Pioneering path

When Dario Frigerio joined Credito Italiano in 1988 as a bond analyst, it was overstaffed and undercapitalized -- business as usual for a government-owned institution. The prospects for the bank, and for Frigerio, a graduate of Milan's elite Bocconi University, changed dramatically with its 1993 privatization.

Almost immediately, the confident, cerebral Frigerio began winning one promotion after another. Finally, in May 2001, a year after the bank, by then known as UniCredito Italiano, paid a hefty $1.2 billion to acquire Boston-based Pioneer Group, the fourth-oldest mutual fund family in the U.S., Frigerio was tapped to be global CEO of the bank's asset management business. The existing money management division, EuroPlus Research and Management, merged with Pioneer and became a new entity, Pioneer Global Asset Management, with Frigerio, then just 38, at the helm.

"Running a global business is a constant challenge," says Frigerio, who also heads UniCredito's private banking group and is one of only four executives reporting directly to the company's visionary CEO, Alessandro Profumo. "But the investment division of UniCredito has always been one of the most international in outlook."

The promotion at first proved to be something of a poisoned chalice. Within months of Frigerio's arrival, as the bear market took hold, U.S. assets hit a trough of $18 billion. Pioneer's European mutual fund business suffered net redemptions in 2000 and the early part of 2001 -- the first in its history.

It quickly became apparent that UniCredito had badly overpaid for the value-equity-focused Pioneer. The bank's bid of $43.50 a share was more than 40 percent above the share price, which had already more than doubled in four months of takeover speculation; the bid valued the money manager at a rich 5 percent of assets.

Even today Pioneer's U.S. business is probably worth no more than $750 million. No matter, says Frigerio coolly. "We did pay a lot for Pioneer, because it turned out to be the top of the market," he says. "Would it have been better to have acquired Pioneer in 2002? Of course, but that is hindsight. What is important is what we have made of the acquisition. When I look at what we have achieved, I think we can feel justly proud."

Indeed, he can. Assets at Pioneer Global have increased from E95 billion ($89 billion) when the acquisition closed to E130 billion at the end of 2004. After bottoming out at $18 billion at the end of 2001, the U.S. division had doubled assets to $36 billion by the end of 2004. Pioneer benefited from the resurgence of value stocks, but its gains reflect more than market appreciation. After posting net global outflows of E400 million in 2000, Pioneer Global has seen its inflows rise steadily, from E800 million in 2001 to E3.5 billion in 2004.

The improved showing came in spite of a meltdown in Pioneer's flagship $7.9 billion U.S. high-yield bond fund, which contributed to the firm's net U.S. mutual fund outflows of $770 million last year, according to Boston-based Financial Research Corp. Most retail U.S. junk bond funds suffered redemptions in 2004, but Pioneer, with a 22 percent market share, was hit disproportionately hard. After years of top-notch performance, the fund ranked in the bottom 10 percent of its category last year.

"UniCredito paid a steep price that was always going to be hard to justify," says Daniel Dart, a former Pioneer national sales manager who became head of third-party distribution at Merrill Lynch Investment Managers at the end of 2002. "But Pioneer has done a good job. It has done it, too, in a short period of time and in a very, very challenging market environment."

More broadly, linking Pioneer Group to UniCredito's E80 billion investment management division, EuroPlus Research and Management, run out of Dublin and Milan for the past seven years, has given the bank new stature as a global player. For many years the only Italian bank with a real international presence -- it owns a majority stake in Poland's No. 2 bank, Bank Pekao, and boasts the most successful retail banking operation in Eastern Europe -- UniCredito wanted to attract U.S. clients and acquire expertise in managing U.S. equities. It also wanted to expand its presence in Western Europe, and Pioneer is especially well known in Germany. Says Matteo Perruccio, Pioneer's Dublin-based head of worldwide sales and distribution: "We paid a high price, but price is relative. We found something we wanted."

Under Pioneer's new ownership a once-lopsided asset mix is now more profitable: fixed-income securities declined from 82 percent to 56 percent of assets between 2000 and 2004, while equities gained from 10 percent to 26 percent. (Balanced funds comprise 14.5 percent of the total, and alternative assets 3.5 percent.) The change can be clearly seen in UniCredito's bottom line. The wealth management group, of which Pioneer Global represents the lion's share, contributed 18.5 percent of the bank's E2.1 billion profit in 2004, up from 12.5 percent in 2003.

