In the world of fund management, the big just keep getting bigger. And the small keep getting, well, more specialized. There is no question that State Street Global Advisors falls into the former category. For SSGA is a global powerhouse, with a network of portfolio managers and clients stretching from Boston to Tokyo. And SSGA is growing its range of investment styles and assets under management almost faster than the bean counters can count.
How things have changed. Back when Nick Lopardo took the reins of SSGA in the early days of 1987, assets under management were only around $27 bn – almost all were from US-based clients and almost all were indexed.
SSGA added that amount last year alone, much of it going into actively managed portfolios – more than a half-billion dollars a week in institutional asset growth, according to Pensions & Investments – faster than Barclays Global Advisors with $24 bn.
Today Boston-based SSGA boasts a whopping $350 bn under management, making it the world’s seventh largest money manager, and the largest US-based manager of non-US capital. Even more remarkably, there’s no end in sight.
‘Down the road, as the market consolidates, our goal is to be one of the premier global money managers,’ states Lopardo. ‘We aim to be running some $500 bn in assets by the year 2000, with half coming from non-US clients.’
That’s a tall order. But few doubt Lopardo’s ability to pull it off. Just look at his track record already. The Brooklyn-born executive has been powering his way through global investing with the same aplomb that carried him down the field as a Susquehanna University fullback.
Quant Quandary
SSGA, of course, has been known mainly as a ‘quant’ investor, passively investing in computer-driven index funds. So why should investor relations professionals sit up and take notice now? In contrast to 1987, when SSGA actively managed just $100 mn, today some 40 percent of total assets is under active management. So on the one hand, SSGA is appearing on shareholder rolls with increasing frequency and force; on the other hand, its new force of actively-oriented fund managers will be demanding a lot more of IR professionals.
How SSGA is growing is key to the equation. To start with, it is hunting for smaller fish to gobble, or at least to team up with. SSGA Global Alliance, formed January 1, 1997 and headed by John Snow, is seeking out alliances ranging from marketing agreements to joint ventures and acquisitions. Although mega-deals are not expected (SSGA was reportedly interested in New York-based Neuberger & Berman but seems to have backed off) several small acquisitions are in the pipeline, especially overseas. For IROs, this means a number of familiar investment shops may soon be imprinted with the SSGA style.
The other key area of SSGA’s growth is even more significant because it shows a pipeline of new money flowing into equity markets: individual investor savings. By 2000, Lopardo expects one third of SSGA’s assets under management to be consumer-related: 401k, IRAs, high-net-worth individuals and mutual funds. Lopardo has even coined a special word to describe the kind of business involved: ‘instividual’. ‘A 401k may be created by an institution, but the real users are the participants. So it is an ‘instividual’ product, not purely individual and not purely institutional.’
Global Manager
Again, Lopardo’s goal is not unreasonable. SSGA is already a giant among managers of tax-exempt assets – number one last year, topping BZW Barclays Global and TIAA-Cref. And the firm’s 401k business is its fastest growing segment. Looking ahead, SSGA’s parent, State Street Bank & Trust Co, is one of the few major institutions to begin gearing up to profit from possible Social Security privatization.
Already, SSGA manages money across the whole pension spectrum from large corporate pension funds to 401k plans to high net-worth individuals. Then there’s a family of 20 mutual funds worth $11 bn, not to mention other funds catering to retail investors in France, Italy and Switzerland. The firm even has a five-year old broker-dealer unit active in pension portfolio liquidations and restructurings, in many cases crossing securities within its own network.
So SSGA is a force to be reckoned with. But what is the firm’s hallmark style? ‘A lot of firms like to say they’re global managers,’ Lopardo remarks. ‘But that only means they manage some non-US securities from their US offices.’
SSGA, by contrast, is truly global in that it manages local equities and local pools of capital in five investment centers among its 14 overseas offices. These centers are London, Paris, Sydney, Tokyo and Montreal. Now Hong Kong, which until recently had only a sales office, is being turned into a fully-fledged investment center on a whole floor of the Bank of China building. All in all, SSGA has 1,800 personnel in 20 locations worldwide.
Every overseas office is staffed with local talent, which means few brash Americans steamrolling local clients or portfolio companies. The Australian office, for instance, which was built into a $3 bn business over the last four years, is staffed entirely by Aussies: ‘People want to do business in their own environment with their own culture and their own people.’
