Russell Investments still needs to figure out what it wants to be when it grows up.
After building a reputation as a top-notch investment consulting firm and a leader in manager-of-managers programs, the firm branched into alternatives.
Now it appears to have lost its way: It disbanded its fund-of-hedge-funds operation in 2008 and last month sold private-equity manager Pantheon Ventures Ltd. to Affiliated Managers Group Inc. for $775-million.
Stephen Nesbitt, chief executive of Cliffwater LLC, an alternatives consulting firm, said that historically, Russell has had a reputation as a very good consulting firm, but it has to decide what direction it wants to take now.
“It's unclear they know what they want to do,” he said.
Jennifer Tice, a spokeswoman for Russell, disagrees. She said that though Russell has been affected by the financial downturn — like many others in industry — the company is determined to continue its leadership role in providing financial services.
“We are in a whole new environment for financial services firms, and we plan to deliver the innovative investment products and services that our clients desire,” Ms. Tice said.
Industry observers said that Russell might have been too ambitious in expanding beyond its core expertise of consulting and running traditional multimanager investing strategies for pension funds.
Russell, like other financial companies, had aspired to be a global player in a wide variety of investment products, said Leonard P. Brennan, president and chief executive of Rainier Investment Management Inc.
“For any investment organization, that's a difficult challenge,” said Mr. Brennan, formerly a managing director of individual investment services at Russell.
“My observation is, most players are very substantial in a core competency or are a leader in a geographical area,” he said. “It's hard for a company to dominate in a wide range of products and services.”
WORK FORCE CHANGES
There have also been big changes in Russell's work force over the past several years, with its long-time senior management almost completely turning over.
Within the past two years, Craig Ueland, Russell's chief executive, was asked to resign, at least 20 other top officials left voluntarily — most after deciding to cash out of an equity ownership program — and the company laid off about 400 employees. The layoffs amounted to about 20% of Russell's 2,000-employee global work force.
The company also recently disclosed in an employee newsletter that Frank Ryan, the company's chief financial officer, and Terry Berland, its chief of staff, will be departing; Mr. Ryan after two years and Mr. Berland after only nine months. Both had been hired to replace officials who left in an earlier round of management changes.
Mr. Ryan and Mr. Berland couldn't be reached for comment. Russell officials said that they don't discuss personnel matters.
Just how Russell plans to maintain its leadership role in the new financial world isn't entirely clear.
Andrew Doman, the former McKinsey & Co. executive who was named Russell's president and chief executive 13 months ago, has been planning new initiatives, including an expansion of alternative-investment advice and research, and the introduction of active exchange-traded funds. Russell officials said it also hopes to get back into the hedge-fund-of-funds business.
Yet at the same time, the company has been retrenching
Mr. Doman was unavailable for comment.
MAKING PLANS
Russell officials this month announced plans to increase the firm's global alternative-investment consulting business to target the large number of institutional investors interested in
private equity, hedge funds, real estate and commodities.
Russell plans to use the expansion of its research and advice capabilities as the first step in getting back into the
hedge fund business, said Vic Leverett, managing director of Russell's global alternative-investments team.
“The first step is building up the expertise; the products will come later,” he said.
Mr. Leverett said that expertise in less traditional strategies is becoming increasingly important as investors consider alternative asset classes following the global financial crisis.
The expansion will involve 25 new employees, said Janine Baldridge, Russell's global head of consulting and advisory services.
She said that about half the new employees will work in the global consulting practice, and the other half will work for Russell's investment division, providing research on alternative investments for institutional investors.
The two practices now have a combined staff of 50 employees devoted to alternatives, Ms. Tice said.
Getting back into the
hedge fund business might not be easy for Russell, Mr. Nesbitt said.
“If you've had serious performance problems or have gone through liquidations, it's hard to re-establish yourself,” he said.
Mr. Leverett said that Russell officials were upfront with their fund-of-hedge-fund customers as the company froze redemptions in 2008 and waived management fees.
That business, which peaked at $6.8 billion in 2007, dropped to $4.7 billion in 2008, the most recent number the company would provide. Mr. Leverett said that fund-of-hedge-fund customers got at least two-thirds of their money back.
Russell also is still suffering the consequence of an investment in Lehman Brothers Holdings Inc. Its supposedly low-risk institutional and retail money market funds had an exposure of more than 5% to Lehman securities.
Russell's parent, Northwestern Mutual Life Insurance Co., agreed to pump up to $764 million into the money market funds to prevent the net asset value from “breaking the buck” — falling below $1. Last year, according to financial statements, Russell paid Northwestern $27 million in interest on that loan.
Russell officials declined to offer a detailed explanation as to why Pantheon, which Russell bought in 2004, was sold. Ms. Tice said that Russell will continue to sell the London-based firm's private-equity funds of funds.
Elsewhere, press reports in Australia quoted Russell officials as saying that the company will launch an active ETF strategy in that country this year. A Russell official, who asked not to be identified, said that those accounts are accurate and that Russell hopes to follow up with introduction of the products in the United States sometime after that.
Randy Diamond is a reporter with sister publication Pensions & Investments.
