AXA Group executives used a computer coding error at AXA Rosenberg Investment Management to accomplish their goal of wresting control of the manager's investment process from founder Barr Rosenberg, sources say.
When AXA bought 60% of Mr. Rosenberg's quant firm in 1999 (a stake later raised to 75%), Mr. Rosenberg had an iron-clad guarantee that his investment models could not be tinkered with, these sources said. He also retained full control of the firm's 40-person research center, treating it like a university research center, but with little transparency.
That situation angered Stephane Prunet, AXA Rosenberg global CEO and global head of equities at AXA Investment Managers.
Mr. Prunet thought it was unacceptable that he and other top AXA Rosenberg officials did not have full access to the model, say current and former employees.
Mr. Prunet and his lieutenants — brought in from France, often to replace Americans who were fired or reassigned to lesser positions — increasingly battled with Mr. Rosenberg.
“AXA officials wanted Barr to be more forward-thinking and tinker with the models, but he refused,“ said one former senior official, who recently left AXA Rosenberg, and who asked not to be identified.
Current and former employees say after Mr. Prunet learned last October that the coding error had occurred and had not been disclosed, he stressed to lieutenants that this could be the opportunity to take control of the investment process from Mr. Rosenberg.
Mr. Rosenberg did not respond to repeated requests for comment.
Those familiar with the ownership agreement between Mr. Rosenberg and AXA Group said that although the parent controlled marketing and left the investment process under the full control of Mr. Rosenberg, a provision allowed AXA Group to assert more control over the investment process if it could show there were flaws in the computer models and that investment results were in the bottom percentile for three successive years
Investments results were, indeed, poor.
For example, one of AXA Rosenberg's largest strategies — U.S. large-cap equity — returned -11.26% for the three years ended June 30, vs. -8.6% for the median in eVestment Alliance's universe of similar strategies. This put AXA Rosenberg in the lowest quartile of that universe.
Also, two sources connected to the company said AXA Rosenberg's institutional clients were told in August that the Securities and Exchange Commission is investigating the circumstances surrounding the coding error and the firm's response to it.
A spokesman for AXA Rosenberg declined to comment on regulatory matters, but did say the firm is in regular dialogue with SEC officials. Marc J. Fagel, SEC regional director in San Francisco, said he could not comment.
The handling of the coding error has proved costly. Since the firm notified clients in April about the error, clients defected from the Orinda, Calif.-based firm and assets plunged 54%, to $32 billion as of Aug. 31, according to information from AXA Rosenberg.
In August and September alone, AXA Rosenberg was terminated by the $22.8 billion State of Connecticut Retirement Plans and Trust Funds, Hartford, for two equity accounts totaling $597 million; Vanguard Group, for about $1.5 billion AXA Rosenberg had subadvised in three Vanguard mutual funds; and the Principal Financial Group, as a subadviser on its $1 billion International Value I fund.
And in an ironic twist in August, AXA Equitable, a unit of AXA Financial, the AXA Group's U.S. insurance subsidiary, terminated AXA Rosenberg as manager of its Premier VIP Mid Cap Value Portfolio, according to an SEC filing by AXA Equitable. Chris Winans, AXA Equitable spokesman, confirmed in an interview that AXA Rosenberg's contract wasn't renewed. He declined to say how much AXA Rosenberg managed.
Geoffrey Bobroff, a money manager consultant in East Greenwich, R.I., said the terminations aren't surprising. “There is a herd mentality. Plan officials don't want to be asked, ‘Why didn't we terminate them?' when everyone was running from the sinking ships,” Mr. Bobroff said.
Officials of Wurts & Associates, Seattle, one of the first pension plan consultants to publicly recommend termination of AXA Rosenberg, said they did not want to comment in detail.
One investment consultant, who asked not to be identified, said consultants had little choice but to recommend their clients drop AXA Rosenberg once they found out how the computer coding error was handled. “You have to wonder what else they are hiding,” he said.
Still, there is little evidence that the coding error had a major impact on clients.
In August, AXA Group officials said a review showed clients are owed $82 million because of the coding error. Officials said the figure will be reviewed again at the end of the year.
It's unclear how much AXA Rosenberg still has under management. While the company put the official number at $32 billion at the end of August, sources familiar with AXA Rosenberg's current situation said assets declined to $25 billion.
AXA Rosenberg's work force has been hit hard as well. The firm's employee total, nearly 400 in 2009, now stands around 250 and could be cut by another 90 by the end of the year, according to current workers with knowledge of the situation.
Sources say officials are considering a new name for AXA Rosenberg in hopes that will remove the stain on its reputation.