Matthew H. Scanlan, CEO of RS Investments in San Francisco, is betting he can build the $26 billion firm into a much bigger enterprise, relying in large part on the acquisition of an emerging markets equity team from Principal Global Investors.
Mr. Scanlan lured the 11-person team to RS with an offer of an ownership stake. That was in November 2012, when the group was managing more than $10 billion. The team began managing money for RS in March 2013.
So far, RS hasn't seen a major bump up in assets, in part because various non-compete agreements only expired in recent months, the last on Nov. 7, Mr. Scanlan said.
Today, the team manages $940 million, and Mr. Scanlan plans a major push to build assets, particularly on the institutional side. Toward that end, he has added two people in institutional consultant relations and sales, bringing that team to six.
Mr. Scanlan said the emerging markets equity group had a strong track record of more than 10 years, but that record did not follow the group to RS.
Some institutional investment consultants want at least a three-year track record at a new firm, said one institutional consultant, who asked not to be identified. The consultant said he, however, is recommending the team because he is impressed with its deep resources, such as analysts located in Europe and Asia.
At RS, the institutional strategy outperformed its benchmark, the MSCI Emerging Markets index, for the year ended Sept. 30, returning 8.18% vs. 4.66% for the benchmark, according to eVestment LLC, Marietta, Ga.
At Principal, for the 10 years ended Sept. 30, 2012, the team's portfolio returned an annualized 18.39% vs. the benchmark's 17%, eVestment data showed.
Regardless of performance, raising money to invest in emerging markets equities has not been easy in the past several years. That's because emerging markets have underperformed developed markets, said Paul Harte, a senior vice president and consultant at Strategic Investment Solutions Inc. in San Francisco.
Statistics from index provider MSCI show the MSCI World index representing developed countries produced annualized returns of 16.78% for the two years ended Sept. 30, while the MSCI Emerging Markets index returned an annualized 2.98%.
“The headwinds have been against us,” acknowledged Mr. Scanlan.
But that might be changing.
Data from eVestment show emerging market equity inflows among institutional money mangers rebounded in the third quarter to $8.3 billion, compared with $160 million in inflows during the second quarter and outflows of $3.5 billion in the first quarter of 2014.
Mr. Harte said valuations among emerging market companies are now cheap, making some stocks attractive investments, particularly if they have a strong dividend yield. He said if markets cooperate and if the RS team continues to outperform its benchmark, it is not unrealistic to expect RS to gather around $5 billion in institutional emerging markets equity assets over the next several years.
“The team is hungry, they are motivated and they have an economic interest,” said Mr. Harte.
Mr. Harte said he was surprised the emerging markets equity team joined RS Investments, considering the firm is known for its U.S.-centric growth and value equity strategies.
Mr. Scanlan said “a little bit of luck” helped RS land the team. He said he served on a non-profit board with a close friend of the team's leader, portfolio manager Michael Reynal. He said that was a bridge in the negotiations.
Mr. Reynal said RS offered an ownership interest, which wasn't possible at Principal. “It was a huge attraction to have a piece of the pie and help shape the future of the firm,” he said.
As part of the deal, Mr. Reynal was also given a seat on the firm's operating committee and was allowed to continue to be based in Des Moines, Iowa, Principal's headquarters. Other team members were allowed to remain in Des Moines and in offices in Hong Kong, Singapore and London. None relocated to San Francisco.
Mr. Reynal said he believes he can build emerging markets assets to $6 billion to $7 billion over the next several years. He said he and team members also had confidence in Mr. Scanlan, citing his long investment industry experience.
Mr. Scanlan was managing director and head of the Americas institutional business at Barclays Global Investors in March 2009, just months before it was sold to BlackRock Inc. During his 12 years there, he was widely credited by former BGI executives with adding hundreds of billions of dollars to the firm's institutional business, which had $1.2 trillion in assets at the end of 2009.
He left BGI to join Renaissance Technologies LLC, New York, as president and CEO of Renaissance Institutional Management, which manages several hedge funds for institutional investors.
Mr. Scanlan said weekly commutes to San Francisco, where his family lived, became too much and he decided to leave the money management business. But a chance meeting in 2011 with Deanna M. Mulligan, president and CEO of Guardian Life Insurance Co., led him back. The insurer purchased an approximately two-thirds stake in RS in 2006. Mr. Scanlan replaced longtime CEO Terry Otton, who retired from RS in early 2012.
His plans for the firm go beyond adding emerging markets strategies. He's now looking for other teams to lift out, particularly in international fixed income. “Given the low yields in domestic fixed income, investors are increasingly looking abroad for opportunities,” Mr. Scanlan said.
He said the firm hired Casey, Quirk & Associates LLC, Darien, Conn., to help determine opportunities to expand. His intent is to double the firm's assets under management within five years.
“We are scouring the landscape for opportunities to increase our scale,” he said.
Mr. Scanlan said he has the full financial commitment of Guardian officials to launch new strategies. Among them is an institutional long/short liquid alternatives strategy being tested with $10 million of seed capital.
He has hired Rick Brandt, a former portfolio manager at Cerebellum Capital, a hedge fund manager, to run the liquid alts portfolio, and hopes to offer mutual funds and separate accounts by early next year.