The 2004 Pension Olympics
Plan sponsors are looking for probity as well as strong performance from their money managers.
Fire first, ask questions later. That, anyway, was the approach taken by many pension plans last fall, as late-trading and market-timing scandals struck the mutual fund industry. More than 20 firms were dragged into the worst scandal ever to hit the money management business. Industry leaders like Janus Capital Group, Pilgrim Baxter & Associates, Putnam Investments and Strong Capital Management all suffered devastating cash outflows.
As big firms struggled, managers like Milwaukee, Wisconsinbased Artisan Partners quietly picked up the pieces. A privately held firm that has acquired something of an institutional cult following, Artisan owns a reputation for integrity and quality that proved an invaluable asset last year. In 2003, Artisan, which manages seven wide-ranging equity styles, from small-value to international growth, pulled in 28 new accounts from the 1,000 biggest institutional investors to claim the top spot in the Pension Olympics for the second straight year.
“I have a lot of respect for Artisan. They’re as formidable a competitor as we’ve seen,” says the CIO of one rival money manager.
Not surprisingly, in the wake of the scandals, plan sponsors are looking for money managers known for their probity -- and well-run compliance departments -- as well as strong and consistent performance. “It’s rare to see a shop that has it all -- ironclad stability, reliable long-term returns, squeaky-clean compliance policies,” says Michael Rosen of Los Angelesbased pension fund consulting firm Angeles Investment Advisors. “But for those that can boast such a trifecta, believe me, it doesn’t go unnoticed.”
The top two finishers in the 2004 Pension Olympics -- Artisan and Fidelity Investments -- delivered on all those fronts.
As it happens, neither is publicly owned. Indeed, it may be no coincidence that privately owned shops have steered clear of scandal. “When you’re privately held, there isn’t that overriding pressure to grow at all costs,” says James Margard, CIO of Seattle-based Rainier Investment Management, a privately held firm with $5 billion under management. “It’s like any family-owned business -- your clients and your reputation are everything to you. That often becomes compromised when there’s a corporate parent above, reminding you to grow, grow, grow.”
“Clients tell us all the time that they hire us for three reasons,” explains Artisan CEO Andrew Ziegler. “Consistency of performance, organizational stability and a depth of resources dedicated to compliance and administration. We are talking about the blocking and tackling of money management.”
The employee-owned firm has had no turnover among its eight portfolio managers since it was launched nine years ago by Ziegler and his wife, Carlene, both of whom had been senior executives at Strong Capital Management. Of Artisan’s seven institutional products (small-cap growth, small-cap value, midcap growth, midcap value, international growth, international small-cap growth and international value), only midcap-value and international-value products proved cool to the touch in 2003, attracting little or no money. Midcap growth, managed out of Milwaukee by Andrew Stephens, and international small-cap growth, managed by Mark Yockey in San Francisco, were closed to new client money by year-end. Since its inception in January 2000, Yockey’s small-cap growth fund has returned an average annual 29.8 percent, versus a 25.7 percent gain for the MSCI EAFE small-cap index.
As government investigations into questionable mutual fund practices -- late trading, market timing, revenue sharing, directed brokerage -- unfolded last year, most pension plans reacted quickly. They moved to switch money managers no more than a few weeks after hearing about a charge or investigation.
“There would be an immediate request that we do a search, and within a week we’d have one or two firms identified from our updated shortlist,” explains consultant Rosen. Two weeks or so later, the deed was done. The scandals intensified a housecleaning trend that began in 2002. According to iisearches.com, which captures money manager hiring activity, plans replaced 563 managers in 2003, up from 447 in 2002.
Putnam appears to have been the hardest hit. Clients, mostly large public defined benefit plans, pulled out an estimated $60 billion -- primarily from international equity portfolios -- when the retail versions of the products were implicated in the market-timing scandal. In its own backyard Putnam lost a $1.7 billion assignment from the Massachusetts Pension Reserve Investment Management Board, money that later went to State Street Global Advisors. The Arkansas Teacher Retirement System recently pulled a $250 million account that later went to Capital Guardian Trust Co. In April, Putnam settled separately with the U.S. Securities and Exchange Commission and the Massachusetts Secretary of the Commonwealth over allegations that at least six employees had profited from inappropriate trades in its funds. Putnam agreed to pay $110 million in separate settlements with the SEC and Massachusetts concerning market timing.
At the end of the first quarter, Putnam had $227 billion under management, down from $272 billion before the scandals hit. “As far as the client losses of last fall, that’s understandable,” says John Brown, head of Putnam’s institutional business. “Both our current and former clients are telling us that they believe we have taken the right steps over the past several months.”
The scandals cost Janus CEO Mark Whiston his job; he resigned last month and was replaced by chairman Stephen Scheid. In April, Janus also agreed to pay $226 million to settle state and federal charges of market timing, in a deal that awaits final SEC approval.
Since September the firm has suffered $14 billion in outflows from its funds. In April the Kentucky Public Employees’ Deferred Compensation System yanked a U.S. equity assignment from Janus and handed it to Capital Guardian. In a conference call new CEO Scheid told analysts, “We deeply regret the loss of shareholder confidence, but we are dedicated to restoring it.”
As these firms struggle to regroup, managers like San Franciscobased Dodge & Cox, a privately held firm with assets of $115 billion, are raking in new mandates. Low-profile and press-shy, Dodge & Cox -- which this year makes its first appearance in the money manager marathon since 1996 -- is widely respected for its integrity and quality. Says the CEO of one rival money manager, “They don’t do much marketing or promotion, but they have a strong reputation, and they just grow their assets the old-fashioned way.”
Some big firms are suffering, but not Fidelity. With nearly $1 trillion in assets, it snares the No. 2 spot. This is the 11th consecutive year the Boston-based firm has won, placed or shown in the Pension Olympics.
Fidelity’s strongest sellers last year were international-equity and core-plus fixed-income products. “A lot of different things were happening in 2003,” explains Drew Lawton, CEO of Fidelity Management Trust Co., the institutional asset management arm of Fidelity. “You had some plans increasing allocations to things like EAFE or core-plus fixed income simply as a way to get strategic noncorrelation away from U.S. equity, and then also you had new contributions from corporations with funding-level issues. And, of course, some plans were replacing managers tainted with the brush of the mutual fund scandal.”
In the fixed-income area, two powerhouses continued to dominate: New Yorkbased BlackRock and Newport Beach, Californiabased Pimco, selling core and core-plus fixed-income accounts. “It was another strong year for our bond products, and we actually saw an increased interest in our equity products,” says Barbara Novick, BlackRock’s director of marketing. Pimco’s net wins: 24. BlackRock’s: 19.
Across all asset classes, pension plans are increasingly looking to nontraditional investments to beat their bogeys. “The general theme among our clients was to invest in asset classes that can generate alpha and increase diversification,” says Robin Pellish, CEO of Rocaton Investment Advisors in Norwalk, Connecticut. “They realize that traditional asset classes may only generate single-digit returns in the next three to five years.” Of all the searches Rocaton conducted last year, the greatest number was for absolute-return managers.
The Pension Olympics is based on data compiled by New Yorkbased Thomson Financial/Nelson Information, then revised for publication by Researcher Edwina Saddington, with additional research from iisearches.com. The feature ranks firms that achieved the largest number of net new client gains from among the top 1,000 corporate, public and union funds, including endowments and foundations, in calendar year 2003. All are major funds, the smallest of which had assets of $850 million. Pension fund accounts are not counted as gains unless they represent new relationships and were funded in 2003. Defined benefit and defined contribution plans are included; to be counted, the latter must include fund management, not recordkeeping or administrative services alone.