Plenty of chief executives like to think of themselves as hard-nosed, but Scott Powers has been officially certified as such. In 1982, as a right-wing forward on Harvard College's varsity hockey team, the fireplug-sturdy economics major won the school's Ralph (Cooney) Weiland Award for aggressive play by skating hard into the corners and slamming into his opponents to dig out the puck.
"He'd look you in the eye and say, 'You and I gotta do battle,'" recalls William Cleary, an Olympic gold medal winner who was Powers's coach at Harvard. "And he'd come away with the puck."
Powers has needed every bit of that scrappiness since becoming CEO of Boston-based Old Mutual Asset Management in September 2001, barely a year after Anglo-South African insurer Old Mutual plc acquired and renamed flailing, dysfunctional United Asset Management Corp. for $1.6 billion. UAM was founded in 1980 by former Putnam Investments CEO Norton Reamer, a visionary who understood how regulatory changes like ERISA and the 1975 deregulation of brokerage commissions would make the institutional business more lucrative. A network of 43 U.S. affiliates stretching from Connecticut to California, UAM gave its money managers near-total independence in return for a share of their revenue, but it faltered under the pressure of rising distribution and technology costs and was wounded by its managers' tilt toward value stocks during the tech bubble of the late 1990s, when growth was king.
A veteran sales and marketing executive, Powers barreled into Old Mutual with his managerial elbows flying. He lost no time junking the firm's business model, substituting profit-sharing for revenue-sharing and radically streamlining the group. He hived off 27 money managers - and added three - while working to unite and rebrand the far-flung affiliates as a single, integrated multistyle solution for investors.
The results have been impressive. Net outflows of $15.1 billion in 2001 had turned into net inflows of $26.3 billion by year-end 2005. Last year the group recorded earnings before interest, taxes, depreciation and amortization of $214 million, up 34 percent from 2004 and double the level reported by UAM in 1999, its last year of independence. Powers wants to triple ebitda in the long term so that his operation will bring in one third of Old Mutual plc's earnings worldwide, up from the 22 percent it currently provides (together with a life insurance business that was acquired from St. Paul Cos. in 2001 and placed under Powers's authority in May).
Yet his firm faces considerable challenges, many endemic to the increasingly competitive asset management industry. Fees are under pressure, distribution is increasingly expensive, regulatory scrutiny is intensifying, and as more corporate pension funds freeze or end their retirement plans, institutional growth prospects are waning. This is all particularly troublesome for Old Mutual, as about 90 percent of its assets are institutional and produce skimpier management fees than those in the retail space. In addition, nearly one third of the group's assets are in lower-margin fixed-income assets, and half are value-oriented at a time when Powers thinks the market cycle is again turning toward growth.
The still-burly CEO sums up with typical directness: "The areas where we are light are growth, equity and retail-oriented assets," from his glass-walled corner office 53 stories above Boston Harbor, the CEO's eyes are firmly fixed on the rough patches all around him.
For one, performance has been spotty. Old Mutual's retail funds have generally lagged their Morningstar benchmarks. And although assets under management have doubled, from $123 billion in 2000 to $230.8 billion as of June 30, the firm remains mired in the middle of the pack of major fund management companies. At the end of last year, Old Mutual finished 31st in Institutional Investor's ranking of the 300 biggest U.S. money managers, the same position it held in 2000.
Powers must also overcome two embarrassing setbacks. Last November the directors of the $6.2 billion-in-assets Clipper Fund fired Old Mutual affiliate Pacific Financial Research of Beverly Hills, California, as the fund's subadviser (see box). That led other investors to withdraw, reducing Pacific Financial's assets under management from $16.7 billion to just $2 billion at the end of 2005. In the fourth quarter Old Mutual expects to lose a further $10.4 billion in assets - mainly small- and midcap value stocks and core-plus bonds - when Los Angeles-based affiliate First Pacific Advisors completes a management buyout. Both episodes stem from disputes over Old Mutual's switch from revenue-sharing to profit-sharing.
Old Mutual's dependence on institutional investors worries Powers: The oldest baby boomers will reach age 62 in 2008. McKinsey & Co. estimates that $8.7 trillion in retirement assets will be "in motion" for the following five years, including $1.5 trillion in 401(k) plans and $180 billion in corporate, state and local defined benefit plans. That's money that Old Mutual stands to lose - and can't pursue without a strong retail franchise.
"A significant part of our business is going to shift into the retail space," says Powers. "We need to shift in advance of that."
