New chief at GMO hopes to stem stream of outflows, staff departures

Grantham, Mayo, Van Otterloo & Co. LLC named a new CEO and discontinued its global equity team's fundamental stock selection efforts, which will result in the departures of senior executives following two years of net outflows, subpar performance and significant executive turnover.

A number of industry insiders have told Pensions & Investments that GMO's outgoing CEO Brad Hilsabeck's leadership style and decision-making process alienated clients, consultants and employees alike, contributing to client and executive departures.

Sources also suggest it might be possible that GMO's new interim CEO, Margaret “Peg” McGetrick, could steer the ship back on course — provided she stays on board as permanent CEO and is given the autonomy to set things straight.

But even if turnaround is possible, it won't be easy, and it won't be quick.

Ms. McGetrick, a portfolio manager on GMO's international active equity team from 1984 to 1996 and partner of the firm from 1988 through 1997, left the company to form her own asset management firm, Liberty Square Asset Management, which has closed. She rejoined GMO as a member of the boardin 2011.

Last month, Ms. McGetrick was named interim CEO. Beginning July 1, she will replace Mr. Hilsabeck, who is resigning effective June 30.

On June 2, it was announced GMO would be reorganizing its asset allocation division by discontinuing the fundamental equity group to focus on its quantitative investment process. This will result in a number of executives leaving the firm, such as Chris Fortson, head of fundamental research for the global equity team; global equity team co-head David Cowan; and asset allocation co-head Sam Wilderman.

Messrs. Cowan and Fortson will leave the firm June 30, while Mr. Wilderman will leave at the end of the year.

Industry observers as well as former employees say these changes have been a long time coming and are the result of major problems plaguing the firm.

GMO spokesman Tucker Hewes said executives at the firm do not comment on internal company matters.

GMO's assets under management are down on a year-over-year basis. Data from Marietta, Ga.-based eVestment LLC show GMO had $98.7 billion in worldwide AUM as of March 31, down 16.6% from the same period a year ago and down 17.1% from March 31, 2014.

Then there's the employee turnover. eVestment lists 24 senior executives as having resigned from the firm from 2014 through May 31.

And a number of GMO's strategies have been struggling with performance issues, which have led to clients either terminating the manager or putting it on watch. For example, the $12.1 billion Orange County Employees Retirement System announced in February it had put GMO on watch; the firm manages $194.7 million in global equity for the Santa Ana, Calif., system.

OCERS spokesman Robert Kinsler said in an e-mail that the system “is continuing to monitor GMO, which remains on manager watch,” and added the OCERS staff has conferred with GMO regarding the personnel changes. He declined to comment further.

According to eVestment, GMO's global all-country equity allocation strategy returned -6.46% for the year ended March 31, vs. -4.34% for its benchmark, the MSCI All Country World index. Its three-year annualized return was 3.45%, vs. 5.53% for its benchmark. However, its five-year annualized return was 5.36%, vs. 5.22% for its benchmark.

Also, the $1.7 billion Milwaukee County Employees' Retirement System in March terminated GMO, which managed $65 million in value-oriented active international small-cap equities, for performance reasons.

GMO's international active small companies strategy posted an annual return of -1.67% for the year ended March 31, vs. 1.96% for its benchmark, the Standard & Poor's Developed ex-U.S. Small-Cap index. Its three-year annualized return was 4.97%, vs. 6.65% for the benchmark; the five-year annualized return was 4.65%, vs. 4.69% for its benchmark.

In May 2015, the $550 million Alameda-Contra Costa Transit District Retirement System, Oakland, Calif., eliminated its $50 million global tactical asset allocation portfolio — of which GMO ran a part, along with BlackRock Inc. and Pacific Investment Management Co. LLC — because of performance.

GMO's global asset allocation strategy returned -3.41% for the year ended March 31, vs. 1.43% for its benchmark, 50% MSCI World/50% Citi World Government Bond index. Its three-year annualized return was 2.73%, vs. 3.79% for its benchmark. Its five-year annualized return, meanwhile, was 4.64%, vs. 4.03% for its benchmark.

Although co-founder Jeremy Grantham is still at the company and serves on the board, he stopped running the day-to-day operations of the company years ago. The firm switched to a CEO from a collective management structure roughly seven years ago, when Mr. Grantham stepped back from active management of GMO.

In March 2009, Marc Mayer, formerly from AllianceBernstein, joined GMO as its first CEO. But in June 2011, Mr. Mayer was replaced by Mr. Hilsabeck, who had been with the firm since 2003 and served as head of global client relations before being named CEO.

Several sources with whom P&I spoke on condition of anonymity — including a number of former GMO executives — described the culture within the company under Mr. Hilsabeck's leadership as one fueled by hubris, where the senior leaders made unilateral decisions without discussing them with the staff beforehand and didn't communicate their vision to staff, consultants or clients, which they say was very different from how the firm historically had been run.

One former executive said this culture led to the firm making a number of decisions that many felt hurt morale, performance and client confidence, and also caused the departures of several longtime executives.

Examples of questionable decisions that sources cited included tinkering with the firm's investment philosophy and restructuring its investment groups without explaining to consultants or employees how the new groups were intended to work.

“Back in late 2013, (GMO's senior leadership) decided that they weren't going to manage against benchmarks anymore,” one source said. “Which is fine. But it was rushed, and consultants wanted answers.”

Another source cited formation of the fundamental equity team within the global equity group that's currently being disbanded as systematic of the old management structure. Its creation “wasn't discussed; it was just imposed,” the source said. “And that type of decision-making led to a number of mistakes from an investment perspective.”

An example of one of these investment mistakes resulting from this top-down decision-making was that senior management empowered the fundamental equity group, which consisted of “some very inexperienced investors, some people literally right out of college,” to be influential across all portfolios.

“It was made clear you would be shown the door if you weren't completely on board,” the source said. “And that was very contrary to GMO's history when I joined. Jeremy (Grantham)'s philosophy encouraged people to speak up.”

Many said GMO going back to its roots as a quant manager is a good sign for the firm. They also believe that putting Ms. McGetrick in charge is a step in the right direction, describing her as a smart, capable leader with solid investment experience. n