Yet the Milan-based Frigerio confronts two pressing challenges. First, he must improve subpar portfolio performance, especially in U.S. funds. At the end of February, only 28 of 93 Pioneer funds had four- or five-star ratings from Morningstar for their five-year performance records. "It's a plain fact that only four- and five-star-rated funds sell," says Osbert Hood, a former CFO at John Hancock Funds whom Frigerio tapped to become CEO of Pioneer's U.S. operation in 2002. "Even though our short- and medium-term performance is improving, we just can't have enough top-rated funds."

Looking ahead, Frigerio wants to grow his business by staking a claim to the institutional market in both the U.S. and Europe. But he has a long way to go. Just 15 percent of Pioneer's assets come from institutional investors, about the same proportion as in 2001.

"Pioneer has no institutional heritage, nor does UniCredito," says Ben Phillips, head of research at Boston-based consulting firm Cerulli Associates. "Trying to plug good product into different distribution channels, such as subadvisory and institutional, makes complete sense, but it isn't easy to succeed at."

To make Pioneer Global a stronger competitor, Frigerio has reorganized the group into a quasicentralized structure. Portfolio management is handled locally, from Boston, Dublin and Milan, but investment staffers all follow the direction of global CIO Marco Pirondini. Working closely with Pirondini, U.S. CEO Hood and worldwide sales and distribution chief Perruccio, Frigerio has expanded and deepened distribution and invigorated the Pioneer product lineup. Immediately after the acquisition closed, he began to build a multichannel distribution network to sell Pioneer funds around the world. He hired wholesalers to market the funds to brokerages and wire houses for the first time. The team now numbers 45 in the U.S. and 130 in Europe.

To strengthen Pioneer's anemic fund performance, Frigerio introduced his new U.S. colleagues to the disciplined investment style of EuroPlus, which for years had modeled itself on the

research-driven, risk-focused approach of Capital Group Cos., the widely admired Los Angeles­based money manager. The Italian bankers had partnered with Capital Group since 1968, when Credito Italiano established one of Italy's oldest mutual funds, Capital Italia. The Italians managed domestic equities for the fund, while Capital Group's Geneva, Switzerland, subsidiary handled equities in the rest of Europe. In the 1990s, Capital opened its doors to EuroPlus analysts and portfolio managers, who spent time in Capital's offices trying to absorb much of the firm's investment process, built upon intense, on-the-ground research.

"Our strategy is working," Frigerio says, "but this is a very tough environment, and we have much work left to do. We are anything but complacent."

PIONEER IS ONE OF THE OLDEST AND MOST celebrated names in the U.S. investment management business. Founded in 1928 by Philip Carret, a World War I fighter pilot, it was the fourth mutual fund family launched in the U.S. Pioneer grew in popularity under Carret, who is still celebrated as one of the country's premier value investors. By the 1980s the firm ranked as one of the top ten mutual fund families, with about $5 billion in assets.

But just as the mutual fund business began to take off, Pioneer lost its way. The company, which had gone public in 1979, made two particularly ill-fated investments, acquiring a gold mine in Ghana in 1986 and a timber operation in Russia in 1994. These money-losing ventures proved to be a major drain and were eventually sold off. Then the late-1990s craze for technology and telecommunications stocks was disastrous for a value-based firm like Pioneer. At the end of the first quarter of 2000, only seven of Pioneer's 55 funds earned four- or five-star ratings from Morningstar. The firm fell to 60th among U.S. mutual fund families in terms of assets.

Under pressure from Pioneer stockholders, most directly from Lens Investment Management, which owned a 4.3 percent stake, then-CEO John Cogan hired Salomon Smith Barney and Merrill Lynch & Co. in 2000 to consider alternatives to boost shareholder value, including a possible sale of the firm. But Lens filed a proxy statement with the Securities and Exchange Commission seeking to take control of the Pioneer board at the May 2001 stockholder meeting. Takeover speculation drove the stock price from $12 in late January to $27.75 in early May.

