Two fund firm upstarts off to very different starts

Virtus' share price -- and assets -- have soared since going public in 2009; not so much for Arto

Feb 17, 2013 @ 12:01 am

Vritus, Arto, mutual funds
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Virtus Investment Partners Inc. and Artio Global Investors Inc. set out on their own in 2009 within nine months of one another. The paths of the two money managers couldn't have been more different.

Virtus, which started as a virtually unknown money manager, has surged 19-fold since its public debut as assets have soared. Artio, which listed in September 2009 after spinning out from Switzerland's 122-year-old wealth manager Julius Baer Group Ltd., saw its life as an independent firm come to an abrupt end with its Feb. 14 acquisition by Aberdeen Asset Management Plc after assets slumped and shares plunged about 90 percent.

Virtus, spun off four years ago from a small Connecticut- based insurer under pressure to boost its share price, advanced the most of any U.S. money manager after a diverse fund lineup and top managers attracted investors. At Artio, returns at its mainstay international stock funds slumped, prompting redemptions and a 75 percent decline in assets. The diverging journeys underscore the importance of diversification and, more so, performance, said Steven Schwartz, an analyst at Raymond James & Associates in Chicago.

“Timing is everything,” Schwartz, who covers asset managers including Virtus and Artio, said in a telephone interview. “Virtus since it went public has had some funds that have done phenomenally well while Artio's performance turned down at exactly the wrong time.”

Share Record

Virtus's broad range of strategies increased the chances it would have something to offer that captured the public's attention, said Schwartz. Artio's concentration left it with nothing to fall back on when its international funds faltered, he said.

Virtus, which went public at $9 a share on Jan. 2, 2009, and a capitalization of about $50 million, rose 0.5 percent to $167.02 at 1:17 p.m. New York time, giving it a market value of $1.3 billion, according to data compiled by Bloomberg. The stock reached a record of $167.44 earlier today. Of the three analysts who follow the Hartford, Connecticut-based company, two, including Schwartz, have a buy recommendation. The stock was the best performer in the 20-member Standard & Poor's index of asset managers and custody banks every year since it started trading.

Six analysts had recommended holding Artio shares and only one had a buy rating on the stock prior to the takeover announcement. Aberdeen agreed to pay $175 million, or $2.75 per share, for New York-based Artio. The shares closed at $2.05 on Feb. 13, the day before the transaction was announced, 92 percent lower than the $26 debut price on Sept. 23, 2009.

Declining Assets

“With the decline in our assets under management over the last couple of years, we felt there would be a significant benefit in partnering with an organization like Aberdeen, which has vast financial strength and a global footprint of analytical resources,” Artio Chief Executive Officer Tony Williams said yesterday in a conference call after the deal was announced. Williams declined to comment beyond what he said on the call, Neil Shapiro, a spokesman, said in an e-mail.

Both firms went public in a difficult market for asset managers, as investors, reeling from losses during the 2007-2009 financial crisis, fled actively run stock funds for the perceived safety of bonds. Pacific Investment Management Co., which specializes in bonds, attracted more than $60 billion to its mutual funds in 2012 while American Funds run by Capital Group Cos., known for stock picking, had redemptions of about the same amount, according to Chicago-based Morningstar Inc.

Live, Die

Virtus, which was spun off from The Phoenix Cos., has what is known as a multimanager model, owning money-management firms such as Duff & Phelps Investment Management Co. and Euclid Advisors LLC, and hiring others as sub-advisers to run its mutual funds. Virtus has 48 traditional mutual funds and eight closed-end funds that cover the spectrum of investment choices, from domestic and global stocks to bonds in developed and emerging markets.

“We don't want to live or die on one strategy,” George Aylward Jr., CEO of Virtus, said in a telephone interview.

The rising share price provides an incentive to managers at the fund units, who are compensated, in part, with stock, said Aylward.

Virtus's multimanager structure is different from the model used by Artio, which controls its own mutual funds under a single brand. Yet like Virtus, the managers at Artio did stand to benefit from rising shares. Artio managers Richard Pell and Rudolph-Riad Younes were the second- and third-largest investors in the company as of November, according to data compiled by Bloomberg.

