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Old Line Firm Reaches Out to Everyman

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.