The trustees of the Old Mutual Advisor Funds II had a big challenge at the end of last year when the board had two months to find new subadvisors. The search began when a new subadvisory contract for the funds fell through, leaving the funds at a risk of being orphaned by the end of the year, and the principals of the subadvisor for one major fund announced their departure from the advisory firm.

Old Mutual's parent company, Old Mutual U.S. Holdings, proposed a number of its other investment advisors to serve as subadvisors for some of the portfolios, but the totally independent board decided to retain Callan Associates to help it screen independent advisers. The board held meetings every two weeks during this two-month period and ultimately chose five new subadvisors that are independent and seven subadvisors that are affiliates of Old Mutual.

 

How It All Went Down

Last summer, Old Mutual decided to discontinue its Liberty Ridge operation, which were the old Pilgrim Baxter Funds. As a result of the mutual fund scandal in 2003, Liberty Ridge was having recruitment problems. Old Mutual was set to acquire ForstmannLeff, which would have replaced Liberty Ridge as the new sub-adviser. The deal was pulled after problems erupted for former REFCO CEO Phillip Bennett, who owned FortsmannLeff, in mid-October.

Some of the Liberty Ridge portfolio managers were planning to move to ForstmannLeff, which had a much broader-based investment group. The board had to work quickly to find a new home for them and the rest of the Liberty Ridge staff was set to leave at the end of the year.

Concurrent with this problem, the subadvisor of one of the big portfolios in the Old Mutual Advisor Funds II, Clipper Focus Fund, was being reorganized. That fund was subadvised by Pacific Financial Research, where three of the firm's principals were retiring (FD, December 2005). The independent trustees chose Old Mutual affiliate Barrow, Hanley, Mewhinney & Strauss as the new subadvisor for the Clipper Focus Fund. The Clipper Focus Fund is run differently from the Clipper Fund, whose board chose not to use Barrow Hanley as a subadvisor. The Clipper Fund moves in and out of the market based upon its portfolio assessments whereas the Clipper Focus Fund is usually full invested, which reflects why the board stayed with Barrow Hanely.