Despite SSGA’s sprawl, the firm has ‘a single investment platform on which all its entities operate,’ says Lopardo. He describes an SSGA portfolio manager in his office overlooking the Sydney opera house, managing money for an Australian pension fund looking to invest in US equities. ‘He runs that portfolio the same way as a Boston manager running Polaroid’s pension fund – picking stocks using the same models and the same database, creating virtually identical portfolios.’
The flip side is also true, Lopardo explains. Any fund manager can select a portfolio of Australian stocks, no matter where the fund might be based. ‘Our strategies all run the same. A portfolio manager with a laptop and modem can tie into our databases and models and run virtually any one of our strategies anywhere in the world,’ Lopardo says.
Then there’s the active versus passive debate – one that Lopardo says is becoming more and more irrelevant to actual procedures. ‘Even pure stock pickers are using a lot of quantitative tools to help them manage money,’ he remarks. ‘Meanwhile, quantitative managers are using a lot of fundamental tools to help them screen baskets of stocks and build models.’
One result of this is the ‘enhanced index’ strategy. ‘There must be some dogs in the index that under the traditional quant model we would pick up anyway. Now we throw them out by overlaying a fundamental screen on the index. My vision of the future is that it all becomes one activity – running fundamental money and quant money out of the same shop.’
In some ways, Lopardo’s future is already here. Two years ago, when SSGA’s institutional and high net-worth individual businesses were rolled under one umbrella, Lopardo went to visit the high net-worth office on Cape Cod where active management had always been the rule. He found that Paul Oldfield, a fundamental stock-picker, actually followed just 50 or so stocks.
‘Suppose every morning a screen on your computer showed all 3,000 major US stocks ranked according to value and growth. Would that be helpful to you?’ Lopardo queried. Now Oldfield comes in each morning to an overview of 3,000 stocks. ‘Here’s a traditional manager now using quant tools to make better decisions. The whole business is coming together,’ concludes Lopardo.
Conversely, Oldfield and SSGA’s other stock-pickers may have visited certain companies in the index, and based on their recommendations, SSGA’s quant funds will underweight or overweight those stocks.
Next Wave
Lopardo isn’t stopping at the relatively higher margin, higher risk business of actively managing equities. On his mind lately are non-traditional investments like private equity and direct investment: ‘I want to go for aggressive active management in hot markets. Along with significant upside, there’s the risk of significant downside – it’s a high margin, high fee business.’
But as Lopardo points out, the investment marketplace as it stands expects disciplined, structured, risk-controlled, and very moderate outperformance of a benchmark from the SSGA they know. Hence the creation of SSGA Global Alliance to seek opportunities in active, aggressive investment worldwide.
For its initial forays, Global Alliance is not throwing around a lot of State Street cash to acquire investment firms on the pattern of fund management holding companies United Asset Management or Affiliated Managers Group. Instead, Lopardo’s strategy is to seek out teams of portfolio managers looking for a new challenge, then offer them a chunk of a new company under the Global Alliance banner. The first such team, with a mandate to invest directly into markets like Central and Eastern Europe, is a group of former Creditanstaldt fund managers who pioneered investing in the Czech voucher program. The new unit, called European Direct Capital Management, is already setting up limited partnerships of $200-300 mn and taking an aggressive role in helping to manage the companies it invests in.
‘In this way, we don’t disturb our existing philosophy, methodology and talent, but we get a piece of a different kind of action for SSGA,’ Lopardo comments.
The second Global Alliance project, launched in mid-May, is London-based King Street Advisors. King Street is made up of an emerging markets investment team headed by Ken King, a former Kleinwort Benson fund manager and a veteran of Latin American central banking.
While SSGA already has $10.5 bn invested in emerging markets through quant models, Lopardo says it was time to get into the higher stakes game of active emerging markets investing, and foresees King soon handling around $7.5 bn.
While the new Global Alliance teams will work independently, Lopardo says they’ll regularly meet to share ideas. ‘The knowledge everyone brings to the table, whether they’re domestic quant investors or active emerging markets people, is going to make us better managers all round.’
This doesn’t look much like the old SSGA – index investment, direct investment and active emerging markets stock picking are rubbing shoulders. But that’s the way Lopardo wants it: ‘You go wherever you need to go, do whatever you need to do, to gather the data, gather the expertise, and deliver the results. It’s a tough game, and I don’t want to lock SSGA into doing it only one way.’
