Sour performance had clients fleeing manager
Artio Global Investors Inc.'s pending acquisition by Aberdeen Asset Management will be an inglorious end to a once high-flying money manager that made its name with strong international equity performance.
That performance has fallen hard — so much so that the Feb. 14 announcement by Aberdeen that it acquired New York-based Artio for $175 million was focused more on Artio's fixed-income assets, with scant mention of the international stock capability.
The price tag includes Artio's net asset value of $141 million in cash and seed investments, for a premium of about $34 million.
Completion of the deal in the next several months will be the final act for a firm, once a part of Julius Baer, that saw its assets under management plunge to $14.5 billion at the end of 2012 from $55.8 billion when it went public in 2009. It will be the end of the Artio brand.
“We will not keep the Artio name,” said Gary Marshall, Americas CEO at Aberdeen Asset Management Inc., based in Philadelphia.
“Our high-grade and global high-yield teams will form a core part of Aberdeen's fixed-income capabilities, enhanced by the depth of its resources,” Anthony Williams, Artio CEO, said in a statement Feb. 14.
“We will continue to manage our international equity and global equity strategies until the anticipated closing date, at which time Aberdeen will assume investment management responsibilities for them, subject to client consent.” Repeated efforts to contact Mr. Williams were unsuccessful.
Artio's assets under management — about $4.6 billion in equity and $9.8 billion in fixed income — would raise Aberdeen's worldwide AUM to about $328 billion.
In a conference call with analysts following the acquisition announcement, Martin Gilbert, CEO of Scottish parent company Aberdeen Asset Management PLC, said Aberdeen “expected to lose all” of the international equity assets.
Aberdeen takes over Artio strategies that have seen outflows that began in international equity but recently extended to the fixed-income strategies coveted by Aberdeen.
According to Artio's annual report, released the same day as the acquisition announcement, its high-grade fixed-income strategy had net outflows of $95 million in the fourth quarter of 2012 and $137 million for all of last year, compared with $5 million for 2011.
Total high-grade fixed-income assets of $5.618 billion as of Dec. 31 were up 2% from the $5.503 billion held at the end of 2011.
Artio's high-yield strategy had net outflows of $544 million in the fourth quarter and $774 million for all of 2012, vs. $471 million in 2011. Total high-yield assets of $4.193 billion as of Dec. 31 were down 2% from $4.295 billion a year earlier.
However, those outflows pale when compared with Artio's two international equity vehicles. International equity I saw net outflows of $1.68 billion in the fourth quarter, a total of $7.1 billion for 2012; in 2011 net outflows were $7.22 billion. Its assets of $2.236 billion as of Dec. 31 were down 74% from $8.68 billion at the end of 2011.
Net outflows for Artio's international equity II were $1.08 billion in the last quarter of 2012, a combined $9.64 billion for all of 2012 and $8.76 billion in 2011. Its $2.16 billion in assets of as of Dec. 31 fell 80% below the $10.9 billion held at the end of 2011.
Performance for the two international equity funds trailed their benchmark, the MSCI All-Country World ex-U.S. index, for the one-, three-, five- and 10-year periods ended Dec. 31 — with annualized five-year returns almost four percentage points below the index, according to eVestment LLC, Marietta, Ga.
“There were probably two contributing factors to the sale,” said Robert Lee, analyst at Keefe, Bruyette & Woods Inc., New York. “The first and foremost by far was the sharp underperformance of Artio's key investment strategy. Even though there are funds I and II, they really were essentially one strategy.
In 2008, on a relative basis, they performed OK, but they've had performance issues for six years.”
Mr. Lee said the other factor was some investors chased performance and then bailed.
Another analyst, William Katz of Citi Research in New York, said, “I don't think (Artio) was salvageable ... They would have been hard-pressed to get a better bid” than the $2.75-per-share cash agreement reached with Aberdeen. Artio shares traded at $26 at the time of the IPO in 2009.
Mr. Katz added that the outflows in Artio's fixed-income funds were the result of franchise risk, with fewer investment consultants keeping Artio on their recommended lists.
Investment consultants contacted for this story wouldn't comment.
“The outflows in fixed income are related to two factors,” Aberdeen's Mr. Marshall said. “One, there was franchise or corporate risk, and the other reason is because of talk in the market about (investors) rotating out of fixed income. Certainly from a franchise risk standpoint, we want to allay concerns on that score. Consultants and investors we've talked to so far sound positive.”
Terminated by 10
Since September 2011, at least 10 pension funds terminated Artio Global for a total of $1.243 billion run in international equities, all because of performance, according to Pensions & Investments data. Among the largest terminations were $310 million from the $14.7 billion San Francisco City & County Employees Retirement System; $280 million from the $30.9 billion Public School Retirement System of Missouri, Jefferson City; and $260 million from the $13.6 billion Kentucky Retirement Systems, Frankfort.
However, two pension funds with assets run by Artio in fixed income — the $157.8 billion California State Teachers' Retirement System, West Sacramento, and the $10.5 billion School Employees Retirement System of Ohio, Columbus — aren't looking at terminating the firm.
“Artio is one of our oldest and better performing managers and is still with us,” said Ricardo Duran, CalSTRS spokesman. “Typically, when there is a change in ownership of one of our managers, we do put them on watch for organizational changes.”
Artio manages $1.2 billion in a core-plus strategy and has been a manager for CalSTRS since 2007, he said.
Tim Barbour, Ohio School's spokesman, said the pension fund is doing an asset allocation study that includes the $201 million with Artio in international fixed income. “We haven't decided what we'll do yet” with the Artio portfolio he said. The pension fund hired Artio in 2009, he said.
Artio's Mr. Williams will not join Aberdeen, nor will Rudolph-Riad Younes and Richard Pell, international equity co-managers who will continue to run the strategies until June, according to documents Artio filed with the SEC on Feb. 25. Mr. Pell was chairman and CEO at Artio until he stepped down last October.
However, Donald Quigley, portfolio manager of the Artio Total Return Bond Fund, and Greg Hopper, portfolio manager of the Artio Global High Income Fund, will join Aberdeen, according to Mr. Marshall.
The Artio employees coming to Aberdeen will move to Aberdeen's New York office.
Goldman Sachs & Co. advised Artio on the acquisition, while J.P. Morgan Chase & Co. advised Aberdeen. n
This article originally appeared in the March 4, 2013 print issue as, "Artio acquisition a quiet ending for once-bright star Sour performance had clients fleeing manager".