BOSTON — The departure this month of Boston Co. Asset Management LLC’s best-performing international equity team could spell double trouble for a firm that has prospered in recent years meeting growing institutional demand for overseas investing.
The Aug. 6 liftout of the international core equity team by Detroit-based Munder Capital Management puts $20 billion of client money in play. Some consultants warn the move also could shake loose clients with more than $30 billion in the Boston Co.’s lagging international value equity strategies, run by the firm’s other international equity team.
The international core team, led by Remi J. Browne and Daniel B. LeVan, has racked up consistently stellar returns, data from eVestmentAlliance, Atlanta, show. The non-U.S. Core Equity strategy, with $13.4 billion, outperformed its benchmark, the Morgan Stanley Capital International Europe, Australasia and Far East index, by a compound 4.12 percentage points a year for the three years through June 30 and by 5.26 points a year for the 10-year period.
The team’s departure is forcing a bevy of satisfied customers to review their mandates, with at least one wasting no time in voting with its feet: Two days after the Munder announcement, the $12.6 billion Illinois State Board of Investment, Chicagociting the liftout, terminated Boston Co. from a $330 million core international equity mandate. Several consultants said they are urging clients in the firm’s international core equity strategies to do likewise.
In contrast to the performance of the international core team, strategies run by the international value team, led by D. Kirk Henry, have struggled recently. The firm’s $9.9 billion Emerging Markets Value Equity strategy has lagged its MSCI Emerging Markets benchmark by a compound 4.23 points a year for the three years through June 30, even though it continues to outperform by 6.22 points a year for the past 10 years.
In the penalty box
Some investors in the value strategies had already put the firm in the penalty box prior to the Munder liftout.
Michele Kowalik, spokeswoman for the $82 billion Ohio Public Employees Retirement System, Columbus, said her fund put its $275 million emerging markets mandate with Boston Co. on watch in December, because of both organizational and performance-related issues.
Jack Marco, chairman of Marco Consulting Group, Chicago, said his firm already had decided to advise clients in the international value equity strategies to terminate the money manager even before the core team’s defection and the early August departure of President and Chief Operating Officer Patrick Shepard.
The latest defections from the firm may be adding to that negative momentum.
At an Aug. 9 meeting of the $50.4 billion Massachusetts Pension Reserves Investment Management board, Boston, Chief Investment Officer Stanley Mavromates said: “Our confidence level is sinking fast for this organization.” PRIM has a $1.3 billion international value portfolio with Boston Co., and Mr. Mavromates cited both the recent turnover and below-benchmark returns. He hinted PRIM’s investment staff could recommend that the board terminate the firm at its next meeting in October.
The Boston Co. has triumphed over organizational adversity before.
In April 1995, then-president Desmond Heathwood led an exodus of 19 professionals to start Boston Partners after Pittsburgh-based parent company Mellon Financial Corp. rejected his buyout offer. Boston Partners quickly lured a number of old clients, helping slash the Boston Co.’s assets under management from $26 billion at the time of Mr. Heathwood’s departure to $12.5 billion by the end of that year.
Today, even though international assets accounted for roughly two-thirds of the $76 billion in assets the firm managed as of June 30, executives are hopeful the fallout will be contained.
Limiting the damage
“We’ll lose some business for sure,” but the Boston Co.’s agile response upon learning of the defections should limit the damage, said David H. Cameron, executive vice president and CIO.
Mr. Cameron said 150 staffers offered to fill the gaps left by their departing colleagues, and by midday Aug. 7 (the day after they quit), the company had a “permanent nucleus” of its international core equity team led byWilliam S. Patzer, lead portfolio manager for the firm’s global core strategies and Maureen A. Ghublikian, portfolio strategist for the firm’s global and international core strategies, as well as a group of 10 fundamental core and quantitative research analysts to look after the strategies.
Some of those analysts will be permanent, others could be replaced as the Boston Co. fills the positions left by the lift out of the seven international core professionals, he said.
On Aug. 13, the firm hired Mark A. Bogar, a 15-year veteran from Putnam Investments, Boston, as an analyst and permanent member of the international core equity team.
Mr. Cameron said it helped that the core strategy relies heavily on proprietary quantitative models, which account for roughly two-thirds of the strategy’s performance attribution. A number of international core clients contacted by the firm have indicated they’ll take a wait-and-see stance, “which we take as a real vote of confidence,” he said.
Turning to the Boston Co.’s international value equity team, Mr. Cameron tied its recent underperformance to the strategy’s defensive style, which he said always lags in go-go markets. The recent surge in market volatility makes it “a terrible time to terminate us in international value,” he said. “The kind of environment we’re in right now is exactly what we’re positioned for.”
Consultants concede the style point, but some note strategies with similar investment styles and characteristics aren’t lagging to the same extent.
Now’s the time
Some clients say now’s the moment when the Boston Co.’s value strategy has to prove itself. “This environment right now is a perfect testing ground,” and hopefully the strategy can deliver on its promises of being more defensive in turbulent times, said Kenneth Goodreau, deputy treasurer for finance with the Rhode Island treasury, who sits on the investment commission for the state’s $8 billion pension fund. The Boston Co. manages more than $500 million in international value equities for Rhode Island, he said.
Mr. Cameron said firms facing important departures often lose considerable assets but, calling the Boston Co.’s response to the liftout “a demonstration of the depth and the strength that we’ve been able to put in place,” he said: “I’m hopeful that we’ll do better” than most.
Time, however, may be of the essence. “Are we happy with their underperformance? No,” said the managing director of one San Francisco-based pension consultant, who declined to be named. “Are we acting on their underperformance? Not yet,” he said.
