Active Management Woes Be Damned

When Steve Peacher, then chief investment officer of Canadian insurance company Sun Life Assurance Co.’s $100 billion general account, went to the company’s board with a proposal to build an asset management company in 2012, he was confident — in spite of the odds stacked against him.

After four decades of fairly easy growth and cushy margins, the majority of asset managers at the time were experiencing the first pangs of an existential midlife crisis that persists today. Most are still trying to reinvent themselves amid fierce competition from almost-free index funds and robo-advisors, investor anger over high fees and a lack of protection from the financial crisis, and regulators eager to enact more rules to rein in the once freewheeling business. What’s more, Sun Life already owned MFS Investment Management in the U.S., an active manager that happened to be doing well. Why tempt fate with a second business?

But Peacher, who ran fixed income at Columbia Management and the high-yield group at Putnam Investments before joining Sun Life in 2009, thought that not all areas of asset management were facing a dim future. Investors wanted alternatives like real estate and private debt deals, while corporate pension plans were implementing liability-driven investing strategies to neutralize interest rate risks and hedge their liabilities. To Peacher, just those two overlapping sectors of the industry — which MFS doesn’t offer — were exactly what Sun Life did all day for its general account.

But the clincher for the board was the perfect pitch it could use to woo clients if it had a third-party asset management business that offered strategies it also used itself. Sun Life would be investing right alongside clients, taking the same risks and getting the same rewards. Pension funds, endowments, and other institutions were increasingly realizing that if they were in the same pool with their managers’ own money, there was a lot less incentive for things to go off the rails. “Co-investments were the cornerstone,” says Peacher.

The board said yes. Sun Life Investment Management, as it is now known, initially seeded a number of new products, including putting a $650 million portfolio of commercial mortgages, private fixed income, and real estate into a fund, and targeted Canadian municipal and corporate plans that were familiar with the Sun Life name. But if parent Sun Life was going to build a new asset manager, it wanted it to make a significant difference to its earnings, which amounted to about C$2 billion annually.

Sun Life Investment Management needed to break into the U.S. to do that. “The U.S. is so competitive, with so many asset managers, and our name is not as well-known in the States,” says Peacher, who is now president of SLIM. “We needed to make an acquisition.” 

In 2015 the company made three: Ryan Labs, a $5 billion boutique that focuses on core fixed-income and liability-driven investing and is in the top decile of performance compared with its peers; Prime Advisors, a manager of customized fixed-income portfolios for midsize insurance companies; and Bentall Kennedy, a Toronto-based real estate investment manager that invests in Canada and the U.S. Bentall Kennedy was owned by management and two pension funds, including California Public Employees’ Retirement System. But the company’s management team was looking for a new owner so it could expand beyond the pension funds and offer a more diversified product lineup.

Sun Life thought the three “bite-size” acquisitions had plenty of room to run. The company could offer strategies such as private credit to Prime’s insurance clients; at the same time, it could grow Ryan Labs five- or sixfold once the small firm had access to Sun Life’s resources.

Randy Brown, now CIO of SLIM as well as Sun Life’s general account, says he joined the insurance company as CIO of the general account so that he could also help Peacher build the third-party asset management business.

“My day job was running the general account, then Steve would get my afternoons, nights, and weekends,” laughs Brown, who was hired by mortgage-backed securities inventor Lew Ranieri to work at Salomon Brothers in the late 1980s. Brown went on to run liability-type investments, particularly for insurance clients, for BlackRock, and later for Deutsche Asset Management.

Brown says SLIM has a unique opportunity to build an asset management business during a period of change for some of its clients. “Insurance companies and pension funds are converging,” he says. Insurance companies have long run their portfolios with a focus on matching their assets to liabilities to reduce risk. Pension funds historically haven’t used that framework, instead investing in equities and other riskier assets. But now both are shifting: Insurance companies need to increase their higher-returning investments, given the low rates they’re earning on traditional fixed income, and corporate pensions need to reduce their risks.

Acquisitions in the asset management business don’t have a great history of working well. Amy Price, president of Bentall Kennedy U.S., says the management team was looking for a parent that would allow it to remain fairly autonomous, while also helping it with things like distribution. That independence, they thought, would help the deal work. Price says her biggest surprise since the transaction has been the lack of employee — and client — departures.

“When there is a change in ownership, you immediately get put on a soft watch list,” says Price. CalPERS, which is still one of the firm’s largest clients, was supportive but skeptical. The pension told the asset manager that the “industry doesn’t have a great record when it comes to acquisitions. We’ll give you the benefit of the doubt, but if there is any change, we’ll have a problem.”

In the end, everything clicked. “It came down to the fact that we got the best of both worlds. We run the business as we always have, yet with more resources and strength behind us,” Price says. As part of SLIM, Bentall Kennedy is now considering how to expand from core real estate to higher-risk and higher-returning products. The firm is now in the market with a small real estate fund targeting investments in cities with highly educated populations such as Boston; Sun Life has committed $50 million in capital to this fund.

Although Sun Life isn’t competing in some of the harder-hit spots of asset management, it’s still subject to some of the same headwinds.

“We’re in the same pool as other asset managers facing increased costs and fee compression,” says Brown. “But I need to invest my balance sheet no matter what. So the marginal cost for me to take on the marginal client isn’t that high.”