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Missing the Iceberg

James O’Shaughnessy, who spun out his Bear Stearns equity boutique, now looks to expand.

Money manager James O’Shaughnessy has good timing. He sold his quantitative equities shop, O’Shaughnessy Capital Management, to Bear, Stearns & Co. in 2001 in the middle of the dot-com bust. He managed about $500 million in assets at the time, and Bear Stearns Asset Management had $21 billion under management, a mix of alternatives, mutual funds and separate accounts. By the end of September 2007, O’Shaughnessy’s assets under management had grown to $12 billion and were 62 percent of BSAM’s long-only equity assets.

In March, as Bear Stearns Cos. was being sold to JPMorgan Chase & Co., O’Shaughnessy was off on his own again, having taken 14 BSAM employees and his five-member management team with him. BSAM began transferring assets to O’Shaughnessy’s new firm in September and completed the transition at the end of March. O’Shaughnessy’s firm will remain subadviser to some BSAM clients; others have contracted with his new firm directly. O’Shaughnessy did not pay anything up front in the deal. Instead, BSAM (now JPMorgan) took a minority stake in the new firm and a revenue sharing agreement on existing assets, but not new growth. O’Shaughnessy announced his plans last summer, saying they were unrelated to the meltdown of two Bear Stearns hedge funds.

He hopes to get additional sales through Bear Stearns’ 500-person brokerage force, which caters to clients with $5 million to $25 million in assets, a segment too small for JPMorgan’s private bankers. JPMorgan CEO James (Jamie) Dimon is keeping Bear Stearns’ brokerage force. One Bear Stearns broker, who declined to be named because of the pending JPMorgan deal, says: “My clients love O’Shaughnessy. His performance record kicks the pants off other guys’.” O’Shaughnessy Small Cap Value Platform, for example, returned 12.32 percent over three years, versus the 5.27 percent of its benchmark, the Russell 2000 value index.

O’Shaughnessy wants to increase his institutional business (institutions now make up about $1.1 billion of the $9 billion in assets his firm holds). He lays out his methods (O’Shaughnessy is a value investor whose favorite metric is the price-sales ratio) in several books. “While others are a black box, we’re a Lucite box,” he quips. He wants to find an institution in the U.S. with which to form a partnership, and he has a deal to subadvise seven mutual funds, representing about $6.2 billion in assets, for Royal Bank of Canada. O’Shaughnessy also is looking for distribution in Europe, Asia and Australia and is planning to launch hedge funds. “But with very little leverage,” he hastens to add.