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THE BUY SIDE - A Storm Brews in Boston
New management seeks to right Boston Co. after staff defections spark an exodus by clients.
At 7:35 a.m. on Monday, August 6, Remi Browne and Daniel LeVan, the two lead portfolio managers of Boston Co. Asset Managements international core equity strategy, marched into the office of a senior colleague and announced that they and five other members of their team were resigning, effective immediately. Then they rushed to join their new employer, John Adams, CEO of Munder Capital Management of Birmingham, Michigan, who was waiting aboard a private jet to fly them to Detroit, according to a lawsuit filed on August 17 by Boston Co. against the seven men and Munder Capital alleging breach of contract, theft of a proprietary investment process and poaching of clients.
Liftouts are hardly rare in the world of money management, but this one has been particularly messy and left Boston Co. scrambling. Institutional investors, who often pull money when their managers change, withdrew nearly $11 billion in August and September from international core strategy portfolios managed by that team, which oversaw about $20 billion of the $76 billion Boston Co. managed before the liftout.
But there was more bad news in October for the venerable money management outfit, now part of BNY Mellon Asset Management, when investors started pulling money out of another fund, an international large-cap value strategy run by portfolio manager D. Kirk Henry, who underperformed his benchmark, the MSCI EAFE index, by 4.06 percentage points on an annualized basis for the three years through September 30. Overall, Boston Co.s assets fell by 14 percent, to about $65 billion, during the third quarter.
In late October, coping with this fallout, the company reshuffled its top management, replacing CEO Corey Griffin with CIO David Cameron, who in turn was succeeded by the former director of portfolio strategy, John Truschel. Griffin, named nonexecutive chairman, will focus on working with clients.
These events created a perfect storm, says Michael Travaglini, executive director of Massachusetts Pension Reserves Investment Management Board, which closed its $1.2 billion account in Henrys international large-cap value strategy on October 2.
Though they have their hands full, Boston Co. senior executives insist they remain confident about the firms prospects. Cameron is hopeful he can win back clients like MassPrim. We have a core competency of superior stock selection, he says, in a world where returns are increasingly more challenging to get.
Adds Ronald OHanley, CEO of BNY Mellon Asset Management: We have put more money into the firm. We are standing by it and making sure it can continue to invest in its own processes and in the renewal of the firm.
OHanley says that the difficulties encountered by two of Boston Co.s investment teams are quite separate from the senior management transition. And he argues that, in any case, the firm can rely on a wide array of investment products, some with excellent records, such as a domestic U.S. large-cap core strategy run by portfolio manager Sean Fitzgibbon that has stayed in the top quartile since January 1, 2006, and has earned a four-star rating from Morningstar for the past five years.
In his new role Griffin has embarked on a global marketing campaign, piggybacking off BNY Mellon, which derives one third of its asset management revenues from non-U.S. clients. For institutional investors, Griffin is pitching a 130/30 strategy an equity product that takes 130 percent long and 30 percent short positions that the firm rolled out in 2007. On the retail front Boston Co. plans to sell long-only mutual funds that it subadvises for Dreyfus, another BNY Mellon subsidiary.
Still, Boston Co. has its work cut out for it. The firms performance problems are not limited to Henrys international large-cap value strategy. Browne and LeVan also underperformed during the first six months of 2007, missing the benchmark MSCI EAFE by 60 basis points after three years of beating the benchmark by more than 5 percentage points annually.
The longer-term track record is what appealed to Munder. In a press release Adams said Browne and LeVan and their team were a tremendous fit with his plan to grow $19.6 billion-in-assets Munder into a diverse asset manager just a year after leading a management buyout from Comerica. Adams, Browne, LeVan and Henry declined to comment.
Not that Munder will find it so easy to woo Boston Co.s clients. The liftout raised questions about whether Browne and LeVan were acting in their own interests or those of their clients, says William Atwood, executive director of the Illinois State Board of Investment, which closed a $281 million account in Boston Co.s international core equity strategy in October. Atwood says he received a phone call from a Munder salesperson on Friday, August 10, just four days after the liftout, but he declined to move the money to Munder.