Systematic Financial plans job cuts after equity strategy crash

After suffering significant outflows, Systematic Financial Management LP, an affiliate of Affiliated Managers Group, is closing the investment strategies associated with its "catalyst value" discipline, according to various sources. In light of the product closure, the firm also plans to reduce its headcount, Systematic has told at least one investor client.

With $3.3 billion in assets under management as of March 31, Systematic's firmwide AUM has dropped precipitously from $14.3 billion at the end of 2013, Securities and Exchange Commission filings show. With the closure of its catalyst value product, which had $584 million in assets as of March 31 according to public investor documents, the firm is bracing for a further decline.

The $57 billion Los Angeles County Employees Retirement Association, Pasadena, Calif., was notified in April that "Systematic was closing its catalyst value equity product as outflows in that discipline, following the extended medical leave of the primary portfolio manager, had rendered the product unprofitable," a memo dated May 3 from the pension fund's investment staff to its board stated.

Ronald Mushock, a lead portfolio manager at Systematic, went on medical leave in late December, according to public investor documents.

Teaneck, N.J.-based Systematic is one of more than 30 affiliated investment boutiques in which AMG is invested. AMG had $778 billion in aggregate assets under management as of March 31.

Systematic and its parent AMG declined to comment via a company spokesman.

Systematic's catalyst value product is offered in large-cap, midcap, smidcap, small-cap and all-cap value strategies, according to the firm's most recent Form ADV, filed March 31 with the SEC. Catalyst value is one the firm's three investment disciplines, leaving its "free cash flow value" and "disciplined value" products, which Systematic will continue to manage.

In addition to LACERA, an executive at an investment consultant who spoke under the condition of anonymity said their firm was also notified in April that the catalyst value strategies were shutting down, and that investors had until the end of September to exit the investment.

LACERA has $225 million invested in a Systematic small-cap value mandate, which was not directly affected by the closure since it is in the free cash flow discipline. But because the catalyst value strategies being closed represent nearly 18% of Systematic's total AUM, LACERA's investment staff is monitoring the firm closely, as "it remains to be seen how the planned closure will affect the firm's culture, philosophy, investment process, and ultimately, its performance," the memo stated.

Jonathan Grabel, LACERA's chief investment officer, declined to provide further information but noted in a June email that Systematic "is not on a formal watchlist" for the pension fund.

As a result of the product closure, Systematic "plans to reduce its internal headcount to better align with remaining assets, focusing remaining team members on its two continuing disciplines, Free Cash Flow and Disciplined Value," LACERA's memo stated.

As recently as November, Systematic had 34 employees, including 13 investment professionals, according to board documents published by a former investor client, the $4.7 billion Fresno County Employees' Retirement Association.

FCERA terminated Systematic in January from a $75 million smidcap value mandate over performance and portfolio manager concerns, after Mr. Mushock, who ran FCERA's strategy, went on leave.

In March, Pensions & Investments reported that another investor client, the $2.3 billion Idaho Endowment Fund Investment Board, Boise, had begun a search to replace Systematic as manager of a $90 million midcap value equity mandate.

Chris Anton, manager of investments for the Idaho fund, said in an interview that the assets were moved in April to Sycamore Capital, a Cincinnati-based investment franchise of Victory Capital Management Inc.

"It was clear that the level of assets had declined significantly, and without Systematic saying 'here is what we're going to do to change things,' we thought it was appropriate to (start a search)," he said.

At the time, the endowment fund had not been notified about a product closure, but "it appeared the strategies were winding down," he said. "It was not clear how the strategy would be supported going forward in Mr. Mushock's absence. We just felt more comfortable making a change at that point."

After being notified that the catalyst value product was shutting down, the $79 million Lauderhill Firefighters' Retirement System, Palatka, Fla., moved its $7 million large-cap value mandate with Systematic into an index fund until it completes a search for a new manager, Barbara White, plan administrator, said in a June email.

A former institutional investor client, which spoke under the condition of anonymity, said the catalyst value smidcap value strategy had been underperforming but did not rebound under "new market circumstances," as they had anticipated. The portfolio failing to recover, plus the announcement of the portfolio manager's absence, resulted in a "snowball effect" regarding redemptions "and we didn't want to be the last man standing," the source said.

Donald Putnam, managing partner at investment banking firm Grail Partners LLC, San Francisco, suspects that given the size of Systematic, an eventual firm shutdown "is inevitable," since the option of selling or combining the investment teams with another manager would be difficult, as the firm is struggling, he said in an email.

Founded in 1982, Systematic became an affiliate of AMG in 1995, but was still partially owned by its employees until last year.

As part of a new revenue-sharing agreement with AMG finalized on Sept. 28, 10 Systematic employees who collectively owned 25% of the company agreed to sell back their ownership stake to AMG, "essentially making Systematic a wholly owned subsidiary of AMG," investor documents published by FCERA said.

The new ownership structure was noted as a "non-material change" in Systematic's most recent Form ADV filing.

A Nov. 7 memo, written by FCERA's consultant, Verus Advisory Inc., Seattle, said: "A potentially related issue to the organizational change: the firm's assets under management have declined in the last several years," the memo later noted.

Verus did not respond for comment.

West Palm Beach, Fla.-based AMG has undergone its own reorganization as of late, with a series of changes in its leadership ranks.

In late May, AMG's president and CFO, Jay C. Horgen, became CEO, replacing Nathaniel Dalton, who had only been in the chief executive role for a year. Last May, Mr. Dalton succeeded Sean M. Healey as CEO, after Mr. Healey was diagnosed with amyotrophic lateral sclerosis, or Lou Gehrig's disease.

With Mr. Horgen's recent appointment, Mr. Dalton became senior adviser and remains on the board of directors.