UniCredito suddenly appeared on the scene with an unexpectedly rich offer -- its $43.50 bid was more than three times the January price. Like many financial services companies at the time, UniCredito had been looking to acquire a money management shop. When Pioneer became available, it moved decisively, offering a generous starting bid.

Until the mid-1990s, UniCredito executives had viewed their own money management business as a modest offshoot of the banking enterprise. But there was nothing modest about UniCredito's banking ambitions -- at least, not since the bank's predecessor, state-owned Credito Italiano, had been privatized in 1993. A year later Alessandro Profumo, a former McKinsey & Co. consultant and a general manager of banking at Italian insurer Riunione Adriatica di Sicurta, joined Credito Italiano as managing director. Under Profumo's forceful leadership -- he was named deputy CEO in 1995 and CEO in 1996 -- UniCredito aggressively expanded at home and abroad. Profumo orchestrated Italy's first hostile bank takeover, snaring Credito Romagnolo in a $2.3 billion deal in 1995. When subsequent attempts to acquire local competitors were quashed by Italian regulators, Profumo looked abroad, snapping up stakes in several foreign banks, including Poland's Pekao in 1999, Zivnostenska Bank in the Czech Republic in 2000 and Zagrebacka Banka in Croatia in 2002. UniCredito now generates a significant share of its profits -- 18.7 percent last year -- from its international operations. UniCredito will expand further in emerging Europe through its planned purchase of Turkish bank Yapi ve Kredi Bankasi. The deal is expected to close sometime in the second quarter.

However, asset management remains central to Profumo's strategy of investing in businesses that can generate strong growth in spite of the pallid economic environment in the developed European markets. To grow and deepen UniCredito's asset management business, Profumo in 1996 centralized operations in an entity called CreditRolo Gestioni, whose assets totaled just E10 billion. Fabio Innocenzi, currently the CEO of Banca Popolare di Verona, was the first head of the money management group. In 1998 he named Frigerio chief investment officer.

Innocenzi and Frigerio knew that they had to diversify the firm's assets, which at the time were more than 80 percent in fixed income. With Profumo's support, the two executives determined that the bank needed to give its money management organization a more global focus. They gave the group an English name, EuroPlus Research and Management, and headquartered the operation in Dublin. Setting up shop in Ireland allowed EuroPlus to pay a roughly 10 percent corporate tax rate, instead of about 30 percent in Italy.

Between 1998 and 2000, EuroPlus hired 175 analysts, fund managers, marketers and back-office employees and saw assets grow from E60 billion to E80 billion. Then it joined forces with its newly acquired U.S. partner, Pioneer.

UniCredito named Pioneer veteran David Tripple as the first U.S. CEO, but he left in September 2001. He was replaced by Daniel Geraci, who had run the wealth management division of Fidelity Investments. A year and a half later, Geraci departed to head asset management at Phoenix Cos. in Hartford, Connecticut, and Frigerio tapped Osbert Hood to take his place.

Frigerio and his team quickly tackled their two strategic mandates in the U.S.: strengthening distribution and improving the product roster. The new crop of wholesalers began aggressively marketing to wire houses and brokerages, which the firm had not done in the past. That sparked a strong increase in sales. After suffering net outflows in the U.S. of $2.3 billion in 2000, Pioneer posted net sales of $1.2 billion in 2001, $1.8 billion in 2002 and $2.9 billion in 2003, according to Financial Research Corp. Pioneer's 2003 inflows put the firm back among the top 20 U.S. mutual fund complexes in terms of sales for the first time since the early 1990s. Last year, though, redemptions in Pioneer's high-yield bond funds left the U.S. group with net U.S. mutual fund outflows of roughly $770 million. But overall U.S. assets increased by 9.3 percent, helped by strong equity markets.

Although the Pioneer brand has been a known quantity in Europe for years, Frigerio's new distribution network has extended its reach. In Germany a net outflow in 2001 turned to E500 million in net sales in both 2002 and 2003 and rose to E587 million in 2004. In Poland, where Pioneer is the biggest mutual fund company, with a 34.5 percent market share, net sales grew from about E500 million three years ago to an estimated E738 billion in 2004.