True to form, the CEO is meeting the challenge head-on. He is investing heavily in a major retail expansion that he hopes will boost retail assets from 11 percent to one third of the group's total in about five years. He is shopping for growth-oriented managers to replace lost assets: In August, Old Mutual was in talks to buy Ashfield & Co., a large-cap growth manager in San Francisco. And like many of his peers, he is looking to hedge funds to provide alpha for his clients: Last year Old Mutual affiliate 2100 Capital, a fund of hedge funds, acquired another fund of hedge funds, Larch Lane Advisors of Purchase, New York, and registered a new hedge fund with the Securities and Exchange Commission.
The retail push won't come cheap: Powers plans to spend between $15 million and $20 million this year on the repackaging and distribution of institutional funds for the retail market. This includes a costly rebranding campaign. The group's fund offerings now start with the Old Mutual parent name and incorporate part of the sponsoring affiliate's name. The Old Mutual Barrow Hanley Value funds reflect the investment style at Dallas-based Barrow, Hanley, Mewhinney & Strauss, and the Old Mutual Analytic Defensive Equity funds indicate the absolute-return strategy at Los Angeles-based quant shop Analytic Investors.
"We have made a conscious decision to use the Old Mutual brand to cover the whole waterfront," says Powers, who doesn't think any single affiliate brand can be stretched that far.
As a result of the retail effort, Old Mutual's earnings are expected to grow by only 5 percent this year, to $225 million, rather than the 15 percent likely without the spending, estimates Greig Paterson, an analyst at Keefe, Bruyette & Woods in London. The firm's operating margin - 26 percent at year-end 2005 - is low by industry standards. By contrast, archrival Affiliated Managers Group posted a 37.3 percent operating margin in the first quarter of this year.
Powers has marshalled a small army for his U.S. retail offensive - a total of 1,100 employees, including 260 investment professionals - but his assets are deployed in a lopsided manner. About 60 percent are managed by just three companies: Boston quant shop Acadian Asset Management, value-oriented Barrow and fixed-income manager Dwight Asset Management Co. About 66 percent of total assets are in defined benefit and defined contribution plans and about 23 percent are in subadvisory plans. The remainder are in retail.
The CEO has the support of London-based parent Old Mutual plc. But the parent company is itself under pressure to boost profits after acquiring the non-U.S. operations of Swedish financial services firm Skandia for $6.9 billion in February, following a six-month takeover battle.
James Sutcliffe, CEO of Old Mutual plc, says of the U.S. money management business: "I'd like the margin to be nearer to 30. That's partly why it's our strategy to move into retail. We're still coming out of the investment phase of that business. We're not seeing it come to its full glory in the margin."
Powers is "making a big bet," says Mellon Financial Corp. vice chairman Ronald O'Hanley, who was Powers's boss when the latter was in charge of sales at Mellon in the late 1990s. "He's got high-performing U.S. institutional, and he's layering in retail. How do you layer in high-performing retail?"
For now, the CEO is concentrating on the cheaper of the two main retail channels: Denver-based affiliate Old Mutual Capital, which Powers converted into the group's distribution arm, is approaching wire houses like Citigroup SmithBarney and Merrill Lynch & Co., with which money managers share fee revenue in return for the equivalent of eye-level supermarket shelf space. To reach individual investors through the other channel - financial advisers - takes an army of wholesalers, and Old Mutual Capital has only 34. That's less than half of the sales force employed by MFS Fund Distributors, the retail distribution arm of Boston-based MFS Investment Management.
Meantime, Old Mutual Capital CEO David Bullock has been busy repackaging institutional funds as retail funds. As of mid-August, Morningstar tracked 29 Old Mutual-branded funds with a total of 130 share classes, most not yet rated. "This is a new frontier for Old Mutual," says Bullock. Last year retail funds brought in about $2 billion in assets for the group, and Bullock predicts he'll raise $5 billion annually within three to five years.
Powers is hoping that individual investors who have never heard of Old Mutual will be attracted to the impressive performance of its affiliates. "We've got to establish ourselves in a very crowded, fragmented market," he says. "The world is not waiting for a new mutual fund with bated breath."
Among his brightest hopes is quant shop Analytic Investors, whose assets soared by about 50 percent last year, to $10.2 billion. With a five-star Morningstar rating, the $607 million Old Mutual Analytic Defensive Equity Z-shares fund was up 13.63 percent over three years as of late August, 27.86 percentage points more than the Standard & Poor's 500 index on a total return basis for the same period.
