Manning & Napier restructures to combat series of misfortunes

Manning & Napier Inc. has faced serious hardships of late due to poor performance, high turnover and the broader migration of institutional assets to passive management.

The Fairport, N.Y.-based money manager has been plagued with outflows for years. Data from Pensions & Investments show that Manning & Napier had $27.1 billion in assets under management as of June 30, down 24% from the same time a year ago and down nearly 50% from its peak AUM of $54.1 billion three years earlier. Quarterly earnings statements show that the fourth quarter of 2012 was last time the firm saw net inflows (client flows were flat in 2013's first quarter).

The firm has also recently lost several senior people — including its CEO. Its stock price has been in decline, dropping to $3.85 at the market close on Sept. 27, down more than 80% from its peak of $19.89 on May 27, 2013.

"It's a perfect storm," said one competitor who asked not to be identified. "Being active, having bad performance, and facing public scrutiny for being a public entity doesn't help them."

Jeffrey S. Coons, Manning & Napier's president, said the firm, which primarily offers active traditional long-only investment strategies, has restructured its investment teams and is refocusing its efforts on risk management and total asset allocation — which he believes should reverse the company's flows and fortunes.

"We have a strong balance sheet," said Mr. Coons in a Sept. 25 interview. "Financially, we are not challenged as a firm."

Mr. Coons added that, despite reorganizing the investment teams, the company hasn't "changed anything about who we are or what we do or how we serve our clients."

"It's the same firm, the same investment process," he said.

Recent client terminations include:

New York State Deferred Compensation Plan, Albany, voted in August to terminate Manning & Napier as manager of an $83 million international equity growth portfolio for the $21.8 billion plan, citing performance;

Wyoming State Loan and Investment Board, Cheyenne, voted in August to drop the firm from its $228 million active international equity portfolio as part of the $20.2 billion board's effort to reduce fees and increase risk-adjusted returns; and

Ohio State Highway Patrol Retirement System, Columbus, in April 2016 terminated the firm as manager of $32 million during a review of the $849 million retirement system's international equity portfolio.

Underperformance is one of the main drivers of the firm's outflows.

Charles Howard Stamey, Manning & Napier's executive vice president and managing director of sales, in the firm's second-quarter earnings call to investors on Aug. 1 attributed outflows to "challenged three- and five-year performance periods as well as the continued trends toward passive investing by our larger institutional clients," according to a transcript of the call.

After the firm released its results for the quarter ended June 30, Robert Lee, a managing director and equity analyst at Keefe, Bruyette & Woods in New York, wrote in a note to investors that Manning & Napier's organic growth "has been very challenged recently, and we see limited prospect for inflows given the challenged performance of its funds."

Data from Morningstar Inc., Chicago, show Manning & Napier's long-term growth strategy — using both stocks and bonds — its largest offering with $5.6 billion in assets as of June 30, returned 10.09% for the year ended June 30, vs. 10.95% for its benchmark, the Morningstar Moderate Target Risk TR index. Its three-year annualized return, meanwhile, was 3.05%, vs. 4.16% for its benchmark, while its 10-year annualized return was 5.27%, vs. 5.31%.

"We had a tough performance period from mid-2014 to about mid-2015. That performance period … had significant impact on flows," Mr. Coons said in the interview.

In addition to performance, the institutional appetite for passive management is also posing a challenge for Manning & Napier.

"We're seeing shifts in the marketplace, and highly active managers like us are being affected by that," Mr. Coons added.

The company also lost several senior people in the past two-and-a-half years, most notably CEO Patrick Cunningham, who retired in April 2016, and Chief Financial Officer James E. Mikolaichik, who left the firm in August 2016 to join Hilton Grand Vacations as CFO.

In addition to Messrs. Cunningham and Mikolaichik, analyst Muris Demirovic, investment strategist Jeffrey Herrmann, senior analyst Ben Rozin and managing director Virge Trotter also left the firm in 2016, confirmed Manning & Napier spokeswoman Traci Legonelli. In March 2015, the company announced the departures of managing directors and senior research group members Jack Bauer and Brian Gambill.

When Mr. Cunningham retired, Manning & Napier co-founder and Chairman William Manning stepped into the role of CEO.

Mr. Coons said the leadership change "was a statement of reinforcing who we are, who we've been, and who we should continue to be." He also confirmed that Mr. Manning was not taking on the role of CEO on an interim basis.

The company also engaged in M&A activity to expand its investment offerings and regional footprint. In December 2015, Manning & Napier agreed to buy a 75% stake in Rainier Investment Management, a Seattle-based money manager with more than $3 billion in assets at the time.

However, the Rainier purchase didn't move the needle in terms of flows. By the time Manning & Napier agreed to sell three Rainier funds to Hennessy Advisors Inc. in May 2017, the boutique manager's AUM had dropped more than 63%, to $1.1 billion as of June 30.

Rainier's AUM has since declined to $868 million as of Aug. 31, according to an ADV form the company filed Sept. 27. The form attributes the drop in AUM to "the closure of Rainier's domestic equity separate account offerings and the corresponding efforts to sell the domestic equity fund assets to Hennessy."

Still, Mr. Coons is confident Manning & Napier can and will turn things around.

In March 2015, the firm broke up its large portfolio team — which had been responsible for the U.S. equity, non-U.S. equity and global core portfolios — into three separate teams covering each core strategy.

"The investment staff was being stretched too thin," Mr. Coons said. "It was about reducing the responsibilities of the staff and making sure analysts were only focusing on the core portfolios."

Manning & Napier also closed portfolios the firm had been incubating with the idea they might be future investment strategies.

After reorganizing its investment teams, Mr. Coons said performance started to pick up. Data provided by Manning & Napier show that its long-term growth strategy returned 12.67% year-to-date as of Aug. 31, vs. 8.86% for the blended benchmark of 40% Russell 3000, 15% All Country World Index ex-U.S., and 45% Standard & Poor's Municipal Build America Bonds Index.

The firm also is refocusing its efforts on providing clients with risk management, total portfolio solutions and consultative services.

Although Manning & Napier is putting more attention into identifying clients concerned about risk late in the bull market and working with clients to build portfolios, Mr. Coons noted it will still manage U.S. equity, non-U.S. equity and fixed-income strategies.

Mr. Coons also said the firm does not have any plans or strong impetus to either pursue M&A options or become a private company again (Manning & Napier went public in November 2011). However, he conceded senior leadership hasn't ruled out such options.

"Nothing's precluded," he said.