It may be getting awfully crowded on the separately managed account playing field. But if a firm has truly talented managers that offer great performance, and management is willing to focus the firm's efforts and resources on distributing to a few select sponsors, it can carve out a successful path.
That's the belief of John H. Streur, Jr., president and CEO of Portfolio Services Group (PSG) of Chicago, the not-quite one-year-old service firm created by asset management firm Affiliated Managers Group. AMG created PSG late last year to offer centralized SMA sales and administrative servicing to any of its affiliated investment firms interested in offering SMAs.
PSG is itself a spin-off division of The Burridge Group, an AMG affiliate. AMG, which typically acquires between a 50% and 70% equity stake in its affiliated management companies, allows those firms to operate autonomously. AMG currently has 17 affiliates with a combined $77 billion in assets under management, and as such, weighs in as the ninth-largest separate account asset management group by assets, according to Cerulli Associates of Boston.
Money Management Executive Editor-at-Large Lori Pizzani recently spoke with Streur to assess what challenges and successes PSG has seen in building an SMA capability for AMG affiliates. An edited version of their discussion follows.
MME: Why was Portfolio Services Group created?
Streur: As we looked across AMG's affiliates, we saw that although a couple of the firms in the AMG family already had a strong presence in the SMA channel, most did not. Many didn't want to offer SMAs on their own. Others were used to just dealing with institutional investors and wealthy families.
We looked at those that had no presence in the channel and found that some of their investment products could be outstanding offerings. One year ago, across all of our affiliates, we created a multi-attribute product that broadly combined various aspects of our affiliates' expertise. We partnered with Wachovia Bank for that first multi-disciplinary portfolio offering. Then we went back and discussed how other excellent investment products from our affiliates could be outstanding if offered to other sponsor companies through SMAs.
So PSG was created. AMG, as the holding company, has seen fit to support the effort and has provided us with services as well as financial support.
MME: Why was PSG spun off as a company separate and apart from The Burridge Group, instead of making it a part of Burridge?
Streur: We wanted to make it clear that this initiative was over and above the Burridge business model, and make our servicing and distribution capabilities available to other affiliates. We wanted the affiliates to be comfortable that this effort was being structured so that there were no conflicts of interest.
We let them do their excellent investment management, while we centralized everything else. We provide the electronic links, do the portfolio accounting and reconciliation, and handle all of the sponsor interfaces and distribution. We do everything except the investment management.
Initially, PSG began by offering multi-attribute portfolios. It then broadened it to include SMAs. We are now finalizing a strategy to allow affiliates to have us do the administrative work and all support for any mutual funds they also manage, if they want us to. We are asking affiliate by affiliate.
MME: Are all of AMG's affiliated investment managers participating in this effort to tap into the SMA market?
Streur: No, and they are not going to be required to participate if they don't choose to. It is up to them.
Right now we have six participating investment firms: Essex Investment Management and Frontier Capital, both of Boston, Renaissance Group of Cincinnati, Systematic Financial of Teaneck, N.J., and The Burridge Group, which includes Sound Capital Partners. For an affiliate, it's a great way for them to extend their reach. But for some, their business model may be different. We think some more of our affiliates would be excellent, but if the affiliate doesn't want to, that's fine.
MME: Has the mission changed at all since PSG first debuted late last year?
Streur: Yes. We've broadened our offerings. Also, in the early days of PSG, if you offered two investment disciplines, that was fine. But now, at the sponsor level, the research people want to be more effective. They need someone who can provide a broad perspective and a broad view. Now PSG can offer a full suite of investment management, and sponsors know that we have six excellent products, and our list is growing.
MME: Do PSG's services to affiliated asset management firms also include a sales force to work with sponsors?
Streur: Yes. We have had a national account manager whose job it has been to deal with sponsors. We hired a national sales manager this past April, a former sales partner with Lord Abbott, and have begun to build out a team. We are now recruiting for more salespeople. We just hired two new people, one for Boston and New England, and one for South Florida, which has a very strong retirement-planning market.
