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December 26, 2011 12:00 AM

Hartford parent pulls money from HIMCO to fund move to Wellington

Douglas Appell
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    Knowing: Hartford's David Levenson believes the Wellington name is better recognized among retail investors.

    Hartford Investment Management Co. was the odd man out this month when its parent company announced a partnership agreement with Wellington Management Co., a status that could undermine HIMCO's plans to grow its third-party institutional business.

    On Dec. 8, Hartford Financial Services Group Inc. announced the signing of a seven-year “preferred partnership agreement” with Wellington, making the Boston-based giant the sole subadviser for Hartford's $100 billion mutual fund family. Under the agreement, Wellington will add as much as $30 billion in fixed-income assets being overseen by HIMCO to the $70 billion in equity assets it already runs.

    Hartford executives, while praising HIMCO's performance, described the move as an unsentimental acknowledgement of the strength of the Wellington brand name in the mutual fund arena.

    Speaking at an investor conference Dec. 9, David Levenson, the president of Hartford's wealth management division, noted that Wellington is a lot better known in the retail channel than HIMCO. Wellington is better placed to help Hartford balance a “high beta” domestic equity-heavy fund lineup that has proven poorly positioned to benefit from the investor rush into fixed-income funds in recent years, he said.

    In Hartford's news release announcing the Wellington partnership, Liam E. McGee, the parent company's chairman, president and CEO, insisted HIMCO remains “an important part of The Hartford,” and will focus its third-party asset management business going forward on the institutional market.

    Some market veterans predict Hartford's decision to favor Wellington over HIMCO can only make it harder for HIMCO to tell its story in that institutional marketplace.

    “Most money managers with an institutional owner start off well behind the ball in competing with the likes of a Wellington or other top managers for investment talent,” noted Donald Putnam, San Francisco-based managing partner with boutique investment bank Grail Partners LLC. Hartford's decision to hire a “bigger, better competitor” can only hobble HIMCO's aspirations, perhaps fatally, he said.

    In a telephone interview, Hugh Whelan, HIMCO's acting president, said strong performance in products such as Treasury inflation-protected securities, high-yield bonds, emerging markets debt and short-duration bonds has powered a pickup in HIMCO's third-party business this year.

    To the extent investors focus on the Wellington news, that momentum could be tempered, Mr. Whelan acknowledged, but ultimately the business is a meritocracy and if the steps HIMCO has taken to better calibrate risk over the past three years continue to pay off, any slowdown should be temporary, he predicted.

    Mr. Whelan pegged the assets in play on account of Hartford's expanded relationship with Wellington at just less than $20 billion, or 12% of the $165 billion in assets under management HIMCO reported as of Sept. 30. The parent company's general account assets account for roughly $100 billion of that total, with third-party institutional business accounting for the remaining assets.

    Some consultants say they've been told the mutual fund assets that will transfer to Wellington from HIMCO are closer to $30 billion.

    Market veterans say it's not always easy for money managers whose primary responsibility is managing an insurance company's general account assets to succeed in the third-party institutional marketplace.

    One executive with experience running an insurance company's asset management affiliate, who declined to be named, said the skills involved in making credit decisions to complement a portfolio of insurance products don't necessarily translate to skill in running an institutional client's bond portfolio. Also, investors are forever skeptical that the general account won't get first dibs on the firm's best credit ideas, which often have capacity constraints, he said.

    Better job than most

    Some investment consultants argue HIMCO has done a better job than most in addressing such issues. HIMCO's structure — with a dedicated team of portfolio managers for third-party institutional clients, distinct from the team looking after Hartford's general account assets — has helped make it one of the stronger insurer-affiliated money management organizations, said Moustapha Abounadi, a director and head of fixed-income research with Darien, Conn.-based investment consulting firm Rogerscasey LLC. Rogerscasey believes HIMCO offers a “strong value proposition,” he said.

    Even so, the decision to move a significant chunk of Hartford's mutual fund assets to Wellington — coming on the heels of HIMCO President Gregory McGreevey's recent departure to join Invesco as head of fixed income — is a matter of concern, Mr. Abounadi noted. He declined to say whether Rogerscasey is using HIMCO in fixed-income searches for clients.

    David Urbanek, a spokesman for the $33.5 billion Illinois Teachers' Retirement System, Springfield — which hired HIMCO in May to manage $265 million in TIPS — declined to comment on either the Wellington news or the departure of Mr. McGreevey.

    If the fallout for HIMCO is uncertain, most observers argue that the partnership agreement between Hartford and Wellington — after a period of friction over the past five years — looks to be a win-win situation for the two principals.

    Even though the $200 billion in Vanguard Group assets Wellington subadvises makes that firm Wellington's biggest relationship, the subadvisory fees on the Hartford equity assets alone are high enough to make the Hartford relationship at least as valuable for Wellington, if not more so, market veterans say.

    Raised the possibility

    Hartford's decision to put its mutual fund business on the block earlier this year at least raised the possibility that another mutual fund company could have consolidated the Hartford assets into its own funds. At the end of the day, Hartford didn't get a bid it was willing to accept, investment bankers say.

    The partnership agreement — the first for Wellington, which according to a Morningstar Inc. tally boasts 37 subadvisory relationships with combined assets of more than $300 billion — leaves Wellington's ties with Hartford on firmer ground.

    Under the agreement, Wellington has a right of first refusal should Hartford again decide to put its mutual fund operation up for sale. Wellington, in turn, agreed that it would not subadvise any new fixed-income mutual funds for competing sponsors in the broker-dealer channel through June 30, 2016, while reserving an unspecified portion of its subadvisory capacity across the board for Hartford-sponsored funds. Wellington also agreed to limit new subadvisory assignments for key Wellington portfolio managers of Hartford-sponsored funds.

    As Hartford's Mr. Levenson said at the investor conference: “Wellington will become the sole subadviser for our entire mutual fund complex. And we will become their preferred provider in the adviser-sold space.”

    As part of the deal, Hartford will beef up its distribution muscle, with the company announcing it would add 50 people to its distribution team over the next few months.

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