Blu Putnam, chief strategist, and small cap aficionado Mary Lisanti, explain the approach at Bankers Trust's $200 bn-strong fund management business
If you asked IROs to name the second largest fund manager in America after Fidelity, few would come up with Bankers Trust. But with nearly $200 bn worth of assets under management, Bankers Trust has a strong leadership position in most US investment management market segments and in terms of size, comes second only to Fidelity.
Bankers Trust's stated mission is to deliver traditional and innovative investment solutions while minimising risk, and its approach aims to offer investors the ability to move along the risk-reward spectrum on any imaginable course.
The history of the business dates back as far as that of any major US investment house.
Founded by the illustrious JP Morgan, along with other financiers, back in 1903, its original raison d'tre was to offer trust bank services to commercial banks who were precluded by law from entering the trust business. When that barrier was eliminated in the 1920s, Bankers Trust looked for markets in which to expand. By 1938, money management was looking like a promising path in a country emerging from recession and building for war, so Bankers began a steady climb, topping the $30 bn in assets by 1980.
Since then the pace of growth has been torrid rather than steady. 'We achieved this growth by providing an unparalleled range of traditional investment strategies,' says Bluford 'Blu' Putnam, managing director and chief strategist at Bankers Trust.
'Our portfolio management teams operate as pockets of enterprise, applying independent judgement and technology-driven decision models to domestic and international markets, thus achieving consistent and superior returns,' claims Putnam. Over the years, we have created product development teams operating independently from traditional managers, and they have designed new products and added extra value to the investment approach.'
Bankers Trust offers a total of 60 investment strategies, and some 20 per cent of its institutional clients have asked the firm to employ three or more strategies. The firm offers customised products in the form of commingled trusts, registered mutual funds and offshore unit trusts.
As one of the largest managers of tax exempt funds in the US, Banker's customers include institutional investors, pension funds, defined contribution plans and defined benefit plans. 'It is hard for people to classify us given our diversity,' says Putnam.
'Basically, we are multi-product oriented and we want to convey to clients that we will work out the best solutions across a range of asset classes and strategies.'
Bankers Trust's assets under management are broken down in roughly equal amounts between equities and fixed income, as well as between active and quantitative management techniques (see chart, next page). The average account varies in size from as low as $200 mn to as high as $3 bn. Some $160 bn of the assets are managed out of New York, with an Australian unit handling a further $20 bn as an active global equity fund manager. The business in New York is half passive, and nearly one-third conservative fixed income. That leaves some $35 bn spread across a variety of actively managed equity, bond and global asset allocation products.
The two operations - Bankers Trust Global Investment Management (GIM) based in New York, and Bankers Trust Funds Management (BTFM) based in Sydney - represent the global asset management arm of the business. There is also a trust bank in Japan with over $10 bn of assets under management, but this operation largely stands on its own, dealing mainly with the needs of Japanese institutional and pension fund clients as well as those foreign accounts investing in the Japanese securities markets.
BTFM - which, incidentally, is Australia's largest fund manager - is counted on to supply a good deal of the international strategic thinking and investment policy. Although the Australian team primarily handles high net worth individuals, retail clients and Australian pension funds, the group travels around the world identifying opportunities. Using voice and video conferencing, as well as e-mail and a just-launched 'intranet' capability (a private Bankers Trust network on the Internet), Bankers Trust makes sure its international teams can communicate effectively with the US investment managers.
'If you are managing a US portfolio and not thinking about the rest of the world, you will lose money,' says Putnam. 'Besides, there are good reasons to handle international investment out of Australia. Apart from the proximity to the Pacific Rim countries, it is natural for Australian investors and companies to demand a global view, given the size of their capital market. For that reason, BTFM has been able to establish a global edge. After all, in the end US fund managers are more inward looking and big enough to live with this conceit.'
Putnam's global vision of asset management is key to the strategic thinking at BT.
Responsible for equity products, along with managing director Frank Salerno, Putnam oversees development of US equities, international equities and index funds. He also wears the hat of chief strategist responsible for investment strategy and global asset allocation. Reporting directly to Ivan Wheen, managing director responsible for BT's investment management business, Putnam is involved in client advisory work and risk measurement. As for Wheen, he reports directly to Frank Newman, president of Bankers Trust New York Corp.
Putnam joined Bankers Trust in mid-1994 after spending more than 18 years as an international economist and market trader. His previous experience included positions as economist at the Federal Reserve Bank in New York, principal and head of the international bond strategy team at Morgan Stanley, and chief economist at Kleinwort Benson.
