Balch Hardy Scheinman & Winston Inc. files bankruptcy. Concord Capital Management Inc. closes. Travelers Insurance Co. exits the index fund business. Aetna Life Insurance Co. withdraws from the business of issuing guaranteed investment contracts.
The failings of all of them in the past year raise a scary question: Which managers will be next? These companies were widely diverse in their investment products and mostly all, except for Travelers, among leading managers in their classes, or styles, in terms of assets and experience.
But rather than some systemic risk and a set of homogeneous problems threatening the industry, a close examination reveals poor decision-making and selective business risks caused the failures in these companies.
There are lessons pension clients can learn from these managers, because every money manager faces, aside from industrywide problems, risks inherent in the way they manage their own business.
The closings of the four businesses underscore a number of significant issues in institutional asset management. The failings challenge some fundamental reasons for hiring and retaining money managers.
For one, pension sponsors and their consultants like to see a consistency and longevity of personnel in a money management organization. Yet, Concord Capital and Balch Hardy Scheinman & Winston exhibited a consistency of professional personnel relatively few firms can emulate. At Concord, for example, the eight founders stayed from its creation in 1981 through its folding last year. They exhibited qualities prized in the business: they were bright, having built American National Bank of Chicago's active management; entrepreneurial; and creative in their unorthodox "thematic" investment style. But they performed poorly.
By contrast, Harris Investment Management Inc., Chicago, lost its key fixed-income professionals near the end of the third quarter last year. Yet the firm, keeping its "no stars" quantitative strategy, managed quite well, ranking as one of the best performing managers in the fourth quarter PIPER universe.
The depth of the Harris organization gave it strength in adversity. Concord's quirkiness and counterculture collegiality was fun, but only while performance was good, and all that masked the ruinous dominance Harold L. Arbit had over investment policy. Consistency is deceptive.
Balch Hardy Scheinman & Winston failed on several counts. For one, it relied too long on an options strategy poorly designed to perform in a strong market, such as in the past nearly dozen years. For another, its principals never appreciated the threat to the firm a dispute over a licensing arrangement with Richard Brignoli. Mr. Brignoli, well-known for his strident pursuit of litigation in perceived wrongs, is the author of an options model the firm, for a time at least, used. The quantitative investment style, often hailed for its investment discipline, gave the firm a complacency in making subjective judgments, causing it to lose in the bankruptcy its two promising efforts to diversify out of options overwriting: equity management and investment style analysis software.
The failing of the firms shows, too, there isn't necessarily a virtue in smallness, especially in a commodity. In indexing, bigger is better, as Travelers found out. Indexing is dismissed as something a monkey could do. But clearly this commodity business requires both a considerable ken to manage and a size on the order of a King Kong-mutant gorilla. The business benefits from economies of scale, such as low fees and extensive passive product lines. Clients, for their part, wasted their time dealing with a relative upstart in this kind of investment as many found out as they go through the expense of finding another indexer.
As for Aetna, its withdrawal shows, once again, how competitive and, thus, unstable the business of offering staid GICs is. GICs, despite their stable nature, still require the insurers themselves to find good investments for the contracts' proceeds. Aetna decided it couldn't remain viable in the industry. Aetna's departure is a reason, among others, 401(k) participants ought to look at the consequences of maintaining such a high proportion of their investments in GICs.
A key main lesson from all of this: Certainly, the troubles in the four firms were particular to each. Clients can avoid many problems associated with having to change managers by better understanding the managers and staying abreast of their problems. Doing so separates monkeying from pension managing.
