SEI gets a run for its money in the growing market for manager-of-managers.
By Laurie Kaplan Singh
October 2001
Institutional Investor Magazine
Though Frank Russell Co. invented the manager-of-managers approach to money management in 1980, the firm lost its hold on the business to SEI Investments in the late 1990s. Now it is SEI’s turn to try to stave off the competition. Both Russell (now owned by Northwestern Mutual Life Insurance Co.) and Northern Trust Global Advisors, a subsidiary of Northern Trust Corp., are stepping up their efforts to attract institutional and retail assets to their programs, with some success.
“The manager-of-managers concept is gaining acceptance worldwide,” says Meredith Brooks, head of institutional services for Russell. “The environment is particularly receptive to delegating the manager selection decision to a professional firm,” she says, noting that a good half of Russell’s asset growth over the past year has come from overseas.
Recent growth has been fueled by the ongoing corporate interest in outsourcing, as businesses try to focus on core competencies. “Corporations around the world are less willing to allocate internal resources to nonprimary business functions,” Brooks says.
“Historically, investment consulting firms provided advice on a nondiscretionary basis,” explains Steve Nesbitt, senior managing director at Los Angeles-
based Wilshire Associates, which also joined the manager-of-managers fray in 1997. On August 30 Wilshire had $7 billion under management, up from $4 billion on September 30, 2000, and up from $2 billion on September 30, 1999. But investors then needed to implement the consultants’ advice, he adds. That was not always easy.
As a result, says Peter Starr, a managing director at Cerulli Associates: “Institutional investors needed to retain and manage multiple, disparate service providers including consultants, money managers, custodians, accountants and recordkeepers. With a manager-of-managers program, they have the option of going to a single source with the capability to cost-effectively perform all of these functions.”
Steve Potter, institutional marketing chief at Northern Trust Global Advisors in Chicago, sees a case of role reversal. “The role traditionally played by the plan sponsor now sits in our office,” he says.
That’s a slight exaggeration - plan sponsors still assume a great deal of responsibility, including at least some fiduciary responsibility. But Northern Trust, Russell, SEI and their cohorts provide an extensive range of services. Among them: asset-liability modeling, asset and style allocation, manager selection, performance monitoring, custody, administration and back-office processing.
Some of those services had once been provided under traditional consulting arrangements. “We work closely with our clients to identify their objectives, their tolerance for risk and their desired asset allocation,” says Russell’s Brooks. “And we spend a lot of time educating our clients about how to respond to market conditions and the need to communicate with both plan participants and the board,” she says. But unlike the consultant who got paid simply for providing this advice, the manager-of-managers is also responsible for implementing all
decisions. That includes hiring, monitoring and sometimes firing managers and performing a host of back-office functions.
At the heart of Russell’s manager-of-managers capabilities is an elaborate manager selection process. “We analyze 6,000 managers in detail,” says Brooks. The firms’ analysts meet with managers, analyze their portfolios and monitor trading activity and performance. “Our objective is to ensure that we hire the best managers and that they do exactly what they said they would do,” Brooks explains.
Although SEI and Northern provide administrative services in-house, Russell farms them out to other service providers, including Northern. “We find the best there is, and we outsource to them,” Brooks says, noting that Russell’s large asset base allows it to achieve significant economies of scale, which it passes on to its clients.
Though Russell pioneered the manager-of-managers concept, SEI, which entered the business in 1996, has been more aggressive in its marketing efforts, drawing on a large network of financial advisers to reel in both retail and institutional accounts.
But Russell is now fighting to gain market share. “We realize that we need to raise our profile,” says Brooks, noting that the firm has increased its worldwide institutional sales force from just three or four in 1997 to about 30 today. A team of 20 is devoted to the U.S. institutional marketplace; five staffers handle Europe. Russell also has two people in Canada, two in Japan, one in Australia and one in South Africa. “We are spending a lot more time reaching out to our clients,” Brooks says.
Although Russell is still No. 2 in market share, its manager-of-managers program experienced asset growth of approximately $5 billion last year. Meanwhile, SEI grew assets last year by approximately $11 billion. SEI’s total assets under management as of June 30, 2001: $80 billion, versus $66.7 billion for Russell. At year-end 1999 SEI had assets of $65 billion; Russell claimed assets of $60.7 billion.
Northern Trust remains the No. 3 player, with $14.6 billion in assets as of June 30 - down from $16.4 billion a year ago. “The decrease is due to the decline in the equity markets, not a loss of clients,” says Jennifer Tretheway, an executive vice president at Northern Trust Global Advisors. Northern’s manager-of-managers program added 14 new clients during the 12-month period, Tretheway reports.
Biding their time
They’re leaving their lawyers alone.
Though rich people believe that President Bush’s tax package will lower the levy on their heirs, they’re not rushing to tear up their wills.
This was one of the key findings in a Phoenix Cos. survey of 1,013 high-net-worth individuals that was conducted in June by Harris Interactive. High net worth is here defined as wealth of more than $1 million, minus debt and excluding a primary residence.
“This group is knowledgeable about the tax law changes, but they are not responding with dramatic changes in their estate plans,” says Walter Zultowski, senior vice president of marketing and market research for Phoenix Life Insurance Co. “In fact, fewer than 5 percent said they anticipate dropping life insurance, terminating one or more trusts, decreasing gifting to children and charities or changing business succession plans in light of the new law.”
Catherine Keating, a managing director at J.P. Morgan Private Bank, is not surprised by these findings. “Normally, a new law means certainty. But this law means uncertainty,” she says.
The federal legislation, which was signed into law in June, gradually increases the amount exempted from estate taxes through 2009 and repeals the estate tax for one year, beginning January 1, 2010. It fully reinstates the tax the following January. Legislators decided that the cost of permanent repeal would be prohibitive.
“It’s very hard to plan in the wake of this law, because you know you’re going to have further laws refining it,” says Keating. She doesn’t expect her clients to seek long-term changes in their estate plans but to search for short-term strategies that will take advantage of annual increases in exemptions over the next few years.
She specifically advises clients to deploy strategies to minimize the gift tax. That’s because while the exemption on estate taxes will rise to $3.5 million before it is repealed in 2010, the gift tax exemption will rise only to $1 million and will not be repealed.
Nearly half of the survey respondents plan to consult a financial adviser about the implications of the new law. Keating believes that most wealthy individuals are using the enactment of the law “as an opportunity to assess their planning. It has heightened everybody’s awareness.”
Richard Martin, who heads Phoenix’s advanced marketing department, agrees that the new law will mainly result in minor “tweaking” of estate plans.
Wealthy individuals may want to pay less in life insurance premiums now and pay out more of a death benefit later, or they may want to give away assets to family members, but at a discounted rate. “Taxes may decrease for now, but they’ll return with a vengeance in 2011,” says Martin.
At the end of the day, this is not a crowd that turns on a dime. “High-net-worth individuals are pretty conservative,” he adds. “They don’t want to do anything radical.” - Rifka Rosenwein