Putnam's counterpart on the fixed income side of BT is managing director Vernon Barback, who was president of Bankers Trust's Japanese business and was chosen to lead the bond team in mid-1994.
Putnam does not downplay the passive management side of the Bankers Trust equation.
On the indexation front, the group offers a variety of products, including Russell 2000 and 3000 index strategies, which compete fiercely with the likes of Wells Fargo and State Street.
'It is a business with high barriers to entry, but once you have the system in place you can take billions of dollars more without any trouble,' says Putnam. 'Still, tracking indices is not as easy as it sounds. You can buy the stocks, but then you must deal with money flowing in and out, take care of dividends, and deliver the technology. A constant monitoring and rebalancing must take place to compete in this market.'
With all sorts of tilts and twirls available for those interested in tailored passive management, BT still boasts that its active managers can beat the index over time. As Putnam notes, 'The S&P 500 is one of the hardest indices to beat if you invest in just those 500 stocks. To beat the index, you have to extend to niche areas, like high technology stocks.
Active managers can beat indexers by specialising in less liquid markets. When you move down the spectrum and invest in small caps, your research, knowledge of management and selection of themes all pay off.'
Generally speaking, however, it is client needs - rather than research prowess - that drive the asset allocation decision; the role of the research effort is to provide support for this.
'We bring our research to bear to back up the depth of our products and to earn the right returns with the right risk levels,' says Putnam. 'And the strong quant bent of the research component brings discipline to active managers.'
BT's quant methodology is used specifically to reduce the universe of investments.
For instance, with some 3,000 stocks in the small cap sector, Bankers Trust will make the first cut by using its quant capability. 'Our quant strength means that active managers have a great set of tools to assist in forming a judgement,' says Putnam. 'There is tons of information out there, and it must be processed in some way. The question is how active managers use quant tools. At the end of the day, it is their responsibility to make the call. This call becomes increasingly more important as risk factors rise.'
Putnam says that companies seeking to attract the eye of a Bankers Trust fund manager should focus on growing their business; if they succeed in that, attracting investment interest will take care of itself. 'We search for companies where we think growth projections will be met and where credit ratings are rising,' he says. 'If you manage your company well, we will find you. While many fund managers rely on roadshows, we like to go on site.
We are focused on who we want to see, why and when.'
Management projections usually stress growth, according to Putnam, but these tend to be overly bullish. What a Bankers Trust fund manager has to decide is whether a particular company can deliver on its plans and, just as importantly, whether the market believes it can do so. At Bankers, much of the investment process goes far beyond mere numbers: buy decisions are often made on the basis of management credibility and the faith portfolio managers place on the corporate management's ability to meet projected earnings over a reasonable time.
When valuing a company, fund managers will usually seek advice from the research arm.
At times, equity and bond research will flow together, especially in the area of high yield debt, international investments and emerging market plays. While high grade bond research focuses on interest rate trends and the course of the Federal Reserve, the research in riskier fixed income instruments moves closer to the needs of equity investors. In the case of smaller companies, however, which do not have the ability to issue bonds, analysts have to make do without this kind of collaboration.
Each basic product area has its own research team at Bankers Trust, and these teams are all brought together in order to discuss the asset allocation process. (Whatever the agreed asset allocation, there is still discretion to move between bond and equity investments: about $2 bn of the active assets under management are in asset allocation strategies, and a further $2 bn are in quant asset allocation programmes.) To arrive at the best allocation, the firm's portfolio managers gather together on a regular basis to talk about what is happening in the financial markets and the global economy.
After listening to everyone else's opinions, the asset allocation team then goes off to make its decision.
An important element in the research and decision-making process is the analysis of themes: at Bankers Trust understanding global themes is deamed just as significant for successful investment practice as any sectoral developments. Take the demographic trend of baby boomers growing older, for example. The asset allocation group will take account of the fact that baby boomers are now considering their retirement, and that the resulting change in mindset may make them more likely to buy utility vehicles, less likely to buy flashy sports cars - which could, in turn, translate into the purchase of a stock class.
Another dominant theme in Bankers Trust's thinking is technology, but this is not just about the sector being highly desirable; it is also about deciding which companies - regardless of sector - are the best at exploiting leading technologies.