In Italy's competitive retail market, Pioneer has held its own against both domestic rivals and such foreign firms as Franklin Templeton Investments, J.P. Morgan Fleming Asset Management and Schroder Investment Management. Other Italian banks and insurers have yet to acquire international asset management expertise and have lost domestic market share, but Pioneer grew its Italian market share in 2004, albeit marginally, from 13.39 percent to 13.76 percent.

To further strengthen his global distribution network, Frigerio aims to place Pioneer funds on more top-tier intermediary platforms. Since March 2003, Pioneer has appeared on Merrill Lynch's Global Selects, a Dublin-registered umbrella fund with 38 underlying portfolios that is Merrill's fastest-growing private client product in Europe. Pioneer manages both a European large-cap core portfolio and a North American high-yield portfolio for Merrill's platform. (Merrill does not make public the size or performance of the underlying portfolios.)

"To get on the platform, a firm needs to be the best money manager for that portfolio," says Paul Sarosy, a managing director in the global private client group at Merrill Lynch in London. "But once on the platform, servicing our financial planners with the right tools, information and education is critical."

"We know how to support distributors," says Frigerio. Among the tools and programs that Pioneer provides to its distributors, which include BNP Paribas, Credit Suisse Group and Deutsche Bank: customized Web sites, marketing support and access to fund managers.

Frigerio has worked to improve fund performance. Before Pioneer was bought by UniCredito, its portfolio managers enjoyed considerable autonomy in both setting investment strategy and picking stocks. Analysts did more data gathering than analysis and consequently claimed far less status than portfolio managers. Quantitative research was virtually nonexistent, and there was a lingering belief that star managers needed little oversight despite their less-than-stellar performance.

Under the gradually implemented new regime, research and quantitative discipline have become central. Notably, Frigerio and global CIO Pirondini have boosted the number of analysts, insisting that research cannot be ignored. Of Pioneer's worldwide staff of 330 investment professionals, 49 are analysts.

The research team, which includes the likes of Dublin-based oil specialist David Allen, a three-time member of Institutional Investor's Best of the Buy Side, compiles a so-called global action list of stocks -- companies in their sectors that they believe should be in fund managers' portfolios. Fund managers can dissent and can add stocks to the action list, but anyone who puts a stock on the list has to put his or her name to the recommendation. The goal is to encourage transparency and personal responsibility.

Pioneer's analysts also run their own portfolios, a hallmark of the Capital Group investment process; an analyst's compensation is tied to his or her portfolio returns.

In Europe one analyst portfolio is sold to retail and institutional customers. Since its inception in July 2000, Pioneer European Research, which has E1.8 billion in assets, has outperformed the MSCI Europe index by an impressive 3.6 percentage points a year, winning an A rating from Standard & Poor's Fund Research.

Performance is beginning to improve across the board. One of Pioneer's leading performers is its E2.5 billion Top European Players fund, a highly concentrated 30-stock portfolio run by ex­Martin Currie Investment Management manager Andrew Arbuthnott. For the three years through 2004, the fund is up an annualized 1.2 percent, versus a 6 percent annualized decline for the MSCI Europe index. Last year it was up 12.9 percent, versus a 9.4 percent rise in the index. The five-star Morningstar-rated fund, which debuted in July 2000, is neck and neck with Fidelity European Special Situations as the bestselling European equities fund.

In the U.S. the $491 million Pioneer Mid Cap Value Fund is up an annualized 14.3 percent over five years, versus 13.6 percent for the S&P 500; the $220 million Pioneer US Value Fund is up 4.72 percent annualized over five years, versus 0.2 percent for the Russell 1000 value index.

Even as they have rejuvenated Pioneer's homegrown products, Frigerio and Hood have aggressively pursued a series of so-called fund adoptions. In these cases, top-performing funds in need of better distribution strike deals with fund families that have a strong brand but are looking for better-performing products. In Pioneer's arrangements, funds managed by outside firms are rebranded with its name and sold by its distributors. Typically, the management fee is evenly split between Pioneer and the outside manager.

