The investment community both shuddered and grieved when it lost David Alger and 38 investment professionals from Fred Alger Management on Sept 11. Nevertheless, even before the dust settled, the day-to-day business of managing money and the firm's long-term viability had to be considered by Alger itself and the outside firms for which it sub-advised.
Early on, Fred Alger himself came out of retirement to again seize the reins of the company and made every effort to reassure clients that the company would be able to provide seamless management of all its portfolios [See MFMN, 9/17/01].
Nevertheless, the loss of so much intellectual capital within a single firm brought into question the investment team's ability to provide portfolio management at the same level of proficiency. Had a group of managers defected en masse to a competitor or to start its own firm, the same question would have been raised.
While Alger had developed strong ties with its business partners, fund and VA managers using Alger as a sub-advisor still had to wrestle with a difficult question: can my firm fulfill its fiduciary responsibility to its shareholders and/or policyholders while keeping Alger in place?
Most answered that question affirmatively. However, American Skandia opted to appoint an interim sub-advisor to handle the portfolio: MFS has assumed management of the $835 million in a mutual fund and VA sub-account.
Skandia's decision was not a defection or lack of confidence, the company said. "This is a temporary arrangement: we have not fired Fred Alger Management," said Michael Murray, chairman of American Skandia's investment committee.
Still, the move raised some eyebrows. "I was actually a little surprised at that because Skandia has had probably a two-to-three- decade-long relationship with Alger," said Teri Schultz, VP of marketing at Cincinnati-based Touchstone Securities.
Touchstone did not consider appointing interim sub-advisors for the two VA portfolios Alger manages, arguing that it was adequately diversified within the style category, Schultz said. "We have five additional large-cap growth funds, so we feel we're already diversified enough that, if people want to move their money around, we don't need to replace the manager."
"They [American Skandia] obviously aren't covered enough or they wouldn't have done that," said Shultz of the interim appointment.
In a demonstration of goodwill, Skandia has started a fund for the families of the Alger victims, seeded with $25,000. Additionally, both Skandia and MFS will donate revenue from their management fees to the fund.
Murray admitted that the decision to appoint an interim manager was difficult.
"Once it became clear late Tuesday evening and Wednesday morning that Alger had sustained heavy casualties, we knew that we would have to make some tough decisions. With their level of experience and expertise, we wanted to keep them on the portfolio but find a way to leverage another manager's expertise," explained Murray.
Skandia rushed to find a replacement within its existing stable of money managers: MFS fit the bill, especially because it already had analysts providing coverage of all the stocks in the Alger portfolio.
According to Murray, Alger was fully on board with the move. "Alger's response was that they completely understood what the decision was and were extremely cooperative with MFS. All three parties know that this is a temporary arrangement and are mindful of the primary goal, which is to ensure that the shareholder receives the best possible management," said Murray.
Sticking with It
With the same concerns in mind, other firms decided to stick with Alger. Bill Davis, VP of AEGON Transamerica Funds Advisors, said that his firm had struggled with the same decision but ultimately elected to stick with Alger. With $1 billion of assets in an IDEX fund and Western Reserve Life sub-account, both sub-advised by Alger, AEGON had a lot to worry about.
"We appointed an interim manager Tuesday night if we needed one," said Davis. Janus accepted the offer, but the plan was never put into motion. He later praised Janus's willingness to pick up the ball, adding, "That's a pretty big commitment to accept. But Janus agreed with ease and we figured we'd work out the details later, but they were altogether prepared to step in if we needed to."
Skandia's decision came as somewhat of a surprise to Davis, who commented, "That's an interesting response. I wouldn't say it's a bad one at all; I think it shows confidence."