David R. Evanson

Investment News, Spring, 2004

Without so much as a warning, the consultant for Charles Schwab & Co. Inc.zzs separately managed account platform recommended last month that San Francisco large-cap-value manager Ashfield & Co. be removed from the program.

The consultant, San Francisco-based Callan Associates Inc., found that Ashfield last year had secretly switched Schwab Select portfolio from Ashfieldzzs Core Growth product to its Advantage product. The former used the S&P 500 stock index to measure sector overweights and underweights, while the latter used the Russell 1000 growth index as the benchmark, according to Callanzzs research.

Since the change was undertaken without “notification or permission,zzzz Callan recommended Ashfieldzzs removal from the platform.

Asked for comment on the Feb. 11 removal, Eric Davison, a Callan senior vice president, said: “At the end of the day, fiduciary responsibility requires you to communicate, and failure to do so is a real breach.zzzz

Executives at Ashfield hadnzzt responded by press time to requests for comment.

A larger question for asset managers and the brokers that rely on them in the $500 billion separately managed account business is: what exactly will get a manager fired? Also, will one firing create a domino effect that will gut a managerzzs SMA business?

Consultants who analyze separate-account managers or organizations that run managed-account platforms like to focus on “Pszzzz when analyzing managers and making their decisions. For instance, at Callan, the basic analysis comes down to people, process, philosophy and performance.

At SEI Investments in Oak, Pa., which runs a separate-account platform for some 5,000 advisers, the key variables are the product, the investment team, performance and the overall organization.

Within this context, a manager will come under scrutiny and possibly get removed from a platform primarily for two reasons, according to Leonard Reinhart, president of The Bank of New York Co.zzs separate-account services division in Malvern, Pa. The bankzzs Malvern-based Lockwood Financial Advisors unit runs a separate-account platform for about 1,800 financial advisers.

The changes are either event driven, or people driven, Mr. Reinhart said.

Events come in several forms, such as a major shift in style or benchmarking, as in Ashfieldzzs case, or a merger or acquisition. For instance, after Lehman Brothers Holdingszz acquisition of New York asset manager Neuberger Berman Inc. closed last fall, Callan and other investment consultants took a hard look at Neuberger to see if there were major shifts in the “Ps.zzzz There werenzzt, according to Callan.

Mr. Reinhart said that personnel changes are by far the biggest cause of most decisions to rotate an asset manager out of a program. That would make sense, based on the often-cited Wall Street truism that the assets ride up and down the elevators every day.

For instance, when performance began to deteriorate at Simms Capital Management Inc. in the wake of personnel changes among senior investment professionals, Callan last fall recommended removing the Stamford, Conn., money managerzzs international and global equity products from Schwabzzs platform.

In the cloistered world of managed accounts, news travels fast – especially bad news. So, when something untoward happens to one asset manager, it is sure to provoke inquiry from other analysts monitoring performance.

According to the most recent figures supplied by the Money Management Institute in Washington, a managed account trade group, the average separate-account manager is on 27 platforms. Inquiry surrounding events or personnel changes is likely to be intense.

After a big change, most managed account due-diligence professionals will put a manager on a watch list to see whether things develop positively.

“Itzzs a lot like equity analysts,zzzz he said. “Two of them look at the same stock but come up with completely different recommendations.zzzz

Although they may ultimately reach differing opinions, John F. Sharry, president of the private-client group at Phoenix Investment Partners Ltd. in Hartford, Conn., said that all separate-account due-diligence professionals have at least two traits in common: “They do not like surprises, and they do not like change,zzzz he said.

That is an unfortunate truth for asset managers because they are in a business which is defined and characterized by change. For instance, new trading platforms, fundamental shifts in Wall Street research and how it is used, and consolidation through mergers and acquisitions, create or have the potential to create massive change in processes, people, philosophy and performance of managers.

Even positive change, if it isnzzt communicated appropriately, can cause trouble, according to Mr. Sharry, whose firm participates in several separate-account programs through its 10 asset management subsidiaries.