Converting an institutional fund into a retail fund can be difficult. Retail investors want to see the Morningstar seal of approval, but the Chicago-based firm requires three years of performance before it will assign a rating to a mutual fund that is repackaged in a new share class. The same rule applies to mutual funds that are created from scratch. The CEOs of Old Mutual's affiliates, however, don't care how their funds are sold as long as new assets keep coming in. "Retail is just another avenue for us," says Dwight CEO Laura Dagan. "It's not my problem. It's Dave Bullock's headache."
It's also Scott Powers's headache.
GROWING UP IN MEDFORD, MASSACHUSETTS, A blue-collar suburb of Boston, "I didn't know about the money management business," recalls the 47-year-old CEO. "Around our kitchen table we didn't talk about money, because we didn't have a lot of money."
Powers's father, Andrew, was a reporter for the Record American tabloid newspaper who at one point covered the infamous Boston Strangler; his mother, Phyllis, was a nurse. The fifth of nine children, Scott was born with a defect that, after bungled surgery, left him with four stumps instead of fingers on his left hand. Thanks to sheer grit and determination, he was able to overcome the impairment and even excel at hockey. One summer, at age 13, he was playing the game in Boston when he was approached by a hockey coach from the Cardigan Mountain School in Canaan, New Hampshire. The coach asked Powers if he was interested in prep school. "What's a prep school?" the teenager asked. He went on to attend elite St. Paul's School in Concord, New Hampshire, and was voted best male athlete.
Accepted by Harvard as a financial aid student, Powers worked part-time as a bartender at the now-defunct Chatham's Corner bar in Boston's Faneuil Hall. When he ran out of money, he took a year off to sell Warner Cable TV door to door. Although he focused much of his attention on hockey - "I graduated summa cum barely," he jokes - he never seriously considered trying to go professional. Today he maintains an active interest in the sport and occasionally runs into former Harvard coach Cleary while squiring his nine-year-old son around ice rinks in the Boston area. Powers's wife, Nancy, a Harvard English major when the two first met, stays home with their three children, who range in age from six to 11.
Determined to go straight into business after earning his undergraduate degree in economics in 1983, Powers returned to selling cable TV subscriptions in the Boston area, working door-to-door on a straight commission basis. "You delivered something and got rewarded for it, and that was appealing to me," he says. Next he joined Burroughs Corp. (now Unisys) and moved to San Diego to sell computer equipment. Before long he met the head of Dean Witter Reynolds's local office, who recruited him in 1986 as a retail stockbroker. In that job he relentlessly cold-called clients, generating commissions throughout the crash of 1987 and the subsequent rebound. He resigned in 1989 - two years after his father died at 57 of a heart attack - and returned to Boston.
Powers made his first foray into asset management in 1989, as an investment fund salesman, traveling the upper Midwest, suitcase in hand, for Boston Co. before it was acquired by Mellon Bank Corp. in 1993. In 1995, Boston Co. Asset Management CEO Desmond Heathwood quit to start a rival asset manager, Boston Partners Asset Management (since acquired by Dutch fund manager Robeco Groep); he took with him the CIO, the COO, the head of sales and marketing and six of the seven members of the equity policy group. The turmoil rattled investors: Boston Co.'s assets under management fell from $24 billion in March 1995 to $13 billion that December.
Sensing a chance for advancement, Powers turned down an offer to join Boston Partners. Instead, he told Heathwood's replacement at Boston Co., Christopher (Kip) Condron (now boss of AXA Financial), "If you're willing to give me a chance at being part of the leadership of the company as we rebuild, I'll stay here." He soon was promoted to COO; in that position he used aggressive salesmanship to help drive an almost complete recovery of assets. Rising through the Mellon hierarchy, he became executive vice president of Mellon Institutional Asset Management in 1999, heading the national sales apparatus from Boston. He served as then-CEO O'Hanley's closest confidant as Mellon changed business models, shifting from a holding company to a multiboutique, in which the parent supports and owns a collection of boutiques.
Across town, Mellon rival UAM was purchased in October 2000 by Old Mutual plc as part of a global strategy to grow its asset management business as a complement to its insurance operation. In addition to its 43 U.S. affiliates, UAM had money managers in London and Tokyo; Old Mutual would sell UAM Japan but keep London-based Rogge Global Partners. Like Mellon, Old Mutual favored the multiboutique model. Says CEO Sutcliffe, "We felt the world was moving toward what clients wanted - a big chunk of their assets in specialists' hands." UAM was bought for a bargain, he says, "because the asset management industry itself had decided that this revenue-sharing model didn't work." (UAM founder Reamer, who now runs Asset Management Finance Corp. in New York, declined to be interviewed for this article.)
