Management, moved to San Francisco from Frankfurt in 2003 to oversee the growth of RCM's business. He spoke to reporter Cecily O'Connor about the direction in which the 35-year-old firm is heading, cooperative efforts among other Allianz subsidiaries and the time horizon for improving the business.
How does RCM plan to turn its business around? People, process and performance. It's helpful to think in those categories to see what we are up to. It was important to us to have the right leadership on the investment side. We hired Peter (Anderson as chief investment officer) in August 2004, which was a key hire. We needed a certain skill, personality and experience level to address the challenges we thought RCM had. This is an extremely valuable fit in terms of what he brings to the organization.
We also have been evaluating where we need to strengthen our activities and have brought in a couple of experienced portfolio managers. Scott Migliori (senior portfolio manager and co-chief investment officer of U.S. large-cap select growth equities) began at the end of 2003 and Ray Edelman (senior portfolio manager on RCM's U.S. large-cap growth equity team) started at the end of 2004. We also have strengthened our research team and made sure each sector team has the leadership and resources it needs to perform. For example, Steve Berexa, our director of research, is focused on that role, rather than also having the responsibility of heading up the technology team. We made a similar change in our consumer team: We promoted Karen Hiatt to help the team, and our sector head of consumer, Alec Patterson, moved to a senior analyst role in the consumer team.
What is RCM doing to shore up its midcap strategies? We analyzed why we didn't deliver, and felt changes were necessary. We made changes in the team, and promoted an individual (Louise Laufersweiler, chief investment officer of RCM's midcap products) in the firm to head up that effort. The midcap change was in April, and we are optimistic.
What are some of the overall changes planned? When Peter joined it was really reviewing the details of the RCM investments and process and putting in place enhancements he thought necessary. These enhancements revolve around three elements: focus, speed and portfolio construction. (The first) is all about making sure analysts and portfolio managers are really focused in terms of their area of responsibility, but also focused on drivers, in the sense of what is driving a company's business success and stock price. Speed is all about the execution of investment decisions, whether this is buying or selling. It has to do with processing information and reaching a level of confidence where you trigger a decision. This is all focused around making valued-added decisions for the portfolios. Portfolio construction involves the number of stocks in a portfolio, the weighting of high-conviction names.
How is RCM enhancing its speed? Team members are now focused either on S&P 500 mandates or Russell 1000 growth mandates, whereas before there was a mix. This means you have two smaller groups within that large-cap team and you can structure communications differently and act more quickly.
We are in the phase of doing things as the people and process enhancements have been put in place. There's always work to be done. A parallel effort that is just as important is communicating to our clients and consultants what we are doing. We really believe in this being a business of trust, and therefore (it is important to have) full transparency and explaining in detail what's working.
What is RCM's timetable for implementing these changes? The time horizons are, to a certain degree, driven by client expectations, and this is again driven by their requirements. You want to move as quickly as you can, but at the same time everybody understands process enhancements are subtle work. From design, to implementation to monitoring, you want to see what is working.
Has RCM won any new business recently? We have been mandated as subadviser by the board of the Mutual Fund Trust, which was called Allianz Global Investor Fund Management. … We find the amount of business which we were mandated so far this year pretty exciting. If you look at our activities, it's primarily in large-cap focus, which is a strategy within our large-cap area. It is an effort that is designed to own the highest-conviction names. We are actively engaged in small cap and high yield, as well as our sector strategies, technology being the most prominent one.
Are there more plans to expand staff? We have been hiring selectively based on where we thought a strengthening of certain areas was really a possibility, but also a necessity. It goes back to core beliefs in how to add value to clients. A key process is to focus on high-quality growth companies and research the primary element to identify those opportunities. You need to make sure that research is really having the resources it needs to dig up those investment ideas and stay close enough to companies to identify drivers working, or drivers disappearing.
What is RCM's relationship with other Allianz money management entities? Allianz has four key businesses (property casualty insurance, life and health insurance, investment management and financial services). Each company has its own management team and operates independently. There are a number of areas, such as infrastructure, where we share and benefit from synergies. Secondly, there are in those parts of the world a very close cooperation on distribution and selling of products in our family. It really depends on the structure of the market.
Take the U.S. We have Allianz Global Investors Distributors? in Stamford, Conn., which is managing retail distribution for all of the investment platforms in the U.S. So, they are selling mutual funds and managed accounts, whether this is PIMCO or RCM. On the institutional side, it's more that each platform drives its own business. This is primarily because of how the U.S. market has developed. Consultant clients have a deep understanding of the managers and look for specific, dedicated mandates that fit certain roles in their pension plans. It's important that you have a team that knows all the details of a specific investment management company, and it's challenging to do that for a broad range of companies.
If you look at Asia or Europe, we are organized differently there. On the retail side, you find the same organization as the U.S. When you look at institutional market, it's a similar model where you have an experienced team representing more than one investment platform. To do that, a product specialist is brought into the process early to add detail when required for a specific entity. You have an AGI sales person who can rely on a specialist to talk about the other offerings of those investment platforms.
How do you like living in California? When I leave the office, I almost feel like I am on vacation every single day. I love it here. But if there is one downside to the weather, it's the fog.