So, on the basis of this thematic approach, the Bankers Trust research intensity and the views of active managers, where does economist Putnam see the US market heading? 'US companies have been doing well in the 1990s because they addressed the excesses of the 1980s,' he says. 'But as they became leaner and meaner, the market did not give them credit for that move until it was sure profits could be sustained. If you look over three years, the S&P 500 has averaged a 10 per cent return annually, much of that in 1995. Over that three-year period, profits grew by 40 - 50 per cent. In the last six months, the market has begun to capture the value of those profits. Now that the market is higher, we believe fair value is being achieved. And that means we will look more closely at sectors and companies, rather than calling the market as a whole.'
Spoken like a true fund manager.
Small Cap Investment
Mary Lisanti, managing director of global investment management at Bankers Trust, has a title that belies her true strength. While she may indeed have a global view, Lisanti's credentials as an investor in US small and mid-cap companies are second to none. A regular member of the prestigious Institutional Investor All-Star Team in emerging growth stocks, Lisanti has registered annual returns of 25 - 30 per cent over the course of her 17 year career.
'Small caps go in cycles,' says Lisanti. 'Since 1990 these stocks have overperformed, and we see that cycle continuing for the rest of the decade.'
Lisanti oversees $1.3 bn worth of investment in the small and mid-cap arena, with Bankers Trust Investment Small Cap Fund (launched in 1989) and Bankers Trust Investment Capital Appreciation Fund (launched in 1967) spearheading the product line.
Traditionally, these two funds have been offered to 100 institutional investors, Erisa pension funds and some 70 mutual fund managers. The investor mix has recently been extended, however, in order to attract high net worth individuals and financial intermediaries in a mutual fund format.
Performance of Lisanti's benchmark small cap funds has been stellar. The Small Cap Fund has been the top performer in the Lipper universe for the last five years for all funds, and the top-ranked Small Cap Mutual Fund has risen some 75 per cent in the year to the end of July 1995. Lisanti has achieved these results with a team of four portfolio managers who claim a total of 47 years of analytical experience among them, as well as a four-person trading group with a combined 60 years of screen action.
Lisanti notes that information flows in respect of small and mid-cap stocks are not always up to the standard needed, and she relies heavily on her investment team's analytical capabilities as well as investor relations presentations. 'These are not big companies, and they are not well covered,' she says. 'Your average S&P company has 23 analysts following the stock, while the average small cap has two to four analysts, and mid-caps five or six. That means we have to do our own research by spending time with company managers, visiting trade shows, and talking to customers, suppliers and competitors.'
Most stocks purchased by Lisanti and her colleagues are listed on Nasdaq. The average market capitalisation on the S&P 500 is around $15 bn, whereas Bankers Trust's small cap universe of companies are in the $50 mn - $750 mn range, averaging $400 mn. Its mid-cap companies are capitalised at anywhere between $600 mn and $2.5 bn, with an average value of around $1 bn.
No single stock makes up more than 3 per cent of Lisanti's $1.3 bn portfolio, but it is not unusual for Bankers Trust to put $10 - 20 mn into a single stock investment.
Theoretically there are some 2,500 companies Bankers Trust could opt to own in the small cap universe, and a further 1,500 mid-caps. But these 4,000 stocks are screened down to a potential buy list of 300, which is constantly changing as the average annual portfolio turnover reaches 100 per cent. Out of these 300 stocks, some 75 - 100 companies will be picked to make up the Bankers Trust portfolio.
Lisanti says there are few companies in the market that the investment team knows nothing about; and she notes that if her team selects correctly, the stock price on the chosen few will double or triple over a one or two year period. In the end, much of the investment decision depends on an interaction between the company and Banker Trust's portfolio managers. ' If we don't buy management strategy and vision, we don't buy the stock,' says Lisanti. 'Among the many factors studied is the percentage of company ownership held by managers. We want the interest of management to be tied with our interest: then if they become wealthy, shareholders will become wealthy.'
Other factors Lisanti considers when choosing her portfolio are improvements in business models and earnings that exceed expectations. 'We do not look at what the company is doing now, but where it will be in three to five years time,' she says. 'We want to know how management is going to execute its plan and what the risks and rewards are if they do. Then we make the decision whether the company will enhance shareholder value.'
Besides a quick trigger finger on the sell side, Lisanti backs up her record of picking winners by making calls on macro themes. 'We take a proactive and forward looking view of the world,' she says. 'It is not so much a top down approach as a way of looking at global developments. We look at what could change in the world that would create opportunities or problems for investments. So even with regard to US small caps, we are always looking and thinking globally.'