Scott Powers took the helm at State Street Global Advisors, the world's largest institutional money manager, in May, after a tumultuous year that saw that firm's relatively small, $40 billion actively managed fixed-income business become a high-profile casualty of the credit crunch. In short order, a number of clients most prominently, Prudential Financial Inc. sued SSgA and its affiliates over steep losses suffered by purportedly conservative strategies, while key executives either left or were fired, culminating in the departure of Mr. Powers' predecessor, William Hunt, at the start of 2008. Institutional clients breathed a sigh of relief when State Street Corp. tapped Mr. Powers a client service veteran who garnered kudos in his previous job overseeing a stable of boutique money management firms as president and chief executive officer of Old Mutual U.S. to get SSgA back on course.
What have you gleaned from talking with clients in your first three months? Clients are particularly loyal to SSgA. Last year, we brought in $120 billion in net new assets, and 65% of those assets came from existing clients. They want us to be at the top of our game. It's not news that over the last 12 months, SSgA has had some challenges, (which) impacted our clients in ways they would rather not be impacted. We've had a lot of conversations about that, and our commitment as an organization to ensure that we don't put ourselves or our clients in that kind of position ever again.
What happened last year, and how has SSgA responded? The problems occurred as a function of an almost unprecedented liquidity crisis, (which resulted in a higher-than-expected) amount of correlation in what was thought to be a broadly diversified fixed-income portfolio. It taught us some lessons about managing the underlying risk in the portfolios, ensuring that diversification was truly embedded in the portfolios and would act that way under stress-tested environments. As an organization, we've brought in a new head of risk, Jacques Longerstaey, from Putnam, and prior to that at Goldman Sachs; a new head of compliance, Tracy Atkinson, from MFS; (and) a new chief legal officer, Phil Gillespie, from Oppenheimer, and before that Merrill Lynch, and before that the SEC deeply experienced professionals to ensure we've got best practices in our control environment and in our risk framework.
And risk (which previously reported to the CIO) now reports to me and, another check and balance, directly to the head of risk at the parent corporation.
Some market watchers saw SSgA as a first-class index provider that stumbled when it tried to move into active management. I don't think so. SSgA has over $200 billion in active strategies. Our core competencies were derived from an understanding of how to replicate the return stream of whatever index you gave us. If you believe you've got the skill set to quantitatively enhance that return stream, as well as just track it, then you're in the active business. We've got strategies that leverage off of our passive skill set, which are enhanced, up into more aggressively targeted active strategies aiming (for) 3% to 5% excess return, relative to the benchmark. Delivering high-quality passive strategies is a huge part of what our clients expect from us, (and) I'll never ever take that (part of our business) for granted. But those skill sets naturally lend themselves to extension up the risk paradigm into active. We intend to grow both of them.
Which segments of your business are doing well now? There's been a lot of interest this year in passive strategies and in cash, as market volatility has continued, and people de-risk their portfolios. We continue to see interest in our asset allocation products, particularly the lifecycle-type funds, (as well as) significant interest in our (fast-growing) exchange-traded fund business. One of the newest wrinkles is asset allocation/lifecycle funds using ETFs as an underlying vehicle. From an efficiency and cost perspective, it's very intriguing to plan sponsors, particularly in the defined contribution world.
Anything new on the horizon? We worked with academics from the London Business School to create a passive representation of a hedge fund-of-funds index. We can give you the same type of returns of a well-diversified index of hedge funds, at a significant discount a 1% flat fee to the typical hedge fund of funds (fee) of 2% and a 20% carry. We have a couple of hundred million dollars of client assets invested in it already, (even though) we have yet to hit our one-year track record. There's a lot of pipeline activity. We think that's going to be an exciting part of what we see as we go forward.
How crowded is that space? Not terribly. (You could probably count the players there on) one hand. We think it has a tremendous amount of applicability in the marketplace, particularly for smaller plans that don't have the resources to research hedge fund-of-funds plays.
The market meltdown hit SSgA's active fixed-income segment hard, prompting a spate of high-level turnover. How well has morale held up? After being one of the real success stories in the industry over the last five to 10 years, to go through a period where we were struggling, where we've had issues play out in the public domain, was painful. What I found here was a tremendous amount of energy in our team to get back on track and get it right, to do a great job for our clients. People were unhappy that we were, as an organization, in the position we were in ... some were angry to be having conversations with clients inconsistent with what our values have been. As I've tried to reaffirm our mission, to rearticulate what we stand for, I've seen people absolutely energized.
Where does SSgA's active fixed-income effort stand now? We brought new people in to lead that effort. Mark Marinella and his team have been in place for eight months, and they're doing a great job, building a diversified, risk-controlled business after having been focused on asset-backed and mortgage-backed securities into corporate credits, Treasuries and so on. We have a bit of a rebuilding to do in terms of reputation. For longer-duration strategies, results have been very good.
Have client lawsuits over losses suffered in SSgA fixed-income strategies been an obstacle to moving forward? We've got a strategy to come to closure with our clients on those issues, and we're executing on that strategy proactively talking with our clients to come to a mutually beneficial closure on that. Some of those things take longer than you'd like them to, (but) I think we're making pretty good progress.
The bureaucratic hurdles facing money managers owned by banks has been a running theme in the industry. If you're part of a financial services company that's growing their business in a meaningful way, and you're not part of that core, you're probably not going to get the kind of focus from an investment standpoint, from a development standpoint, etc. But if you're in a business like State Street's, where we've got really three core businesses investment servicing, global markets and State Street Global Advisors those are three businesses that we want to grow, and State Street has been very clear they want to grow asset management to be a significant part of the overall business. So we've got a strong corporate commitment, and we've got resources.
Has the parent company set any targets for you? The aspirational goal is for SSgA to contribute 25% of the operational income of the company, so that's the challenge.
Contact Douglas Appell at [email protected]