Ralph Verni may be the only investment company executive who says that he is pleased about voluntarily returning millions of dollars to investors after a core strategy driving one of his portfolios failed.
Verni, chief executive and chairman of State Street Research & Management Co., closed the firm's two-year-old market-neutral portfolio in 1996, returning its assets of about $100 million to the institutional investors in the program.
"We took a hell of a tumble with that," he says. "It was a lot of revenue [that] we said goodbye to, but so be it."
So be it, indeed. Despite his studied casualness, Verni and his 75-year-old Boston-based company learned long ago that a reputation for strong performance and veracity counts for almost everything in the managed money game.
"In a funny way, we made a few friends by doing that," he says.
He also says that State Street, which has been tarred at times by its reputation as a slow and methodical company, must not be deterred by stumbles. The company, whose retail funds are sold primarily through broker/dealers, must continue to devise new business models and investment techniques and to increase its distribution channels, Verni said in a recent interview.
Founded in 1924, State Street Research is a subsidiary of Metropolitan Life Insurance Co. (It has no ties to State Street Bank & Trust Co., the Boston-based custody bank.) The company has $55 billion of assets under management including $18 billion in its 24 retail equity and fixed-income mutual funds. Although that is only one-third of the company's total assets under management, the retail sector has been growing rapidly under Verni's direction. At the end of 1994, State Street Research had only $4.5 billion of assets in its retail funds.
The company's overall assets under management make it 63rd among more than 600 U.S. money managers tracked by Financial Research Corp., a Boston consulting firm. State Street officials have a five-year plan to rank among the top 30, primarily through new programs and products on the drawing boards, says Ray Liberatore, an analyst at FRC.
The firm derives a large portion of its $37 billion of institutional assets from managing public and private pension funds. Among its defined benefit plan clients are such behemoths as Ford Motor Co. and Lockheed Martin Corp. As workers retire and get their lump-sum pension pay-outs, State Street, of course, hopes to convince them to transfer assets to the company's retail funds.
One of State Street's main drawing cards is its reputation for solid returns, strong research and employee stability. Its 36 analysts have an average tenure at the firm of 12 years, the company says.
"This is the granddaddy of stock research," says C. Troy Shaver, who joined State Street as executive vice president and head of marketing in 1996, after serving as president of John Hancock Funds. "When I was a stockbroker, this was where it all happened."
The company's portfolio managers also tend to have longer tenures than the industry average. State Street Research's original growth-and-income fund, launched in the mid-1920s, is still operating. Its portfolio manager, John Wilson, is only the fifth in the fund's history.
State Street was created when several Boston blue-blood families got together to jointly manage their money. In 1924, that pooled effort became State Street Research Investment Trust, the nation's second-oldest, publicly-offered equity mutual fund.
Met Life, the New York insurance giant, bought the fund company in 1983 and its 7,000 agents account for about 20 percent of State Street retail fund sales. Merrill Lynch is the second largest retailer of the company's funds, representing about 15 percent of all sales, according to Shaver. A Merrill spokesperson said the company does not comment on sales statistics or compensation arrangements on its non-proprietary funds. In recent years, State Street has also begun distributing through financial planners and independent registered reps.
Verni, who is also president of State Street Research, is himself an insurance man. Before joining the company in 1992, he ran New England Investment Companies, an insurance holding company. Prior to that, he spent 16 years as a senior investment manager at The Equitable.
State Street's insurance industry ties may account for the conservative reputation it has cautiously been trying to shed. Though Verni stresses his company's innovative nature, State Street began professional marketing of its retail funds only about eight years ago. That was long after its load and no-load competitors began developing sophisticated marketing machines. Likewise, the Boston company's push into the 401(k) market is less than two years old.
"Until 1984, we limited [our money-management efforts] to the top 50 companies in America," says Shaver.
State Street Research has a market share of about 0.65 percent among fund wholesalers, according to Financial Research Corp. Among the niches it is building to increase its penetration are specialized marketing of financial planning services to professional athletes and labor unions.
Its sports group, launched two years ago, targets young athletes (the average age is 20 1/2) who earn an average annual bonus of $4 million, according to Shaver, who coordinates the group. The focus is on simplicity. Its core investment vehicle is State Street Athletes Fund, an open-end large-cap growth fund launched in March, 1998. The fund has returned 28.2 percent in the 14 months ending May 31, 1999, handily beating the S&P Index by 7.2 percentage points.
State Street advisors are trained to talk to athletes about the fundamentals and to illustrate them with clear account statements and charts.
"Very few people can understand their account statements," Shaver says. "The more simple you make it, the more people are going to come to you."
On the defined benefits front, State Street's fledgling efforts got a major boost this year when the company won the investment management and record-keeping mandate for running the Supplemental Income 401(k) plans of a global consortium of 15 unions including the Teamsters. State Street, which began managing the plans on April 1, 1999, says the assignment represents the largest multi-union, collectively- bargained Taft-Hartley 401(k) plan in the country. State Street would not comment on its pricing.
The plan covers 350 employers and about 6,000 active participants with over $30 million in assets. Shaver has estimated that State Street can potentially capture 35,000 participants.
In another push to expand retail marketing, State Street in May rolled out a program to help brokers capture investors of Hispanic and Chinese descent. State Street provides bilingual marketing materials for the two groups, while investment options are designed to appeal to the traditional investment tolerances of the ethnic groups.
State Street cites demographics to explain why it has targeted the new markets. Hispanics are expected to make up 14 percent of the U.S. population and control $965 billion of buying power by 2010. Chinese-Americans already have $20 billion in annual purchasing power and represent 30 percent of the country's overall Asian population.
To be sure, all is not rosy at State Street. In this year's first quarter, impatient investors yanked so much out of the company's equity funds that the firm recorded $88 million of net equity outflows, according to FRC.
One of the biggest losers has been State Street Research Capital, a mid-cap growth fund that has been slapped around by the market's disdain for anything but big stocks. As of May 31, the fund's net asset value year-to-date had fallen by 1.3 percent, and it has trailed the Russell Mid-Cap Growth Index for the previous five years.
Another casualty of recent market trends has been State Street Research Aurora. The small-cap value fund suffered losses in 1998, after experiencing strong gains in both 1997 and 1996, according to Morningstar.
State Street officials say both funds fell prey to the market's bias toward large stocks and against smaller and value stocks.
"Aurora fell into both those categories," said Joan Miller, the company's senior vice president for communications. However, Aurora's three-year annualized return of 17.3 percent is still nearly seven percent ahead of the Russell 2000 Value Index.
Company officials say the current managers of Research Capital and Aurora will remain in place. Richard Jodka, manager of the Research Capital Fund, took over in February, 1998. Portfolio manager Rudy Kluiber has run State Street Research Aurora since its inception in 1995.
Some other funds, of course, have fared better. Legacy, a large-cap growth fund introduced in late 1997, had a 12-month return of 22 percent as of May 31, slightly ahead of the S&P 500. State Street Research Investment Trust ranked in the top tenth percentile among 340 growth-and-income funds for its five-year annualized return of 22.4 percent as of May 31, according to Wiesenberger, a fund industry data firm.
Despite the recent ups and downs, States Street Research is "turning things around," says Liberatore, the FRC analyst. The company that began by investing for Boston blue-bloods is now reaching out for everyman.
"They're marketing much more aggressively," Liberatore says. "I think that will help a lot. They may be slightly ahead of their time with [the multicultural program], but I think that, over the long run, it's going to pay off."
This story first appeared in the August issue of On Wall Street, another SDP publication.