LONDON - A permanent tie between the asset management businesses of Schroders PLC and Wertheim Schroder & Co. Inc. could make an ideal pairing.
On July 7, London-based Schroders announced it was buying the 50% of Wertheim Schroder's voting stock it didn't already own for about $68 million. Schroders is offering $24 million for 14.7% in non-voting stock held by three institutional investors.
A merger would create an entity with some $85 billion in assets under management - although nearly all would come from Schroders in London.
Still, the two firms' asset management businesses fit hand-in-glove, and provide some areas for future exploration.
Tony Coelho, president, chief executive officer of Wertheim Schroder Investment Services Inc. and managing director of Wertheim Schroder, said there is "a natural fit" between the two groups' products, given Schroder'sinternational focus and Wertheim's U.S. orientation.
He said Wertheim will remain independent and will not experience any management changes. "We are assuring our clients that nothing changes here," Mr. Coelho said.
George Mallinckrodt, Schroders' chairman, concurred the organizations are remaining separate, though he said there would be greater coordination on research, investment policy and cross-marketing of each other's products.
Where there is potential synergy on the product side, executives for both firms said, is in creating a global bond product. Wertheim Schroder has strong domestic bond capabilities, while Schroder is focused more on its international fixed-income and currency operations, observed David Salisbury, chief executive officer of Schroder Capital Management International.
While matching up nicely, the firms actually are quite different and offer striking contrasts in how they have built their respective businesses.
Since former House majority whip Tony Coelho joined Wertheim Schroder in October 1989, assets under management have grown 360% to $3.7 billion. The firm has expanded its products to a collection of equity, bond and cash strategies and recently started a series of five mutual funds.
Meanwhile, Schroders' assets under management soared 47% to 53 billion ($81.6 billion) in 1993 alone - including 6.5 billion in net new business. One of the U.K.'s biggest balanced managers, the firm produced compound-annualized returns of 32.7% in 1993 and 17.8% for the five years ended Dec. 31, 1993, compared with 29.2% and 16.8%, respectively, for the Combined Actuarial Performance Services Ltd. universe.
Mr. Mallinckrodt himself sometimes is astounded at the performance his firm has produced. Recently presenting the firm's track record in Malaysia, he was stunned to see Schroders has returned 40.4% a year on a compound-annualized basis over eight years - nearly twice the level of the Kuala Lumpur Composite Index.
"I had to squint to make sure I was seeing right," said the 63-year-old chairman.
Since Schroders bought its half-interest in the old Wall Street firm in 1986, the financial firms have agreed informally not to compete on each other's turf.
In fact, the two firms have three investment management presences in New York alone: Wertheim Schroder handles domestic investments for U.S. clients; Schroder Capital Management runs investments in the United States on behalf of foreign-based clients; and Schroder Capital Management International, established in 1979, is Schroders' arm that runs solely international portfolios for U.S. clients.
The latter firm's 9.5 billion ($14.6 billion) in assets managed on behalf of U.S. institutions caused it to be the first British institutional money manager to win The Queen's Award for Export Achievement.
Schroders also has a 23% interest in Dimensional Fund Advisors Inc., Santa Monica, Calif.
Solid investment approach
London-based Schroders has developed an enviable reputation for solid - if somewhat boring - investment management.
"It's important not to be carried away by fashion," Mr. Mallinckrodt said. For example, the 176-year-old firm has shunned hedge funds. "We basically have been plodding along by being very, very basic in our approach," he said.
Last year, Schroders almost suffered the embarrassment of ranking in the top decile. That would have been difficult to explain to clients given its conservative, risk-averse posture, explained George Henshilwood, partner in the consulting firm of Hymans Robertson, Glasgow. The firm ex- plained away its faux pas by saying the things that had gone wrong in late 1992 turned out right in 1993.
Schroders' approach, which favors top-down on large-cap stocks and bottom-up for small-cap, is based on consistency. Only three times in 19 years has it fallen below the median - and then only in the sixth decile.
For its international investments, Schroders relies on a combination of locally based research but portfolio managers based in London.
Loyalty among staff is common. Senior portfolio managers average 26 years of experience - 23 of which are with Schroders. The firm has 900 investment profes-sionals, of which 165 are based in London. There is a separate research team of 75 analysts and economists, according to data compiled by Hymans Robertson.
