Russell on front burner again after time in limbo

Officials at Russell Investments say prospective institutional clients are taking a new look at the firm now that the ownership question has been resolved.

There has been renewed interest among asset owners in its biggest business — managing outsourced assets for pension plans, foundations and endowments — since the London Stock Exchange Group's announcement in October that it had sold the investment manager/ consultant to private equity firm TA Associates for $1.15 billion.

“We could be sympathetic with people ... until there was some certainty in the transaction (the sale of Russell), they might have been uncomfortable,” said Russell CEO Len Brennan in a recent interview at the firm's headquarters in Seattle. “That (uncertainty's) been removed.”

Mr. Brennan said prospective clients “are very much back at the table,” evaluating Russell as an option for its outsourced chief investment officer services.

Russell officials would not say if any of the prospects had hired the firm. According to a Pensions & Investments survey, Russell managed $117.3 billion in worldwide institutional OCIO assets as of March 31, 2015, ranking it No. 1. Other Russell businesses include $76 billion in derivatives and currency overlays, a $35.5 billion mutual fund business and $6 billion-plus in target-date funds.

Russell also is a consultant to institutional investors; it had $2.3 trillion in worldwide assets under advisement as of June 30, 2015, ranking it No. 4 on P&I's list.

Russell Investments was a pioneer of investment outsourcing more three decades ago, enticing investors with it multimanager funds. Today, the firm lists 340 offerings using dozens of different asset managers.

While Russell's outsourcing assets had grown less than 2% in the year ended March 31, 2015, other key competitors including second-ranked Mercer have grown rapidly. Mercer's $111.8 billion in worldwide institutional OCIO assets as of March 31, 2015, was up 22% from the previous year.

Russell's time in the penalty box goes back to January 2014, when its owner, Northwestern Mutual Life Insurance Co., announced it was considering selling the firm, said consultant Martha Tejera, founder and project manager at Tejera & Associates LLC, Seattle.

Ms. Tejera said most institutional investors had written off Russell because of the uncertainty surrounding the sale. “They have a long history, which is compelling,” said Ms. Tejera of Russell. But once she informed asset owners of the potential sale, 80% of them said, “let's not look at them right now,“ she said.

Ms. Tejera said concerns about hiring Russell continued after the London Stock Exchange Group purchased the firm because it was widely believed by industry observers that LSE Group would sell the investment management and consulting business, keeping only the index unit.

And they were right. In December 2014, two months after completing its purchase of Russell Investments, LSE Group announced it was selling the investment management business.

Ms. Tejera said Russell began being included in more OCIO searches business after the announcement of the latest sale six months ago to TA Associates. A letter by Mr. Brennan shortly after the sale was announced assuring he would remain CEO and Russell's management team would continue to operate the day-to-day functions of the business also helped, she said.

Russell's sale to TA Associates is expected to close in the first half of 2016. A second private equity firm, Reverence Capital Partners, will take an undisclosed “significant minority investment” in Russell Investments.

In an e-mail, Todd Crockett, a TA managing director, said Russell Investments will be the firm's 18th investment in the asset management business. “TA wants to help Russell Investments grow globally and we look forward to working closely with the management team to further leverage the firm's core strengths to build additional value in the business,” he said.

Donald Putnam, a founder and managing partner at San Francisco investment bank Grail Partners LLC, said private equity ownership is a much better fit for Russell Investments. “The (LSE) ownership hurt because people don't trust big exchanges,” he said. “Clients who wanted (Russell's) services were not comfortable, and existing clients were worried about the new owners.”

Mr. Brennan, who has been Russell's CEO since 2011, said TA officials have been interested in buying a stake in Russell since 1995 and know the firm well. When the deal is completed, a “meaningful” employee ownership plan will be established, he said; he would not go into specifics. “We believe that ensuring that associates have an ownership stake is always a positive thing,” Mr. Brennan said.

It has been a difficult decade for Russell Investments, one that has seen the firm sell or close businesses and make staff reductions. Russell disbanded its hedge fund-of-funds operation in 2008. In 2010, it sold private equity manager Pantheon Ventures Ltd. to Affiliated Managers Group Inc. for $775 million.

Russell stumbled again in 2011. A foray into the exchange-traded fund business saw Russell quickly introduce 25 funds only to shutter them the following year after a lack of investor interest.

Grail's Mr. Putnam said calculations made before the announcement of Russell's sale to TA Associates put Russell Investments' annual profit around $100 million. He said that amount could grow depending on how successful the firm is in the OCIO business and in fixing troubled units, such as its mutual funds, which have been marred by poor performance and subsequent outflows.

Russell's open-end mutual funds, which use a multimanager approach, saw more than $4 billion in net outflows in 2015, according to Morningstar data, with combined assets under management of $35.5 billion as of Dec. 31, down 9% from the previous year.

“It's an undistinguished lineup,” said Mr. Putnam, who added he believes management will revamp the funds to improve performance and increase assets. “I think they will turn a goulash of mediocrity into something spicy and delicious,” he said.

Mr. Brennan said funds that invest across asset classes can be subject to market cycles. “You can always cherry-pick and find some funds aren't doing well,” he said

Russell also has seen performance challenges in some of its target-date funds followed by net outflows. The funds had net outflows of $126.3 million in 2015, a loss of 28.37% from the previous year. Morningstar Inc. data show open-end target-date funds had assets under management at $312.1 million as of Dec. 31, down from almost $900 million at the end of 2011.

Chicago-based Morningstar analyst Janet Yang said the target-date funds have been hurt by their exposure to commodities and international equities, noting Russell's commodities strategies lost almost 25% of their value in 2015.

Russell spokeswoman Kate Stouffer said assets have remained stable in Russell's larger $1.2 billion commingled target-date trust series, not tracked by Morningstar.

She said that Russell's target-date funds were designed with a more globally oriented equity allocation. “Therefore, peer relative performance has been a headwind the last several years when U.S. equities have vastly outperformed everything else on a five-year basis.”

Overall, Russell Investments lost more than 11% of assets in 2015. Data from the London Stock Exchange Group showed Russell Investment's AUM was $241 billion as of Dec. 31.

For one business, consulting, Russell is not taking all comers.

“Consulting for us plays a very unique role,” Mr. Brennan said. “We only selectively take on new consulting clients; we don't promote it. Potential clients typically bring unique and distinct problems that we haven't solved before.”

He said the intellectual property developed helping consulting clients with areas such as asset allocation is used more broadly to help clients in the firm's OCIO business.

Mr. Brennan acknowledges Russell faces intense competition in offering OCIO services, not only from other consultants but also from money managers.

“Many of the other money managers are piling into this now,” he said. “It's the flavor of the month. For us, it's how we fed our children for the last 40 years.” n