Old Mutual installed as CEO Kevin Carter, a South African who set out to reduce the size of the U.S. group and switch to profit-sharing. A chemist by training who had run Old Mutual Asset Managers (UK), the insurer's London-based money management arm, Carter concluded that the company should keep just seven affiliates, two of which were predominantly growth-oriented. The other 36, mainly value-oriented managers, were to be sold to the highest bidders. But Carter spent too much time shuttling between his London home and the Boston office to act on this grand design, and Sutcliffe decided to look for a Boston-based executive to lead the business. (Carter declined to be interviewed.)
Like the prep-school hockey coach who had spotted the adolescent Powers on the ice, the London-based executives of Old Mutual plc saw great promise in the hard-charging Mellon executive. They recognized that Powers's experience in managing Mellon's complex of boutiques would be a great asset for their U.S. group, and they hired him in August 2001. He began work the next month.
THE NEW CEO LOST LITTLE TIME IN TACKLING Old Mutual's problems. Just days after walking into the firm's headquarters in John Hancock Tower to meet the staff, Powers flew off to visit some of his money managers, stopping first in Los Angeles for board meetings at two affiliates, Analytic and Provident Investment Council.
When the World Trade Center was destroyed on September 11, commercial flights were grounded nationwide and Powers was stranded in Los Angeles. By all accounts, he succeeded in instilling calm throughout the Old Mutual group - a display of leadership that would reinforce his command of the company while reassuring affiliates that they were in safe hands.
But there was no denying that Powers had inherited a firm in disarray. Some of the affiliates were adrift: Their founders had lost interest in them after selling out to UAM. And as long as they shared revenues with Old Mutual, the affiliates had little incentive to cut costs or grow profits.
"UAM suffered from a misalignment of interests," says Michael Rosen, a principal at Angeles Investment Advisors in Santa Monica, California. "It was a mechanism for money management firms to essentially cash out."
Getting the group to agree on anything was difficult. Under UAM's management the boutiques enjoyed full independence; they did not share back-office facilities or coordinate marketing efforts. Indeed, Old Mutual money managers often found themselves competing with one another for institutional business.
Powers agreed with most of his predecessor Carter's conclusions, especially concerning the need to shift from revenue-sharing to profit-sharing. This was already under way at the handful of affiliates - known internally as the "magnificent seven" - that London had decided to keep before hiring him. "We ran all the numbers and iterations out the wazoo," recalls Acadian COO Churchill Franklin. "It seemed to us we could do better under their profit-sharing plan than under the old revenue-sharing plan. It worked."
Says Powers of the old system: "The boutiques each kept 50 cents of revenue and $1 of expense. There was no incentive to invest." Today affiliates deliver an average of 70 percent of their profits to the holding company, which in turn relieves some of their administrative burdens by performing accounting, legal and compliance functions. All affiliates retain control over their own P&L.
Although Powers had concurred with Carter's decision to move to profit-sharing, he disagreed with the plan to pare Old Mutual back to seven affiliates. The handful that Carter had wanted to keep included Acadian; Analytic; Barrow; Dwight; and Pilgrim, Baxter & Associates - together these made up two thirds of total assets under management: about $100 billion. The problem was that more than half of their assets were high-momentum growth stocks that had been bellwethers of the ill-fated bull market. Powers - convinced that the market would be weak for some time and that growth stocks were not about to make a comeback - wanted to keep a variety of managers on hand. He recalls telling colleagues that he was worried that Carter's model would "deliver very volatile performance, and I think there are a lot of money managers in the other group that can bring a better balance to the equation."
At that critical moment the varsity hockey star emerged: Powers cornered his parent company's British and South African executives one by one, did battle with them and won them over to his side. Spreading the risk more evenly from large cap to small cap, from equity to fixed income and from growth to value, Powers sold off only 27 affiliates. Today 16 of the original UAM firms remain in the stable; Old Mutual acquired three more money managers though it sold one of them, eSecLending, in March.