Schroders relies on a team approach. The firm has inculcated "a very careful, clear, strong culture," said Anthea Nugent, head of manager research at William M. Mercer Ltd., London.
Schroders also has developed its business internationally. It extended into Hong Kong and Singapore in the early 1970s; it now accounts for 26% of Hong Kong's growing pension fund market. The firm also has a strong presence in emerging markets, with more than 3 billion in assets invested at the end of 1993. It has invested in Latin America for more than 100 years. And the firm just announced it is opening its first office in mainland China, in Shanghai.
In addition, Schroders opened a private client business in Switzerland in 1967, and also has real estate and venture capital investment arms.
"They get most things right and very little wrong," said Ian Woods, director, The Wyatt Co. (U.K.) Ltd., London.
Of its 52.9 billion in assets under management, 38% came from U.K. institutional clients, another third from non-U.K. clients and the rest from private clients and others.
Asset management clearly is a critical leg of the merchant banking firm. Pre-tax profits last year from money management totaled 56.8 million, or 40% of the firm's 140.3 million in pre-tax profits.
For the future, Mr. Mallinckrodt says the development of pension systems around the globe makes those markets very important. Countries such as Chile, Argentina and Indonesia all realize that future generations are not going to pay for state pension benefits, he said.
Wertheim Schroder's rise
Wertheim Schroder Asset Services, on the other hand, is a story of the phoenix.
Following a clash with senior management, Chief Investment Officer Bill Smethurst left the old Wertheim Asset Management in 1979. During the next 10 years, the firm went through five different CIOs and presidents.
Meanwhile, investment performance deteriorated sharply. Assets under management gyrated between $1.4 billion and $1.7 billion, until plunging to $955 million at the end of 1987 and $800 million a year later. All of the firm's $500 million in private accounts left.
In 1989, the firm lured back Mr. Smethurst, after stints as chief investment officer at Tallasi Management Co. and C.J. Lawrence Management Inc.
Mr. Coelho joined shortly thereafter. He showed up for work with his most important asset: his Rolodex. He received his schooling in investment management on the job. The first $100 million in new business rolled through the door by the end of 1989.
The firm started adding to its product line. In 1990, the firm added a small-cap equity product, run by Nancy and Michael Tooke in Boston, that now has about $170 million. It has beaten the Russell 2000 index by 610 basis points compounded annually during the three-year period ended March 31.
Two years later, the firm bought out Financial Management Advisors, a Los-Angeles-based high-yield bond firm run by Ken Malamed, who formerly had been president of Bear Stearns Asset Management. In the five-year period ended March 31, the high-yield bond product has returned 21.3% a year, outperforming the Merrill Lynch High Yield Master Index's 12.5% annual return.
In addition, core bond, intermediate bond, and cash products were added.
Eventually, Wertheim Schroder officials agreed they needed a new chief investment officer. Mr. Smethurst became chairman of Wertheim Schroder Investment Services. Hired as CIO was J. Richard Walton, who previously had been president andd CIO of Morgan Grenfell Capital Management, later serving briefly at Pitcairn Financial Management Group.
"They saw opportunities to acquire worthwhile talent or product," said Catherine Higgins, national director, asset consulting, Towers Perrin, New York.
To tell its story to the pension fund consultant community, the firm hired Bob Follert, a veteran of Morgan Stanley Asset Management who had previously worked for Wertheim Asset Management form 1975 to 1984.
From having no consultant-referred business in 1993, the firm so far this year has been placed in 80 different searches.
The upshot has been a huge pickup of business. When Mr. Coelho came on board, the firm had no public pension fund business; now it has 17 public fund clients with $400 million in total assets. For example, this year it has won $75 million in high-yield bond accounts from two New York City funds and a $106 million small-cap portfolio from the University of Texas permanent fund.Wertheim manages $300 million for 36 taxable corporate clients and $500 million for 73 tax-exempt corporate clients. Also, the individual side of the business has rebounded, and now accounts for about 32% of the firm's assets under management.
Mr. Coelho said the job has been "fun because we started off in a hole. It's difficult to remodel a house when you're living in it at the same time."
While Mr. Coelho does frequently consult with the Clinton administration, he said he's "not interested in going back into politics at this time. I like what I'm doing, and my family likes what I'm doing."
