Credit Suisse cuts back

NEW YORK — Credit Suisse Group's reorganization is sounding the death knell for the vast majority of its traditional asset management business in the U.S.

The Zurich-based company will phase out most of this business before the end of the year, shifting its focus to alternative investment strategies and select forms of active management such as quantitative and enhanced index strategies.

The New York-based unit is attempting to repair a business that has experienced significant employee turnover, declining assets and poor investment performance in the past several years.

Officially, Credit Suisse said it will reduce its New York-based U.S. asset management headcount by 40%, to 450 employees from 750. But these figures include more than 300 alternative investment and cash professionals added to the asset management group from other parts of parent Credit Suisse over the last year.

Neither the alternative investments nor cash businesses will be affected by the layoffs, confirmed spokeswoman Suzanne Fleming.

Prior to the two integrations, Credit Suisse had 390 employees in its U.S. asset management business, according to data the firm provided to Pensions & Investments in July 2005. Effectively, with the alternative and cash strategies left intact, the layoffs will eliminate roughly 80% of the company's legacy Credit Suisse Asset Management employees in the U.S. (In January, Credit Suisse Group combined all of its businesses — asset management, private banking and investment banking — and eliminated the CSAM brand name.)

"They're really starting over from scratch, something they probably should have done a couple of years ago," said one source, who spoke only on the condition of anonymity. "They acquired some quality firms over the years, like BEA (Associates Inc.) and DLJ (Donaldson Lufkin & Jenrette Inc.), and really destroyed a lot of their value."

Along with alternatives and cash, Credit Suisse will leave its commodities, high-yield fixed-income, emerging markets equity and international equity strategies untouched, said Ms. Fleming.

Strategies such as "enhanced index, quantitative strategies and structured products" will be expanded, Renato Fassbind, Credit Suisse's chief financial officer, said in a conference call last week.

Some of Credit Suisse's traditional equity and fixed-income strategies have been unprofitable, Mr. Fassbind said. That prompted a six-month-long review of Credit Suisse's global asset management business, led by David Blumer, who became chief executive officer of asset management in January. Mr. Blumer would not make himself available for comment for this story.

The firm reported U.S. assets under management as of June 30 of $114.5 billion, which includes the cash and alternative investments integrated into the asset management business after March 2005. Before that, Credit Suisse managed $25.6 billion in the Americas as of March 31, 2005, 31% less than a year earlier, according to numbers Credit Suisse provided to P&I in July 2005.

"Basically, they didn't have enough assets under management to support the size of the (U.S.) platform, so they're going to refocus that franchise," said Kinner Lakhani, research analyst at ABN AMRO Holding NV, Amsterdam, who follows Credit Suisse.

Ms. Fleming declined to identify individuals or teams that will leave Credit Suisse over the next several months. The first 50 people to be laid off were dismissed last week, Ms. Fleming said.

Credit Suisse executives will ask the firm's remaining institutional clients to switch from traditional to enhanced index or quantitative strategies. The firm has five traditional equity strategies — large-cap value, large-cap growth, midcap growth, small-cap growth and small-cap value — with a combined $3.7 billion in assets at the end of June, according to the Marietta, Ga.-based eVestment Alliance manager database.

None of the five equity strategies outperformed its benchmark in any one-, two-, three-, four- or five-year period ended June 30, according to the eVestment database.

On the fixed-income side, the firm offers core, core-plus and short-duration core-plus strategies; each consistently outperformed its benchmarks in recent years, according to eVestment Alliance. They have a combined $1.3 billion in assets.

Some key fixed-income executives have left recently, including Michael Gray, former managing director and global head of credit research, who resigned in June.

Also, Dennis Schaney, managing director and head of fixed income, announced earlier this year he will retire from Credit Suisse in the first quarter of 2007.

Several sources said Credit Suisse executives might have explored a sale of some parts of its U.S. money management business. But they added it might be quicker to simply shed the employees. Ms. Fleming would not comment on why Credit Suisse chose layoffs over a sale of some of the business.

Second-quarter returns show restructuring the asset management division cost the company 152 million Swiss francs ($124 million), causing profits to plunge 92% to 27 million francs as of June 30, from 357 million francs a year earlier. Operating expenses, which includes the restructuring charges, totaled 649 million Swiss francs, compared with 425 million francs at the same time in 2005, according to the company's half-year financial statement.