Analysis: Like Obama, new fund CEOs face turnaround pressure

By Ross Kerber

BOSTON (BestGrowthStock) – The leaders of three of the largest U.S. asset management companies face the same challenge as President Barack Obama: how quickly can they turn around bad situations not entirely of their own making?

All three — Janus Capital Group Inc (JNS.N: ), Legg Mason Inc (LM.N: ) and AllianceBernstein Holding (AB.N: ) — recently reported continuing outflows of customer money for the quarter ended September 30.

All three companies also are led by chief executives who have taken over since 2008, during the depths of the financial crisis.

Like Obama, all three face growing pressure from frustrated constituents — in this case, their shareholders — to show progress. AllianceBernstein and Janus shares have fallen more than peers for the year so far, while Legg Mason Chief Executive Mark Fetting now faces activist investor Nelson Peltz on the company’s board of directors.

All three fund chieftains have made changes and say things are on the right track. But there is a lag between improving performance at previously lagging funds and convincing investors to put money back into those funds.

“You can do the right thing, but it may not show up for a long time,” said Jeffrey Hopson of Stifel Nicolaus & Co. “The problem in this business is that, if you underperform badly enough for a long time, the chances of you getting hired back anytime soon are rather limited,” he said.

The financial crisis was particularly hard on most asset managers as investors shifted money from high-profit equity funds into lower-margin bond and money-market funds. Some left entirely and put their cash into insured bank accounts. Among the biggest casualties were Legg Mason’s Western Asset bond division and Janus’ Intech quantitative investing unit.

LESS PERFORMANCE-CHASING

Both have reported improved investment performance of late. A reason that has not turned around flows for their parents is that there are fewer institutions looking to shift money around chasing performance and reviews can take longer.

All three companies also suffer from their traditional strength in equities, a sector from which investors have shifted away. Data from Lipper, a unit of Thomson Reuters, shows that large-cap core funds had the most outflows of any category during the third quarter, $9.4 billion, followed closely by the $6.2 billion taken out of large-cap growth funds and the $4.2 billion taken out of large-cap value funds.

Poor performance in some cases has not helped. Legg Mason was long known for star stock picker Bill Miller, who beat the S&P 500 for 15 consecutive years. But the streak ended in 2006 and, so far this year, his Value Trust fund trails 92 percent of similar funds according to Morningstar data.

AllianceBernstein, meanwhile, was recently fired as manager of a big Vanguard U.S. growth fund amid poor performance.

The rough spots were not the focus of company conference calls, however. Mostly executives asked for patience while explaining how hard they are working to win mandates. Recent improvements in their performance overall should help.

“(W)e think the strong peer performance in Q3 and the much better relative performance against the benchmark that we had in Q2 will have a positive effect on flows in the future,” AllianceBernstein Chief Executive Peter Kraus said on October 28.

The company could use a boost. Late Wednesday, it reported outflows of $18.9 billion in the quarter, most of which, $15.2 billion, was withdrawn by institutional customers. In the quarter that ended June 30, outflows were $4.7 billion. Its shares fell more than 5 percent in trading October 28.

“TERRIBLE ENVIRONMENT” FOR FLOWS

Outflows also widened at Janus, whose chief executive, Richard Weil, took over just this year. It reported outflows of $2.9 billion for the quarter that ended September 30, up from outflows of $1.3 billion in the previous quarter.

“Candidly, the summer was a terrible environment for the equity markets and flows, and we’re seeing some stronger equity returns here in the fall, and we’re looking forward to operating under improved conditions,” Weil said on October 21.

The experience has been quite different at competitors with a broader line-up of better performing funds. T Rowe Price Group Inc (TROW.O: ) reported inflows of $8 billion for the quarter and Franklin Resources Inc (BEN.N: ) had inflows of $19.4 billion.

Legg Mason, whose $673.5 billion under management as of September 30 make it the largest of the three companies with new CEOs and lagging flows, improved by some measures.

It reported outflows of $12.7 billion for its second fiscal quarter ended September 30, less than the $23.1 billion investors yanked out in the first fiscal quarter. Chief Executive Fetting struck some of the same notes as the other leaders and explaining that improved performance at units such as Western Asset simply has not shown up in the inflow figures to date.

“The story of Western’s progress isn’t measured by flows alone,” Fetting added.

(Reporting by Ross Kerber; editing by Aaron Pressman and Andre Grenon)

Analysis: Like Obama, new fund CEOs face turnaround pressure