MME: What have you learned since beginning this SMA build-out for the affiliates?
Streur: At the end of 2002, we struggled with what was the right thing to do and considered hiring people with less experience but with potential. But we've learned that hiring a great national sales manager is critical. Anyone who decides to build an SMA program should save themselves a lot of time and hire themselves a proven winner.
MME: What other challenges must new SMA market participants consider?
Streur: The next challenge is scale. Today, you're not up against niche firms, you're up against huge mutual fund firms. The struggle is how to make yourself relevant with at least 10 other head-on competitors out in the field. That's the challenge of any smaller player.
While we had been succeeding in gathering assets, that didn't mean that we had a great distribution network. It is important to have a talented, results-oriented lead person who is focused on sponsors' needs. That is critical.
MME: Are there potholes to avoid?
Streur: Yes. You cannot be all things to all people. You have to focus on specific sponsors. You need to segment the market, develop that segment, and stay with a strategy.
Also, five or six years ago, sponsor firms just wanted product. Now you have to provide excellent product, which has become a barrier to entry.
Don't even waste your time going to the national firms if you don't have excellent products.
MME: Where has PSG seen the most success?
Streur: We've found success with larger regional and national brokerage firms. But there is still plenty of opportunity within the big five - Morgan Stanley, Merrill Lynch, Smith Barney, UBS and Prudential. Yes, it's a crowded field, but there are some excellent opportunities. There's an opportunity to cut right through and get on the platform and make a difference.
We also attribute our success to having great relationships with our affiliates. Many holding companies struggle with related challenges.
MME: So far, what do you see as your greatest success?
Streur: Going from not being there to having multi-disciplinary portfolios, building the SMA business as we have and attracting extremely talented individuals are our greatest successes. Including Burridge and Sound Capital, PSG now has about $1.5 billion in assets. We have gathered $300 million to $400 million in new assets across SMAs and multiple-attribute portfolios since we began.
In no way have we matured, but we've grown to scale.
MME: Is it better to be known for a strong brand name or as a less-recognizable but institutional-quality manager?
Streur: Name recognition is the double-edged sword.
It is better to be recognized for having outstanding investment management products that financial advisers are not seeing from other sources. But you have to get past the "Tell me again who you are?" Once they get to know us, we're finding we are getting excellent penetration with those firms.
Once they use us, we find they tend to use us broadly, across different disciplines. But it's a slower build than with a national brand.
MME: What other challenges do new SMA players face?
Streur: For any new player, you have to educate the financial advisers about the benefits of the individual investment disciplines. Sponsors hire us for the process, the investment discipline and the effectiveness. But we have to provide good reasons in order to get hired.
MME: How does PSG plan to continue to compete in this increasingly crowded marketplace?
Streur: We are basically building our strategy around the excellence of our investment management. Our philosophy is a great team, with a great discipline and a proven record.
We try to offer superior products, then through our field sales force, build excellence in servicing. You'd better be very good to those who choose to work with you, or you'll be picked off by the big brands.
We are also focusing our resources on working with a specific number of advisers. Burridge and Sound View have had a relationship with Bank of America. We also now have a relationships with Wachovia, as I mentioned, and also with Wells Fargo Bank. And we are part of Prudential's MAP SMA platform.
We are immediately focusing on building sponsorships with banks as well as large networks of independent financial advisers. Those are the two fastest-growing SMA channels for us and our particular structure is being well received. They have an interest in boutique products. Particularly in the financial adviser channel, companies are coming to us and saying, "Here's what we need." We have additional deals in the works and should have another announcement soon.
MME: Since PSG has centralized sales, service and distribution for investment affiliates, might you spin off a second company that would provide those same core services to outside, non-affiliated investment firms wanting a slice of the SMA pie?
Streur: No. We have been contacted by many firms that have asked if we would outsource this for them. We are working exclusively with our affiliates.
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