Alliance, MFS faring best after market-timing woes

Oct 10, 2005 @ 12:01 am

By Douglas Appell

BOSTON - Two years after Eliot L. Spitzer's market-timing dragnet, AllianceBernstein Capital Management LP and MFS Investment Management Inc. are the strongest asset gatherers among firms that paid hefty fines to settle with regulators.

Money managers especially hurt by the double whammy of the New York attorney general's investigations and a five-year slump in growth stocks, including Putnam Investments LLC and Janus Capital Group Inc., are still waiting to turn the corner.

Other heavyweights that continue to see net outflows include AMVESCAP PLC, as investors await the plans of new chief executive Martin Flanagan, and Columbia Management Group Inc. of Boston, which is working through the 2004 merger of its operations with those of parent Bank of America Corp. of Charlotte, N.C.

New York-based AllianceBernstein - created after Alliance Capital Management LP acquired New York value shop Sanford C. Bernstein & Co. LLC in mid-2000 - and Boston-based MFS, which had relatively strong value and international-equity offerings, both appear to have turned the corner, said Geoff Bobroff, president of Bobroff Consulting Inc., an East Greenwich, R.I.-based firm that advises the mutual fund industry. Putnam, by contrast, is still seeing large outflows, although at this point, "I'm not sure I can fully attest to why," he said.

Alliance spokesman John Meyers said executives at the company declined to comment for this story. And MFS spokesman John Reilly said executives at the company declined to comment, as it had put its house in order and "moved on."

Numbers look good

Year-to-date asset flow numbers support that contention. MFS manages $150 billion, up from $146.4 billion at the end of 2004. AllianceBernstein manages $543 billion, up from $508.5 billion, after adjusting for the sale of almost $30 billion in money market assets to in Pittsburgh-based Federated Investors Inc.

Among firms heavily invested in growth stocks when the technology bubble burst, Denver-based Janus manages $130 billion in assets, down from $139 billion at the end of 2004; Boston-based Putnam manages $194 billion, down from $213 billion; and London-based AMVESCAP manages $373.2 billion, down from $382.1 billion.

Of course, Alliance itself was a pure growth shop before it purchased Bernstein, and its numbers mask the trauma that part of its operation has endured. In December 2000, the firm's $196.1 billion in growth equity assets dwarfed its $90.9 billion in value equities. Today, at $133 billion in assets, Alliance's growth division is overshadowed by the firm's $218 billion in value equities.

Analysts credit Alliance for one of the strongest responses to the market-timing scandal. The firm used the opportunity to make sweeping changes it couldn't otherwise have made, allowing a cadre of respected Bernstein managers to take over the organization quickly, said Neil Bathon, president of Boston-based Financial Research Corp.

Those managers "aggressively reorganized that entity around their own business model, and that's really helping them," said John E. Coyne III, president of Berwyn, Pa.-based Brinker Capital Inc., a provider of managed-account and mutual fund services.

Looking ahead, analysts predict that investment performance will be the final arbiter of which firms win and which lose. After the roller coaster ride of the past decade, however, consistency is at a premium. It's become clear that "people who shoot the lights out are taking on more risk to get there," and a single year of good numbers won't be enough to win back investors, said Mr. Bathon.

Turning the tide

That's especially so for firms such as Putnam that are heavily dependent on brokers and financial planners for distribution. Those intermediaries have "a long institutional memory," and they'll demand years of "compellingly good performance before they'll even think of going back to you," said Donald L. Cassidy, senior research analyst in Denver with Lipper Inc. of New York.

In separate interviews, Charles "Ed" Haldeman, chief executive and president of Putnam, and Gary D. Black, Janus president and chief investment officer, conceded the point but expressed confidence that the improved, steady investment results their firms are achieving eventually will turn the tide.

"I don't know that there's a silver bullet, other than day after day, month after month, year after year, do the right thing for our investors," said Mr. Haldeman.

He and Mr. Black noted that portfolio managers at their companies are compensated more for their three- and five-year numbers than for 12-month returns, with rewards for consistently achieving modest targets of being in the top half or third of their peer groups. Being in the top one or two deciles might win bragging rights but no extra compensation.

Another common theme: Both executives said they've worked hard to empower portfolio managers and analysts - moves that have offset the sobering effect that asset outflows might otherwise have on morale.

Getting senior portfolio managers to "believe in the recovery of the business" is a top challenge for these firms, and many have sharply boosted compensation to hold on to those people, said Donald H. Putnam, managing partner of Boston-based merchant bank Grail Partners LLC. (Mr. Putnam is not related to the founding family of Putnam Investments.)

Mr. Haldeman said Putnam Investments has more money to pay its portfolio managers after three years of slicing away layers of management - in line with the CEO's quest of changing the "highly centralized, bureaucratic" culture he found when he joined the firm three years ago.


Money, though, isn't as important to portfolio managers as job satisfaction and the work environment, and giving them more control and less red tape to deal with promotes that end, he said.

At Janus, four portfolio managers participate in the firm's executive committee meetings as one means of ensuring that the firm is "investment-centric, not distribution-centric," Mr. Black said.

He and Mr. Haldeman said their firms have turned the corner as far as performance is concerned.

At Janus, "performance has been outstanding," with 80% of the firm's strategies besting their peers' on a one-year basis and 70% on a three-year basis, Mr. Black said. Among the company's stellar products is the $1.2 billion Janus Adviser Forty Fund, which delivered an "off the charts" gain of 27% for the year ended Aug. 31, and the $9.7 billion Janus Twenty Fund, with a 23% return for the same period, he said.

Mr. Haldeman said that funds representing 80% of Putnam's mutual fund assets are in the top half of their Lipper categories, with only 4% in the bottom quartile, while flagship multibillion-dollar funds - including Putnam's Investors Fund, the International Equity Fund and the Global Core Fund - are delivering top-quartile returns.

As the ghastly performance data from 2000 begin to give way to the strong numbers being generated today, however, five-year rankings for their firms' offerings should quickly improve, the executives said.

"Our hope is that sometime in the year 2006, we get into positive net flows" for both institutional mandates and mutual funds, said Mr. Haldeman.

Mr. Black said Janus' institutional business should enjoy net inflows of more than $10 billion in 2005, led by the firm's Palm Beach Gardens, Fla.-based quantitative unit, INTECH, but helped by Janus equity strategies, as well. And 12 to 18 months out, Janus' good performance and beefed-up sales force working with intermediaries should succeed in pulling in net flows on the mutual fund side, as well, he predicted.

Mr. Black said a long-overdue revival of interest in growth stocks also could add some wind to Janus' sails in the coming year.

By contrast, Mr. Haldeman said he isn't focused on predictions that growth will come back at last, with Putnam instead looking to prove that it can add alpha for a range of products in both up and down markets.

Grail's Mr. Putnam said that it might take another year to determine which firms have pulled off the "very tough job" of rehabilitating their brands and performance. Perhaps half of those heavyweight firms will be no stronger in a year than they are today, he predicted.


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