While most investment management companies hunger to secure long-term relationships with clients of sizable assets, Mellon Equity Associates of Pittsburgh is happy to welcome small transitory clients looking for a comfy, but temporary, port to keep them out of a storm.
Mellon Equity Associates, with $18.5 billion in current assets and 100 clients, is one of Mellon Financial Corp.'s asset management subsidiaries. The unit actively manages U.S. domestic equity and balanced assets. Mellon Financial's other asset management subsidiaries include The Dreyfus Corp. in New York and Newton Investment Management in the U.K.
In January 2003, Mellon Equity officially launched into a new line of business that it had already been unofficially providing to both new and existing clients for some time -- interim asset management services, said Bill Rydell, president and CEO of Mellon Equity, in an interview.
Institutional clients, such as pension funds, foundations and endowments, were often referred over to Mellon Equity from Mellon Financial's global securities services custody division. The new interim management service unit allows Mellon Equity to step in and manage an account where an institution has, for one reason or another, terminated its investment arrangement with one money manager, but has yet to seek out and hire another manager, Rydell explained. This can happen for reasons other than poor performance, he said.
Sometimes a client releases a money manager because the client has become disenchanted with the manager, an individual or team leaves the management firm, or the money manager is snatched up by a larger firm. But it can often take months to search out and hire a new manager, leaving the institution in limbo and without a manager to safeguard, monitor and tweak the portfolio as needed.
Rydell confirmed that the current firing spree among institutional managers whose investment managers have been implicated in the deepening mutual fund scandal, has boosted Mellon's business. Since the beginning of the year, Mellon has inked short-term arrangements with seven institutional clients and was given a collective $200 million to manage. "Some of the most recent clients are due to the scandal, but you don't want to win business at the expense of others," Rydell confessed.
Still, Mellon isn't afraid to answer the call to temporary action, Rydell said. Mellon will discuss the institutional client's investment mandate, perform a risk analysis of the portfolio and then, if necessary, recommend restructurings to better meet the mandate. While some clients just want someone to babysit the portfolio until it is turned over to a new manager, others seek Mellon's active counsel with regard to particular securities or notification if Mellon managers spot a loss potential. If, for example, Mellon believes a particular security is a bit too risky for the mandate, it will notify the client and ask what it would like Mellon's managers to do. Still others are comfortable enough to turn over full discretionary authority to Mellon to decide what to buy, sell and hold, Rydell said.
Just like the medical industry's oath to first do no harm, Mellon's whole premise is to allow the temporary client's portfolio to maintain market exposure while mitigating risk, Rydell noted.
Short-term Ties to Long-term Relationships
Mellon's typical interim management engagements are for up to six months or so and usually involve a portfolio of $40 million to $50 million, Rydell said. But Mellon execs are open to longer-term relationships. Of the seven clients secured year-to-date, two have turned into permanent clients for Mellon, Rydell said. "One of the nice things is that if it's [an interim arrangement for] an existing client, it cements the relationship with that client. But it also gives us exposure to new clients," Rydell commented. Rydell foresees his firm comfortably handling up to 10 new interim management clients per year.
The one thing Mellon will not do is get involved in the process of searching for a new manager for the client.
Interim asset management relieves some pressure on the institution to find a new manager post haste, said Jeff Keil, vice president of global fiduciary review at Lipper, in Denver. "It sounds like it's a great way to test drive a new manager; kick the tires a few times, and assess the horsepower," he added.
Mellon's new business line isn't too far off from larger investment manager's "transition management" services in which an interim manager will be hired to reposition or restructure a portfolio by offsetting transactions and calculating exact positioning so as to reduce transaction costs and better position the portfolio for a new manager to take over, said Gavin Little-Gill, a senior analyst with the TowerGroup in Needham, Mass.
Active transition management became popular in the 1990s and replaced the now outmoded method of transitioning one plan or portfolio over to a new manager by liquidating all holdings and reinvesting the cash in a new lineup of securities. Transition managers, including Goldman Sachs, JPMorgan, State Street Global Advisors and Frank Russell, have built big businesses around analyzing the potential restructuring of a portfolio, then making the necessary adjustments to minimize the harmful and often costly transactional impact on the managed assets.
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