Once you've achieved relative success, how do you keep the momentum going?
That's the question executives at Delaware Investments of Philadelphia have been pondering. Within the last several months, the firm has broken through the top 10 tier of the largest separate account investment managers. The challenge going forward is that two of the three investment management styles that the firm has successfully parlayed into the separate account channel have closed within the last four months because Delaware managers have reached their desired investment capacity.
And that's exactly the way Delaware wants it. The firm is significantly more interested in protecting the returns of existing clients than taking in an unlimited amount of money from new prospects.
"We have a sense, desire and drive to deliver long-term value-added performance," said Jim Hinkley, senior vice president and director of wealth management, which includes the firm's separate account program. "But our bottom line is that we're acting in the best interest of our clients. We deliver a capacity-constrained product."
Hinkley joined Delaware 11 months ago after spending a decade in the consulting group at Smith Barney of New York, most recently as manager of global equity advisor research. In that capacity, he searched across the industry for the best global equity managers to include in the Smith Barney separate account program.
That's not to say that Delaware isn't focused on growing and expanding its SMA program. In fact, Hinkley noted that one of his objectives is to deliver an institutional-quality product to the retirement marketplace. But, he says, Delaware simply won't risk investors' returns or managers that must succumb to "cap creep" or style shift just to keep up with inflowing assets.
Breaking Through
Delaware is not a novice player in the separately managed account industry. But the firm has risen from virtual ranking obscurity a couple of years ago and has been slowly and deliberately climbing through the ranks.
At the end of the first quarter of 2006, the firm, a unit of Lincoln Financial of Philadelphia, had risen to notoriety as the sixth-largest separate account manager with $14.7 billion under program management, according to Cerulli Associaties of Boston. That puts the firm squarely after Tradewinds NWQ Global Investors, which has 16.7 billion, and just ahead of AllianceBernstein, which also has $14.7 billion in SMA assets and a 2.2% market share, according to Cerulli.
Tradewinds NWQ is the newly established investment unit of Nuveen Investments of Chicago, which spun off the unit from its NWQ Investment Management affiliate in order to focus on international and global investments.
Delaware's competency in international investing through American depository receipts (ADRs), and to a lesser extent its large-cap growth and large-cap value styles, are what Delaware owes to its recent ranking breakthrough, Hinkley said. But that doubled-edged capacity constraint sword caused the firm to close its international ADR product on April 18 and its large-cap growth product one month later, on May 24.
"Our portfolio managers are making the call [on capacity] to help preserve the integrity of the underlying investment product," he said. "At other firms, the marketing side drives sales and they keep products open. This is clearly not the case here." Instead, the goal is asset retention and client servicing, he added.
New Avenues to Growth
With two of its hottest SMA products now off limits, Delaware is pondering which of its other capabilities may play out well for SMA investors. The firm also offers a small-cap product in the SMA realm, and although the firm overall manages a large amount of fixed-income assets, it currently doesn't offer any fixed-income products to its SMA customers. This year will be the year to decide what type of other products to offer and which Delaware investment managers are willing to manage SMA assets, Hinkley said.
Delaware has been actively courting and hiring portfolio management teams from other firms. It recently brought over a five-member team from a Boston-based investment company that changed ownership, Hinkley said. The nucleus of that team has been in place for several years and has managed two products, including an international ADR value product that Delaware recently rolled out on a limited scale through a couple of SMA platform providers, and is negotiating to include in others. But it isn't a clone of its now-closed, successful other international ADR offering since this team applies an entirely different process, Hinkley noted.
Also of note, Delaware has voluntarily implemented a constraint on the number of platform providers it will offer its separate account services through so as to limit trading and administrative complexities and maintain its ability to be nimble, Hinkley said.
"We've had an extremely successful past couple of years. Continuing that growth is doable but will be a major challenge," he concluded.
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