The last time ‘naming names’ was in vogue, Joseph McCarthy was tearing apart the US in search of communists. Generally, the unsavory practice is relegated to a few individuals comfortable with the terms ‘rat,’ ‘squealer’ and ‘fink’. But within the asset management community, revealing the ownership structure of an investment advisor strikes a slightly less virulent chord. What may be surprising, however, is some of the subsidiary and affiliate relationships that do turn up. The names behind the names, if you will.
Perhaps the best way to illustrate the point is with a riddle: What has $201 bn under management and 50 investment subsidiaries? Need a hint? One of its firms is Pennsylvania-based Pilgrim Baxter. Still not sure? How about United Asset Management (UAM)? With property that includes Cooke & Bieler, NWQ Investment Management and Barrow Hanley Mewhinney & Straus, UAM is certainly the largest example of an asset management holding company in terms of number of firms owned. But it is not alone. Nvest LP, Affiliated Managers Group (AMG), Liberty Financial Companies and Pimco Advisors are among the larger asset management holding companies in the US, each owning a number of independent investment subsidiaries.
The trend is evident throughout the US financial services sector, where there is such a vast demand for investment management products. But these companies are unique in that they are almost solely concerned with overseeing a stable of at least five asset management subsidiaries. Each subsidiary independently makes day-to-day investment decisions, and each at least for institutional accounts, trades on its own investment prowess and brand-name recognition to such a degree that IROs and clients are often unaware of a larger ownership structure.
Big players
Based on assets under management, Pimco Advisors is the largest of these entities, with more than $244 bn under management. Its seven subsidiaries represent an impressive roster of pre-eminent managers, including NFJ Investment Group, Cadence Capital Management, Parametric Portfolio Associates, Pacific Investment Management Co, Columbus Circle Investors, and Oppenheimer Capital. Although the seventh investment advisor, Blairlogie Capital Management, is being sold, Pimco has recently created a new division, Pimco Equity Advisors, which maintains its own investment staff.
Liberty Financial Companies, with $61 bn under management, owns six investment subsidiaries, including Stein Roe & Farnham, Colonial Group, and Crabbe Huson. Nvest LP oversees some $135 bn and eleven investment advisors, including Loomis Sayles, Capital Growth Management (50 percent stake), Reich & Tang Capital Management and Harris Associates. Rounding out the group is AMG, a $62 bn company that takes majority stakes in affiliates such as Tweedy Browne, Skyline Asset Management and GeoCapital.
All of these umbrella entities have been quietly gobbling up investment advisors. Most strive to ensure that each acquisition represents a strategic fit. Liberty Financial Companies’ Hal Thayer, vice president of communications, says his company’s strategy has been ‘to acquire managers who fill different niches along the investment spectrum.’
On the equity side, Liberty’s Newport Pacific subsidiary invests in Asian securities, while Crabbe Huson, a contrarian investor, complements its traditional value investor, Colonial Group. Stein Roe & Farnham is the holding company’s growth-focused unit. ‘We never say never, but our strategy has been to find companies that fill the unfilled niches, rather than add capacity in investment styles that we already have,’ says Thayer.
Mark Porterfield, director of corporate and public affairs with Pimco, says that his organization strictly follows this niche-focused philosophy. ‘If the acquisition is not a strategic fit or the economics aren’t there, we won’t do it.’ True to its word, Pimco is selling off Blairlogie. ‘It ended up not quite fitting strategically. It was not well positioned to gather significant assets in Europe, and it was not central enough to our US sales effort,’ says Porterfield. He adds that the decision was reached on a basis of mutual understanding.
It is difficult to imagine that UAM, with 50 asset management subsidiaries, does not own firms which compete for similar audiences with similar products. But in fact, the company addresses a restructuring of its strategy in a February 4, 1999 press release: ‘We have adopted more selective criteria for potential transactions. We are focusing on acquisitions that will enhance the business of existing affiliates, bring new distribution or add capacity in under-represented asset classes.’
To highlight this approach, the release holds up two 1998 transactions. Subsidiaries Pell Rudman & Co and Dwight Asset Management each acquired other management companies and folded their operations into their own – a departure from UAM’s former strategy, and more in line with the industry at large.
Live free or die
So what makes a maverick investor like Capital Growth Management’s Ken Heebner, or a firm as diverse and influential as Loomis Sayles, throw their chips in with someone else’s ante? According to Chris McConnell, CFO and principal of AMG affiliate Essex Investment Management, the answer lies in independence and incentive. ‘They leave us alone and we like that about them. That was one of the things. The other is that we sold to allow us to create some equity to give to our next generation of employees. It’s something you can’t do with a private company,’ says McConnell.
UAM and AMG both employ – even more than their peers – a ‘stand back’ approach to their subsidiaries. In fact, Essex’s McConnell points out that AMG actually provides little to no back office support or centralization of administrative functions.
In keeping with this independent philosophy, the parent companies have allowed their sub-managers to maintain distinct profiles. In the case of UAM, a company spokesman admits that in most instances, people have no idea their sub-managers are UAM subsidiaries. Kelli Powell, VP of investor relations and tax reporting with Pimco, agrees that her firm’s sub-partnerships retain their own identities. ‘It’s encouraged at the separate account level. The institutions recognize Cadence, Columbus Circle Investors, Pacific Investment Management. On the institutional level, you want them to associate with the firms they always have known.’
So where is the ‘synergy’? In most cases, it is through the back office support, as well as through distribution channels. As Liberty’s Thayer explains, ‘We help subsidiaries by consolidating their back office and by using the Liberty Funds distribution group to market them. So essentially, we let the money managers do what they do best – manage money.’
UAM, for its part, is working much more closely with its subsidiaries and affiliates than it has in the past. The push is to create a name-brand mutual fund group that is recognizable to retail investors, while at the same time preserving the independence and status of the investment subsidiaries with regard to institutional investors.
Changing trends
While centralization is rapidly taking place at the retail and distribution level, day-to-day investment decisions, including proxy voting, are handled independently, and contact with companies is conducted by each separate investment unit. John Wilcox, chairman of US-based proxy firm Georgeson & Co, says he has not seen a parent influence on proxy policies. ‘We haven’t seen much of an impact on proxy solicitation due to the parent-subsidiary relationship of some of the asset management holding companies.’
But the industry is constantly shifting. As one holding company insider says: ‘I think it’s important for IROs to understand what’s happening to the industry that owns shares in their companies, even if there’s no direct relationship between an industry trend and the contact an IRO has with a money manager.’
What are those trends? Centralized, or partially-centralized, distribution of mutual funds, for one. This means UAM or Pimco funds may be sub-advised by one or more of their various investment subsidiaries. In other cases, a Colonial fund belonging to Liberty Financial Companies’ distribution unit may be sub-advised by affiliate Stein Roe. On another front, the holding companies are increasingly conducting second-tier transactions, in which a sub-advisor or affiliate uses acquisitions to grow their own business, merging the entity within their own unit. Nvest conducted several of these deals, including its purchase of HA Schupf, merged into Reich & Tang in 1998. And nearly all of the companies’ spokespeople outline plans for international expansion. As parent companies continue to grow assets and diversify their client bases, the consolidation-averse approach may give way to a hybrid or quasi-consolidation strategy, making it increasingly important to dig deeper to get behind the names.