Powers realized that he needed to build a retail business to balance Old Mutual's heavy reliance on institutional money. He hoped to spearhead the retail push with Pilgrim Baxter, but the plan fell apart when the firm became embroiled in the scandals that engulfed the mutual fund industry in 2003 (see box). To overcome this setback, the CEO created Old Mutual Advisor Funds, a family of asset allocation funds. Eager to adopt elements of the Mellon multiboutique model, he formed Old Mutual Capital in June 2004 to distribute a newly born family of OMAF asset allocation funds.
Old Mutual's retail horizon is not without clouds: The cost of the expansion will continue to rise along with distribution expenses in general, and the firm faces fierce competitors who already command prominent placement on wire house platforms.
"The problem is, it's a very, very mature marketplace," says Jim Jessee, president of Boston-based MFS Fund Distributors. "From our perspective, if you end up with funds that have less than $100 million in assets, you are not making any money off them. You could have big cash strains by doing that."
What are Old Mutual's chances of success? "It's dependent on how aggressive they are going to be in pursuing this new channel," says Jeff Tjornehoj, senior research analyst at Lipper in Denver. "The better a deal you can offer these platforms by offering more basis points on assets, the more likely they are to play along."
Competition puts pressure on fees. Although Old Mutual Capital CEO Bullock says fees can be passed on to investors, Dwight is already exploring the upper limits of tolerance. At 85 basis points, the Old Mutual Dwight Intermediate Fixed Income Z-share fund is "a little bit pricey," says Morningstar fund analyst Todd Trubey.
Old Mutual Capital is trying, so far without success, to persuade wire houses to actively sell its mutual funds. The funds can be bought over the open-architecture platforms of firms like Citigroup SmithBarney and Merrill Lynch, but none of those firms has agreed to pick up the phone or knock on doors to sell Old Mutual products. The mutual funds can be purchased through other money managers, such as Vanguard Group, which sells them without transaction fees, providing investors hold them for at least six months. The funds are also sold on broker-dealer platforms, including Charles Schwab & Co.'s OneSource Web site.
"Retail investors tend to concentrate on a small number of fund families," says Paul Hatch, director of advisory services at Citigroup SmithBarney. "What we have communicated to Old Mutual is, 'Come to us using your breadth of solutions to come up with something unique.'"
That combination of talents is precisely what Powers is trying to achieve by promoting coordination over competition among his affiliates. Financial advisers and wire houses cite four Old Mutual managers as having the most potential in the retail race: Acadian, Analytic, Barrow and Dwight.
Because the Lehman aggregate U.S. bond index grew less than 3 percent last year and Lehman's global index was negative, Dwight CEO Dagan says that more than 95 percent of her firm's asset growth in 2005 came from net inflows. Based in Burlington, Vermont, with a stunning view of the Adirondack Mountains beyond Lake Champlain, the 23-year-old fixed-income shop prides itself on its ability to attract talent straight from Wall Street. Chief economic strategist Jane Caron was with Merrill Lynch and then Credit Suisse Asset Management before joining Dwight in 1999; she stood out from the crowd last year by predicting - correctly - that the Federal Reserve would continue to raise interest rates.
Boston-based Acadian, meanwhile, swears by a controversial discipline: Never physically visit a company in which you own stock, and don't buy stocks just because you like them. "We don't have in-house analysts," says COO Franklin. "One of the beauties of objectivity is that you don't need your own people. You don't need to fire your own people when they're inept."
Instead, Acadian invests about one quarter of its annual budget in technology, continually perfecting a process called the Smart Analysts Predictor that uses statistics to forecast changes in buy-sell recommendations even before earnings surprises occur. The firm's Singapore office tracks emerging markets. Investors appear to be satisfied: Net of market appreciation, Acadian raised $14.6 billion in new assets in 2005 and $5 billion in 2004. Morningstar ranks the Acadian Emerging Markets fund at five stars and places it in the 97th percentile. The fund outperformed the MSCI Europe, Australasia and Far East index by 3.6 percentage points during the first seven months of this year and by 24.3 percentage points in 2005.
No doubt Powers would like to build up every Old Mutual affiliate as a showcase for investors. He figures that will get easier if the second generation of management has a greater sense of ownership. As an incentive, he is now rolling out a phantom equity scheme for senior employees of the affiliates.
If anyone displays a sense of ownership, it's the CEO himself. To hear his London-based South African boss tell it, Powers's modest upbringing taught him how to hold on to what he had. "He didn't take things for granted," Sutcliffe says. "When I have a conversation with Scott and say we need so many basis points of margin next year, we don't need to have the conversation twice."
Powers knows exactly what he has to do, and he's moving toward the goal at full speed. i