MFMN: As a global company, with many business lines, services and products, what is at the core of the Frank Russell Company?
Brennan: We do the most due diligence on money managers. This is one of the most disciplined ways to combine managers to deliver investment results. Everything else is just wrapping. This same discipline can be used for separate accounts, variable annuities, mutual funds, etc.
MFMN: Have you ever considered shifting that core focus as the industry has evolved, and other players have entered the multimanager arena?
Brennan: That's our foundation. We now see a lot of firms in the multimanager space, and we've done some soul searching. But we've decided to continue our disciplined third-party format which involves manager research, and bringing together the best minds in a combined, multimanager, multiasset class and multistyle format.
MFMN: With other investment managers moving toward the multimanager model, how will Frank Russell compete?
Brennan: It's OK if others are working to promote the multimanager idea. It's a quality concept. Some will shine. But Russell has the most experience--30 years of commitment and depth of research. Our sole purpose is to manage outside managers. We don't manage money or own any money management firms.
It's really hard work to do this. The marketing pitch of a manager can fool people. But you have to really understand the manager and what combinations of managers will do, even within the same style categories. Particularly in the separate account world, people are learning that it really makes a difference which manager they pick.
MFMN: What areas are currently generating the most revenue for the company, and where are you seeing the most growth right now?
Brennan: The biggest revenue producing areas are our international operations, Frank Russell Securities, U.S. individual investors and U.S. institutional investors. Each segment provides an equal contribution to the firm.
By far, the fastest growing segment is the international operations where we sell Russell multimanager funds to both individual and institutional investors. We began by launching our first fund outside the U.S., in Canada, in 1990. Then we continued to expand globally. We went into Europe in 1995, Australia in 1997, and Japan in 1998. Europe is taking off with numerous new funds and asset classes having been created there in the last 12 months.
There's an interesting thing we have observed. All four geographic regions that we are in are entirely different. We have had to figure out how to take our multimanager idea and wrap it, price it, and distribute it in those home markets. There's no single process.
MFMN: Why do you believe the multimanager investment approach is growing in importance globally?
Brennan: There's recognition of the growing number of managers. People are realizing they cannot choose on their own. First, individuals got savvy about stock and equity diversification. But now they recognize the importance of diversification among managers.
The multimanager strategy is going to be a bigger part of the landscape but it will become available in different formats. Some want multimanaged bundled 401(k)s, VAs, or separate accounts. Over the last year we've recognized the importance of offering the same approach in different formats. We've worked at creating an environment where an adviser can get his Russell in various formats.
MFMN: Does that hold true even beyond mutual funds, such as the multi-managed funds Frank Russell offers?
Brennan: Separate accounts are the natural evolution to the multimanager process. Now the technology exists which allows for that diversification in an easy, customizable separate account format.
In the U.S., separately managed accounts are a new element for us this year.
MFMN: Do you believe the predictions that separate accounts will replace mutual funds as investment vehicles?
Brennan: There will be some cannibalization from mutual funds. But I think there will be room for both formats, mutual funds and separate accounts. Abroad, with different tax structures, the mix may be different.
MFMN: Whom do you view as your biggest competitors?
Brennan: In the multimanager area we compete against SEI, and against Northern Trust on the institutional side.
MFMN: All of your retail multimanaged products are sold through intermediary channels?
Brennan: Yes. There's a broad spectrum of intermediaries--broker/dealers, registered investment advisers, insurance agents--that are helping wealthy individual investors. We are out to service the needs of the high-net-worth intermediaries. But we've created an open architecture to recognize different needs, platforms.
MFMN: Right now, all of the Frank Russell multi-managed mutual funds are no-load. With other fund sponsors abandoning the no-load fund model and adding sales charges, do you have plans to follow suit?
Brennan: No. We have no plans to go the load route. It doesn't fit with the wealth management culture.
MFMN: What will be the distribution focus for Frank Russell now?
Brennan: We have become an effective partner for financial institutions around the world to help them deliver investment services. We want to continue that. Lots of financial institutions have to deliver a "choice," but people want intelligent choice, not just lots of choice. We want to deliver best-of-breed third-party choice to investors who are comfortable with their current financial services organization.
Frank Russell, in many ways, has become the Intel chip inside these companies' wrappings. We have developed a partnership business model.
MFMN: What are your goals for 2002?
Brennan: We are working to achieve the reputation of being the number one provider of multimanaged solutions. When intermediaries think of multimanagers we want them to think of Frank Russell first.
But even if someone else is already doing a multimanager program, we want to offer them implementation services. Many that utilize multiple managers need an enhancement to run more efficiently. Let us rebalance the asset mix among the multiple managers and your cash position. Use our intellectual smarts.
MFMN: Any other expansion plans?
Brennan: We are also looking to expand further into the UK and Germany. Those are two countries we are extremely interested in. We've had some great success in the UK institutional market and we now have one distribution partner in Germany but want to develop more. And we want to develop more retail business there.
We've seen much success in Europe within the last two to three years. We are now seeing about $10 billion just from the European continent. The Frank Russell business model is resonating.
MFMN: What is Frank Russell's biggest weakness?
Brennan: Our roots, our heritage is in financial engineering. We are a shop desiring to deliver a good solution. But we didn't pay as much attention to distribution. That has slowed our growth.
MFMN: Is 2001 going into the record book as a good, or a bad year for the company?
Brennan: We haven't needed to cut or layoff any of our people. We have not had any significant redemptions in our funds, largely because our investment process works. The future looks very bright and 2001 is shaping up to be our best year ever in terms of cash flows.
Frank Russell at a Glance
Parent Company: Founded 1936, Northwestern Mutual Life Insurance Company of Milwaukee acquired Frank Russell in January 1999 for $1.4 billion
Trademark: Pioneered multimanager investment approach (typically three to 10 managers) in 1969.
Products and Services
Offers 144 multi-managed investment funds worldwide including 31 U.S. no-load mutual funds with $16 billion in assets.
Investment Consulting - Provides consulting services for 225 clients in 35 countries with more than $1 trillion in assets. Clients include investors, funds, defined benefit and defined contribution plans, foundations, endowments and financial institutions. Provides asset allocation, information on markets and managers, manager selection/monitoring, performance measurement.
Investment Strategy and Research - Global staff of 250 researchers and analysts, 65 of whom evaluate outside money managers. Thirty-five portfolio managers and analysts manage and evaluate the 100 individual managers that sub-advise Russell's multi-managed funds.
Equity Indices - Provides 21 U.S. market benchmarks encompassing 98% of equity market, including the Russell 1000, Russell 2000, and Russell 3000 indices.
Performance Measurement - Russell/Mellon Analytical Services, a joint venture with Mellon Bank Corp. provides performance measurement tools to plan sponsors, money managers.
Frank Russell Securities - Firm's U.S. broker/dealer. Provides commission recapture, direct trading and proprietary research through 18 correspondent brokers in 40 countries.
Breakdown of Assets
Total worldwide assets under management: $66 billion in mutual funds, retirement plans, commingled institutional funds and private accounts
Retail: $30 billion
Institutional: $36 billion