UAM BATTLES TO PLUG DRAIN OF ASSETS: FOURTH QUARTER LOSS WAS NO FLUKE

United Asset Management Corp. chief Norton Reamer surprised Wall Street last month by announcing that UAM will take a big earnings hit as a result of clients yanking a net $7.5 billion in assets in the fourth quarter alone.

But here’s an even bigger surprise: The giant money management holding company has been battling asset outflows for more than a decade.

Now Mr. Reamer may feel pressure to do something he’s dead set against: Rebalance UAM’s own portfolio by selling lackluster subsidiaries to snap up managers who can deliver higher growth.

Since 1994, Boston-based UAM has been bleeding assets at the rate of $6 billion to $8 billion annually, estimates analyst Neal Epstein of New York investment banking boutique Putnam Lovell & Thornton.

That’s hardly cause for alarm, given that UAM manages $197 billion in assets, but still a vexing problem, considering the strong bull market.

UAM’s troubles also suggest a potential challenge for its imitators, younger upstarts hoping to cash in on the rapidly expanding — and consolidating — money management industry.

Even UAM’s Boston neighbor, Affiliated Managers Group Inc., which went public in November, wrote down the value of two affiliates in 1996 and 1995 after significant customer withdrawals.

Of the three biggest money management holding company consolidators — UAM, Boston-based New England Investment Cos. LP and AMG — only New England has recorded net positive asset flows over the last four years.

writedowns coming

“UAM is focused on building shareholder value by pursuing selective acquisitions, helping its affiliates grow, assisting its firms with operating changes where needed,” Mr. Reamer said last month, after announcing the company would write down the value of two units — JMB Institutional Realty, a unit of Chicago-based Heitman Financial Ltd., and Bryn Mawr, Pa.-based Newbold’s Asset Management Inc.

But 1997 was not a fluke. UAM — the country’s oldest and largest holding company focused on consolidating money managers
— has suffered net client asset withdrawals in eight of the last dozen years.

Mr. Reamer said the asset withdrawals could result in a charge against 1997 pre-tax earnings of up to $175 million. Since then the company’s stock price has dropped 5.6% since last month’s announcement to $22 at presstime. The firm is slated to report fourth quarter and full-year results on Wednesday.

UAM’s troubles have led some industry observers to question its favored strategy of acquiring money managers outright. By contrast, a handful of younger money management holding companies — such as AMG, as well as Westport, Conn.-based Value Asset Management Inc., Boston-based Cypress Holding Co. and Chicago-based Convergent Capital Management LLC — seek controlling equity stakes but usually leave some equity on the table to motivate managers.

Though Mr. Reamer declined to comment, other UAM executives say the Boston company has been hurt by its reliance on institutional managers of defined benefit pension funds, as opposed to mutual fund managers specializing in 401(k)s.

Defined benefit plans — which represent 45% of UAM’s assets — are suffering net withdrawals because strong stock market returns allowed pension sponsors to reduce their cash contributions even as they pay retirees. What’s more, as defined benefit management contracts expire, clients are setting up defined contribution plans which typically use mutual funds.

“The defined benefit industry is in a net outflow position,” says Gregory Dimit, a senior vice president in UAM’s acquisition and business development unit. “You see payments going out to fund pension liabilities, but you don’t see any contributions.”

Nevertheless, competitors like New England say they continue to record net inflows into their defined benefit-oriented units.

Mr. Reamer plans to bolster growth by acquiring mutual fund firms and international money managers. He’s also building both retail and institutional distribution and service networks globally to help stimula
te sales. He is also revamping its incentive pay for managers to reward new business rather than overall revenue growth.

a kind of hemophilia

Putnam Lovell’s Mr. Epstein estimates that since the beginning of 1995, UAM’s net client cash outflows have run four times the 1.5% annual rate of the average money manager holding company.

Though UAM appeared to turn around in 1996, as net asset outflows shrank nearly two-thirds to $3.3 billion, the extent of its client losses was masked by $6.1 billion in net new sales by Pilgrim Baxter & Associates, one of few affiliates that has made a splash in mutual funds.

Yet Pilgrim’s growth stock-picking style lost favor last year and investors withdrew $477 million in assets, according to Boston-based Financial Research Corp.

Analysts note UAM’s troubles are being magnified by some weak acquisitions five years ago.

“Some of the firms they bought were not the most competitive,” says Mr. Epstein. “You’re reaching a point now where those weaker points are beginning to crumble.”

UAM executives dispute this claim, citing promising new purchases, such as a 49% stake in Toronto-based Integra Capital Management and the launch of Dutch unit Palladyne Asset Management, and Expertise Asset Management in France

While UAM officials have vowed not to sell poor-performing affiliates, the firm has pared some managers, like Newbold’s, which was merged into Pilgrim Baxter.

“They’re doing all they can given the structure they’ve set up,” says Gregory Jackson, a portfolio manager with Chicago-based Yacktman Asset Management Co., which holds 2.9 million UAM shares. “The central question: Is this a viable model going forward?”