Industry Accolades

“Structure and how you handle compensation can't always explain success in money management,” Geoff Bobroff, a mutual- fund consultant based in East Greenwich, Rhode Island, said in a telephone interview.

Some of Virtus's fund strategies have caught on with investors. The $7.6 billion Virtus Emerging Markets Opportunities Fund attracted $3.4 billion in 2012, according to data from Morningstar. The research firm last month named the manager, Rajiv Jain, international stock manager of the year.

In 2011, the fund lost 2.9 percent compared with a decline of 18 percent, including reinvested dividends, for the MSCI Emerging Markets Index, according to data compiled by Bloomberg.

The $7.4 billion Virtus Multi-Sector Short Term Bond Fund won $1.9 billion in deposits last year. It outperformed 99 percent of rivals over the past five years, according to data compiled by Bloomberg. It has been run since 1993 by David Albrycht.

Investors Rewarded

Virtus, which manages $45.5 billion in assets, got $6.7 billion in deposits in 2012, the company reported. Franklin Resources Inc., which had $782 billion in assets at year-end, attracted about twice the money in that same period.

Since Jan. 3, 2009, Virtus has returned almost 1,500 percent. The next-best performing stock in the asset manager index is Beverly, Massachusetts-based Affiliated Managers Group Inc., which gained more than 200 percent.

Jeffrey Thorp, founder of New York-based Sonoma Capital Management, bought Virtus shares in 2009 because he thought the stock was cheap and ignored by other investors.

“We have been well rewarded from a change in the market and a management team that has done an excellent job,” he wrote in an e-mail. Sonoma owns 9.5 percent of Virtus' shares, according to data compiled by Bloomberg.

'Glory Years'

Artio previously was the U.S. arm of Zurich-based Julius Baer, the Swiss wealth manager founded in 1890. While the company runs stock and bond offerings, it is best known for its focus on non-U.S. funds, with funds including the Artio International Equity Fund, run by Younes and Pell.

“This mutual fund is like the Boston Celtics or the New York Yankees in their glory years,” Morningstar's Gregg Wolper wrote in a Dec. 2006 note.

Between 1993 and 2008 the fund gained 6.2 percent a year compared with 1.8 percent for its benchmark index. Then the pair missed out on the rally in bank stocks that began in March 2009, and bet too heavily on a 2011 rebound in Chinese stocks that failed to materialize, Wolper said in a telephone interview.

The result: Over the past three years Artio International trailed 96 percent of rivals.

'Below Par'

Investors responded by taking their money elsewhere. The fund and a similar strategy run by the same two managers have experienced redemptions of more than $17 billion since the end of 2008, Morningstar data show. The firm's assets shrunk to $14 billion as of Jan. 31, down from almost $56 billion in September 2009.

James Meynard, the executive director of the Georgia Firefighters' Pension Fund, was part of the exodus. The Conyers, Georgia-based pension fund, which has almost $600 million in assets, pulled $46 million from Artio last year.

“They had gotten below par,” he said of the international managers.

Artio's Williams replaced Pell as CEO so the latter could concentrate on investment management, the company said in an Oct. 30 statement. Williams had been president and chief operating officer.

“It is essential that we turn around performance in our international equity strategy,” Williams said in an October conference call.

In August, the company closed four U.S. equity funds with $143 million in assets and said it would cut 25 positions. Artio cut the same number of people in September 2011.

'Turn Again'

Michael Kim, an analyst with Sandler O'Neill & Partners LP in New York, who had a hold rating on the stock, said Artio's bond funds have fared better than its equity funds. The $2.1 billion Artio Total Return Bond Fund beat 78 percent of peers over the past five years, data compiled by Bloomberg show. The $2.9 billion Artio Global High Income Fund beat 68 percent of rivals over the same stretch.

Schwartz of Raymond James said the managers of the international funds did “fantastically” for many years and have done well again in the early part of 2013.

“Things could turn again,” he said.

<-i>--Bloomberg News--


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