It might not be the story of the phoenix rising from the ashes but the re-emergence of a leaner, meaner Nicholas Applegate from the wreckage of the 2000 stock market crash is impressive nonetheless.
The $14.8bn (€11.2bn) growth shop, which has lost 70 per cent of its assets since it was bought by Allianz Global Investors in 2000, has now restructured and stands poised for expansion in Europe.
But chief executive officer, Marna Whittington, is not interested in writing another ‘rags to riches’ story. The woman who in 2001 eschewed retirement to take on the challenge of turning around a rapidly shrinking business says hard lessons have been learned and mistakes won’t be repeated.
Shutting down funds
Joined by chief investment officer, Horacio Valeiras in 2002, she began by closing the sector funds. To address the poor performance of the traditional growth and core growth strategies (“only 16 per cent of our assets were ahead of their three-year benchmarks”), she developed new valuation, research and risk management tools.
“The worst thing you can do in this business is take in more assets than you can manage and try to produce alpha. Like other firms, this is one of the mistakes we made prior to the stock market fall,” she says.
A combination of market movement and new assets coming in led to many of Nicholas Applegate’s strategies growing quite large.
The lesson she learnt was to close, and close early. So now all of the firm’s products are capacity-limited. For instance, at the end of 2006, the largest of Nicholas Applegate’s 35 strategies was the $919m International Growth while the smallest funds were the $3m US Systematic [quantitatively-driven] Large Cap and the $3m US Systematic Small-Mid Cap strategies.
The meagre amount of assets in these systematic funds stems from the departure a year ago of six members of the systematic team to set up their own business. After that, most of the assets under management in these strategies was withdrawn.
But the systematic team has now been rebuilt and Ms Whittington claims that the new quant funds managed “are more robust than before”.
More fundamentally, she has reshaped Nicholas Applegate into a three-pronged business with traditional equity, systematic and high yield and convertible strategies.
The advantage, she claims, of running these three distinct investment groups under one roof is that it affords both a debt and equity perspective on a stock, “which means we do a better job for our clients”.
Now she has decided to close the firm’s $1.3bn US large cap value and small cap value equity funds in order to focus on its growth, core, systematic, high yield and convertible bonds.
“Within the AGI group, there are other value managers [NFJ Investment Group and Oppenheimer Capital], so we did not see a future in building out our value suite of products”, she says.
New thrust
Instead, the firm, which already manages around $800m for institutional investors in France, Holland and Germany, will spearhead a thrust into the European institutional market with its traditional Global Select and systematic equity strategies. The London office is headed by Nicholas Melhuish, who is also portfolio manager for the Global Select strategy.
But no hard sell is planned. Ms Whittington points out that the UK office will focus on investing and client service and leave the business development to its parent, AGI.
Allianz sales staff, she says, will present Nicholas Applegate’s investment products to existing and prospective institutional clients, if they feel it is appropriate to do so.
“I am not here to tell you that we are going to sell XYZ products and raise X amount of assets. If we win two three or four mandates a year in Europe and they are the right mandates and by that I mean the right products for the client, we will be happy,” she says.
Does she try to ensure that Nicholas Applegate’s products are promoted to prospective clients by AGI? “If we are not the best performing product, then the prospective client should not be sold that product. To do so would not be in AGI’s interest or ours,” she says.
The firm is targeting growth of 5 per cent a year in net inflows with market rises hopefully delivering an additional 5 per cent.
This level of growth, she believes will keep her staff “stimulated” and financially rewarded while allowing the firm to continually reinvest in its technology and operations platform, launch innovative products and give shareholders a “fair return”.
But Ms Whittington hastens to emphasise that she is not focused on gathering assets. Her main concern is achieving sustaianable performance because that is the only story that sells.
She says: “I have not seen any research which shows that the size of an organisation is a predictor of performance. I do know that the size of assets under management in strategies is a predictor of performance. Fixed income is a big scalable business, but equity strategies are inherently capacity-constrained and I think if you put too many assets in a given strategy with a given team, it is inevitable that performance will deteriorate.”
So the firm wants to be good, not big. Ms Whittington claims that at the end of December 2006, 80 per cent of strategies outperformed their one-year benchmark and 90 per cent their three-year benchmark (see table).
Nicholas Applegate manages a modest $9m of assets in a systematic market neutral fund. More long-short type products are in the pipeline. The firm will soon roll out two 120/20 and two 130/30 strategies which are currently being incubated with seed funding from AGI.
Extending expertise
“We see the long-only and alternative spaces coming together and our move into alternatives is an extension of our long-only expertise,” says Ms Whittington.
She forecasts that many institutional investors will suffer by subscribing to hedge funds launched by fund managers who lack the necessary expertise to step outside the long-only arena.
However, if an asset manager can generate sustainable and measurable alpha in any investment product, be in a long-only fund or a hedge fund, that manager will be able to command a premium.
“Producing alpha is very difficult to do, but there is a plan sponsor who will pay you nicely to do it,” she says.
Given the commitment to limiting the capacity of its stategies, Ms Whittington says the firm will always look to launch new products. A new systematic emerging market equity strategy is in the offing, while the firm has just raised $500m for a new closed-ended fund which will invest in a combination of convertibles, high yield bonds and options.
Going forward, Ms Whittington anticipates greater demand in Europe for the firm’s systematic equity products on the back of increasing risk awareness on the part of institutional investors. The quantitative strategies also offer the investors the option to leverage their investment if they so wish.
In a move designed to incentivise and retain staff, Nicholas Applegate in line with other subsidiaries of AGI, has implemented an equity ownership programme in a bid to incentivise and retain key staff.
“I think people want ownership in the value they create,” says Ms Whittington.