Serious Responsibility
Some observers might see SSGA’s moves towards active management as a hedge against an impending correction in the market. After all, index funds have gained tremendous allure during the market’s bull run, but common sense says they are bound to underperform active managers in a bear market. Not necessarily so, says Lopardo. ‘Active managers can go down further in a down market, just like they can go up further on the up-cycle. Expanding into active management is really a strategic move in response to what our customers want.’
‘You can’t be an active manager too,’ critics told Lopardo in the past. ‘Why not?’ he demands. ‘We have people with active expertise and people with index expertise. In fact, our index managers are better off because they are surrounded by active-oriented managers who have ideas on how to enhance the index.’
As both a buy-and-hold index investor and a value-chasing active one, SSGA has long taken its corporate governance role seriously, actually taking the lead in voting international proxies. The investment committee sets proxy voting guidelines which are then stringently applied by a full-time team of four professionals. Lopardo says that while SSGA doesn’t go out seeking confrontations with companies, sometimes CEOs come in to try and sway the investment committee to their way of thinking. ‘In some cases we have gone along with them, and voted in favor of management because of that presentation.’
Clearly SSGA takes its responsibilities as a global investor seriously. Another example of this is the SSGA Issues Group, created four years ago to bring together clients and other affiliates to discuss issues on twice-yearly one-day retreats. The first session, on social security, helped spur SSGA principal William Shipman to become a leading crusader for social security reform.
SSGA is undoubtedly a name to watch out for. As aging Boston-bluebloods strived to maintain market share, the boy from Brooklyn quietly yet forcefully brought SSGA from behind to occupy a leading spot among the world’s fund managers.
| PROGRESSION UP STATE STREET | |||
| 1987 | 1997 | 2000 | |
| Passively managed assets | $27 bn | $210 bn | $250 bn |
| Actively managed assets | $+100 mn | $140 bn | $250 bn |
| Individual-based assets* | 0% | 18% | 33% |
| Portion from non-US clients | 1% | 35% | 50% |
| Portion invested outside US | 12% | 23% | 33% |
| Total assets under management | $27 bn | $350 bn | $500 bn |
*401k, IRA, high-net-worth, mutual funds
Paradigm Shifting
As managing director and a senior portfolio manager focusing on global activities, Anthony Ryan is often faced with explaining how SSGA is building stock-picking firepower out of its historically index-driven arsenal.
‘The SSGA investment philosophy is to utilize model-driven methods on both the passive and active sides,’ he explains. ‘That doesn’t mean a black box approach to active management. Our approach is based on fundamentals, but there are benefits in doing a structured, disciplined analysis first.’
Ryan describes the process as a compilation of top-down and bottom-up methods, emphasizing that it’s a team effort. Each investment management team in SSGA’s investment centers around the world is headed up by a strategy coordinator who reports to SSGA’s chief investment officer for non-US investments, Alan Brown. Overseeing the process is an investment committee, made up of senior investment professionals, which sets portfolio guidelines.
In managing global portfolios, SSGA starts with the country allocation decision based on the relative attractiveness of different markets. ‘We look at both value and growth,’ says Ryan. ‘With respect to value, we look for markets trading at a discount relative to where they normally trade. If you look at Japanese PEs, they’re very high compared to Canada’s. But the right question to ask is how Japan is trading relative to where it has normally traded.’
‘Historically, value investing has been very powerful internationally,’ Ryan continues. ‘But one of its caveats is some things can be cheap for a long time or can be cheap for a reason. What we do is complement this value approach with a future outlook on growth, looking for markets that are cheap and where things are starting to change. And the way that we do that is through discounted cashflow analysis.’
The next step after country allocation is individual security selection. SSGA uses all the usual financial tools to pick individual securities: price compared to intrinsic value, classic valuation measures based on accounting, book value, cashflow and earnings.
‘But price in and of itself isn’t enough,’ says Ryan firmly. ‘We buy based on value and expectation, because we’re not paying for historical growth, we’re paying for future growth.’
This is where SSGA pulls away from the crowd when it comes to marrying active management with quant models. It studies analysts’ expectations, compares them to the price it wants to pay for an individual stock, and comes to a decision about the future performance of the stock.
So SSGA is actually watching the watchers, coming to conclusions based on historical behavior.
