Long Haul Warriors

John Maynard Keynes was acerbic in berating practitioners of the dismal science. Economists, he noted, prefer to forecast well into the future because of their inability to predict short-term swings in the economy, which would be far more useful. As he memorably put it, "In the long run we are all dead."

Fund managers must empathize with that conviction. Just when it looked as if market sentiment couldn’t get any worse, and analysts were engaging in a grisly competition to predict the bottom of the market ("Do I hear 350 on the S&P 500?"), global equities suddenly staged the fastest rally in decades. The Standard & Poor’s 500 index shot up 23.1 percent in a mere 17 days last month after U.S. Treasury Secretary Timothy Geithner relaunched the government’s plan to mop up toxic assets from the banking system. Was that a bear market bounce or the start of a real recovery? The fact that markets can surprise just as much on the upside as on the downside provides little comfort to fund managers, who are struggling to perform amid unprecedented volatility and redemptions by demoralized investors.

Today’s environment is forcing money managers to reconsider just about every facet of their business — and even whether to stay in it. In a special report this month, we examine how a few managers are reshaping their companies for the long haul.

In "Great Scot!", beginning on page 42, Senior Editor Jo Wrighton shows how inveterate deal maker Martin Gilbert is building Aberdeen Asset Management into a leading European fund manager. CEO Gilbert has been buying small U.K. money managers since the mid-1980s; in the past four years, he has put the strategy on steroids, snapping up a big chunk of Deutsche Bank’s fund business in 2005 and, in December, agreeing to swap a 25 percent stake in the firm with Credit Suisse for $67 billion in assets. Gilbert has shown a knack for achieving efficiencies at asset management businesses that big banks couldn’t operate profitably. But, as Wrighton points out, to truly succeed he needs to prove that Aberdeen can deliver consistently strong investment performance.

Few asset managers have fallen as far as Putnam Investments. The Boston-based outfit helped pioneer the U.S. mutual fund industry in the 1940s and ’50s and rode the technology boom to become the country’s 12th-largest asset manager a decade ago. Since then poor performance, scandal and management uncertainty have caused the business to implode.

In "Putnam’s Last Chance?", starting on page 36, Senior Writer Michael Shari examines the turnaround strategy of Robert Reynolds, the firm’s recently appointed CEO. Reynolds is applying the formula he honed in nearly 25 years at Fidelity Investments: recruiting talent — many of them ex-Fidelity hands — and giving them the freedom, and incentives, to succeed. Reynolds has managed to win back a few clients, but he will need many more if Putnam is to survive in the long term.