It's not easy being the new kid on the block. But sometimes being the old kid on the block is no bed of roses, either.
Federated Investors, which has a total of $193 billion in assets, has amassed $6 billion of that money in separately managed accounts. However, while Federated has been an SMA provider since 1973, the Pittsburgh-based fund giant has only pursued retail accounts in the past two years. And that has made getting onto the top-tier SMA sponsor platforms something of a challenge.
Robert F. Tousignant, national sales manager for managed accounts at Federated, recently spoke with Money Management Executive Editor Lee Barney on how he plans to double those SMA assets over the upcoming years - and get onto the big league platforms.
MME: Isn't Federated a longstanding player in the separately managed account business?
Tousignant: We have been in the separately managed account space since 1973, and we have more than $6 billion, but, granted, most of those separate accounts were institutional, or quasi-institutional - small endowments, federations, etc.
And Federated decided to take that expertise and transfer it over to the retail side two years ago. To date, we have been successful at getting on platforms like Raymond James, Legg Mason, LPL, Lehman Brothers, Bank of America, Janney Montgomery Scott, Ryan Beck and Stieffel Nicholas.
We also have a pretty unique niche in the marketplace in that a lot of Federated's history goes back to servicing trust departments of banks. In the early 1970s, we started to provide money market funds to them, and then, that progressed to selling them fixed-income funds, to equity funds, and now we are actively gathering assets from trust clients.
We are also on what is commonly referred to as turnkey asset management programs like AdvisorPort, Investnet, PMN and FundQuest.
Now, in addition to these major platforms, we are in the process of talking to the top-tier platforms and are cautiously optimistic we will be able to get onto one of their platforms.
MME: Only a handful of sponsors control the SMA space. Smith Barney, for instance, is said to have a 90% market share of multiple-style portfolios. How hard is it to get onto this top tier?
Tousignant: (Laughs.) Very hard. And part of that is really because it isn't about what we have. It's about what they need. If we are talking to a certain firm, and they are in the midst of searching for a small-cap manager, and our discipline does not include that, we have no chance to get on their platform that quarter.
MME: On top of these market-entry difficulties, given the increasing popularity of SMAs among asset managers, isn't it getting awfully crowded out there?
Tousignant: This is becoming a very, very competitive aspect of the business, and I think that because it's growing and it's attractive, and if you don't have a separately managed account group, you really can't offer a comprehensive wealth management program.
So, that's why I think more and more firms, seeing the growth of this business, are saying, "Hey, this is something we have to look at."
MME: What does Federated offer in separately managed account products and services that your competitors do not?
Tousignant: First of all, we offer three equity styles: a core equity, a mid-cap value and a large-cap value. We also offer products on the fixed-income side.
But, quite frankly, when you look under the hood at most of these companies, the distinctions between most of these products are minimal. We happen to have a mid-cap value that is somewhat different than your traditional mid-cap value in that it is a very defensive product. It's a high-yield product.
And, consequently, in today's marketplace, a lot of advisers and their clients are looking for income-related equity strategies. Particularly with changes to the tax law where dividends can be taxed as low as 15%.
That probably would be our unique niche in the marketplace at this point. But further than that, advisers are looking for managers who have differentiated themselves and demonstrated a consistent and a disciplined approach to their style. So, we are continuing to build our investment research capabilities, and we believe that is going to positively attract our investment performance over a longer period of time.
MME: Are you hiring more analysts and researchers or doing more quant work?
Tousignant: It's a combination of both of those, and one of the things we've been fortunate in achieving in the past three years is building our assets at Federated from $150 billion to $200 billion. While other companies have put their expansion plans on hold in the tough environment of the past few years, or have had to cut back, we've had the luxury of being able to add the staff.
MME: Was this because of your fixed-income or your money market offerings?
Tousignant: Fixed income was part of it, but I would say the main reason would be the fact that since we already had a strong franchise in fixed-income, money market and equity, we were able to capitalize on the environment.
Had we only had equity, we would have had a hard time growing the company over the past three years. Having a balanced offering really helped us.
MME: Now that you have benefited from this conservative environment, what are you doing to retain these assets?
Tousignant: I think you retain assets primarily through that consistent and disciplined investment approach. By saying to the adviser and their clients, "Here is what we are going to do." And then, actually doing it, bears a lot of weight.
What you had in the late 1990s was managers who were going around telling clients, "I'm a growth manager. I'm a value manager." So many of them got carried away. They didn't stick to their style. They chased performance. They went heavily into tech.
And, consequently, when all of it imploded, they had some pretty dismal performance numbers.
It's important for investment advisors, be they mutual fund or SMA advisors, to look for portfolio managers who stick to their style. Maybe they don't have to always been in the top quintile of performance, but they want to know that there is consistency there, that there is an investment process that they can depend upon, that can be duplicated. And that the company is going to stick to its knitting.
One of the things we try to do is try very much to say, "Look, we want to work with advisers who are trying to provide solutions for their customers." And part of that is putting together a comprehensive asset-allocation plan. Our products, hopefully, will fit in, as advisers try to provide investment solutions for their clients.
We don't take the approach of, "Buy my product because it's good." We simply ask advisers to consider our products because they fit into an asset-allocation plan and provides some value.
MME: Have you noticed any change in the way SMAs are sold over the past 10 years?
Tousignant: Absolutely. The separately managed account business has really evolved. It used to be managers out there simply selling their investment style. If I was a large-cap growth manager, all I'd need to say was, "Buy my product." If I was a large-cap value manager: "Buy my product."
As opposed to putting together a plan for the investor to protect them when markets go south.
MME: You came to Federated from Phoenix, which has developed a very well-known name in managed accounts (see MME 8/18/03). How long have you been working in the managed-account area?
Tousignant: I started in 1996, working for Roger Engemann. That's how I ended up at Phoenix. Phoenix purchased Roger Engemann, and I was asked by Jack Sharry, president of the private client group at Phoenix, to come to Connecticut and head up their distribution and sales for their subsidiaries.
MME: Was being part of this start-up an exciting time for you?
Tousignant: Oh yes. Very exciting. A lot was happening, and what my experience has taught me is I understand what clients and advisers are looking for, and how they want to be dealt with, which is another way you can differentiate yourself. Your level of service for the ultimate client. How you add value to the adviser's practice, as opposed to just positioning a product.
That's what they really want. They want people who understand the investment process and can relate to the needs of their clients, so I think it gave me that kind of experience.
MME: What are some of the top-of-mind concerns among Federated's SMA clients right now?
Tousignant: The real question is, when the bull market really comes back, will they forget the lessons they have learned and go back to their old behavior? I hope not, because that's not the way to increase your wealth and reach your investment objectives over the longer period of time.
MME: Besides getting onto the major platforms, building out investment research, delivering consistent returns and providing the right solution to customers at the right time - do you have any strategy for growing the business?
Tousignant: Yes, we have. First of all, with all of the competition that's in this area today, one of the major issues facing companies is that margins are shrinking. Consequently, the target threshold for turning a profit five years ago might have been $1 billion. Today, you are probably looking at $2 billion. That's been a major change.
Thus, we have some long-range objectives. Over the next several years, I would love to get our business to the $10 billion to $20 billion range.
Federated has a real presence in the marketplace, one that we have earned over the years through broker/dealers, independent firms, bank broker/dealers and bank trust departments.
The challenge is to use these products appropriately when they should be used. In my mind, this race isn't about SMAs versus funds, versus annuities, versus alternative products. It's up to the client and his or her adviser to decide which is most appropriate in which circumstance.
In some cases, the mutual fund might well be the best solution for that particular client.
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