For example, in February 2004, Pioneer began selling the $9.5 million large-cap and $16.5 million small-cap growth funds managed by Chicago-based Oak Ridge Investments, which also runs $1 billion in separately managed accounts. The small-cap Oak Ridge fund earns four stars from Morningstar; the large-cap fund earns five stars. "It was very hard for us to market the mutual funds," says David Klaskin, co-founder and chief investment officer of Oak Ridge. "Partnering with Pioneer gives us the distribution clout we were lacking." Pioneer wholesalers have aggressively marketed the funds to brokers and financial advisers, highlighting their long-term track records -- the Oak Ridge Large Cap Growth Fund returned 0.35 percent annualized in the past five years, compared with a 9.71 percent decline in the Russell 1000 growth index; the Oak Ridge Small Cap Growth Fund is up an average annual 13.2 percent over ten years, versus a 6.5 percent rise in the Russell 2000 growth index.

From an initial $26 million in assets, the Oak Ridge funds have grown to $120 million. Last October, Pioneer paid an undisclosed amount to acquire a 49 percent stake in Oak Ridge, claiming a toehold in the growing market for separate accounts.

And in the most lucrative, fast-growing business of all, hedge funds, Pioneer has both developed and acquired expertise and assets. Pioneer increased hedge fund assets from E90 million when its first single-strategy hedge fund debuted in 1999 to E400 million at the end of 2001, at which point it deployed four strategies: fixed income, risk arbitrage, convertible arbitrage and global macro. It was clear to Frigerio and Alberto La Rocca, head of Pioneer Alternative Investments, that they needed to buy a funds-of-hedge-funds capability to become a serious player.

It didn't come cheap. In May 2002, Pioneer paid a hefty $110 million for $1 billion-in-assets Momentum Asset Management, a top-performing London-based fund-of-hedge-funds manager founded in 1987 by Man Group alumnus Michael Goldman. Its flagship Momentum AllWeather Strategy, which now runs more than $1.1 billion in funds of hedge funds, returned an average annual 6.2 percent, compared with 4.7 percent for the HFR Fund-of-Funds Index, for the five years ended December 31, 2004.

"We just didn't see any way to organically grow our hedge fund business," says La Rocca. Assets at Momentum have more than tripled since the acquisition, to E3.5 billion, taking Pioneer Alternative Investments' total assets to E4.5 billion. (The group's single-strategy hedge funds now run E1 billion on their own.)

Frigerio is especially pleased that Momentum's funds of hedge funds have given Pioneer an entrée into the U.K. institutional market, because he's determined to grow Pioneer's pension business. Last year Momentum won mandates from the £850 million ($1.62 billion) Dorset County Council Pension Fund and the £558 million Clwyd Pension Fund. "We're working hard to develop a strategy to enter the institutional market, and that will be a big strategic effort in the next few years," Frigerio says.

Currently, though, only 15 percent of Pioneer's assets are institutional. Although Frigerio hasn't ruled out an acquisition, it's more likely, he says, that Pioneer will repackage its strongest retail products for the pension crowd.

"I am not underestimating the task ahead," Frigerio says. "Clearly, we will need to develop institutional marketing and client service." To that end, in December Frigerio recruited Kerry Duffain, the head of consultant relations at Citigroup Asset Management, to assume the same role at Pioneer.

Certainly, institutional firms have shown that they can make a successful transition to the retail arena. But it's less common for a retail firm to build a pension business. Putnam Investments and Fidelity Investments have done it, but not many other major asset managers have succeeded.

Merrill's Sarosy, for one, believes Frigerio will prevail. "Pioneer has strong management and disciplined processes," he says. "I think they can compete for institutional business."

It will take years to become a major pension player, but UniCredito and Pioneer have surely come a long way in a short time. Says Arnault de Batz, head of asset management ratings at Fitch in Paris: "In a little more than five years, they have moved 250 people from Milan to Dublin, created a group of in-house analysts and bought a mutual fund business in the U.S. and a hedge fund business in London. All that has been integrated successfully, and the business continues to grow."

And what of the fact that UniCredito paid $1.2 billion for Pioneer Group, about $450 million more than its U.S. business might sell for today? Frigerio has a simple answer to that question: Pioneer is not for sale.