Heartland Fights Back After Crisis
August 13, 2001
It has been over nine months since a class-action lawsuit alleging management fraud was filed against Heartland Advisors, yet reporters still call once or twice a week about it, according to a company spokesperson.
In fact, it can take years for a firm to rid itself of a tarnished reputation, and the only means to do so is to engage in an aggressive campaign for clients and the public, according to public relations consultants.
Last October, Milwaukee-based Heartland, with a long-time reputation for squeaky clean, small-cap out-performance, was named by shareholders of two junk bond funds in a class-action lawsuit (MFMN, 11/6/00). The firm had adopted a fair-value pricing procedure, which led to a drop in the net asset value of the funds by 44% and 70% and the complaint alleged that the firm issued false and misleading information about NAV, performance and risk. Neither the litigation, nor the public relations nightmare, is over.
"Once something happens, and once it gets very bloody, it's very hard to gain the reputation back," said Richard Sincere, president of Sincere & Co., a marketing and distribution firm, and former senior VP of marketing for Fidelity Investment Advisor Group. "It can take a really long time."
Indeed, last week saw a major Wall Street Journal story on the problem.
Address The Situation
The most important thing companies that face a PR crisis can do is address the incident and not try to hide anything, Sincere said. "People need to be as open as possible--recognizing that there are losses, recognizing that their lawyers are going to be advising them differently," he said. "If they're not communicating with their clients they're making a huge mistake. Most people want to ignore it, and that's just foolishness."
Being as open as possible about the incident is especially crucial. If it is already getting media attention, people are going to find out about it anyway, said Ann Becker, president of Thompson Becker International, a financial services PR firm. "If the incident is going to make people not trust you, you have to apologize for it," she said. "If it's bad, you're going to lose assets. It's important that you regain the trust of the people who are buying and selling your funds."
However, being upfront about the situation is not always possible. Because litigation is still pending, Heartland would not comment on any aspect of the re-pricing, the case or its aftermath.
But even in that scenario, there are things firms can do to help deflect some of the media attention, said Becker. "Firms should definitely focus and highlight another area of the business that is positive," she said.
That appears to be exactly what Heartland has done. Following the unwanted media attention from the lawsuit, the firm advertised heavily in Milwaukee newspapers promoting its flagship Value Fund, according to an analyst who spoke on a condition of anonymity. While an aggressive campaign to promote the value fund might not have helped with institutional clients or financial advisors who are immersed in the industry, it could draw in assets from retail clients, who simply haven't heard the bad news, the analyst said.
"I can tell you right now that our focus is value equity management and in particular small and micro-cap value, which is a style that has been very much in favor in the last six to 12 months," said the Heartland spokesperson. Then he touted the recent performance of the fund, adding that it was recently mentioned in The Wall Street Journal and Forbes and has been ranked highly by both Morningstar and Lipper.
Apparently that approach seems to have worked for Heartland. Assets of the value fund had dropped 13.5% from the end of the 3rd to the end of the 4th quarter last year amid the turmoil, according to Lipper. In that time total mutual fund assets fell only 4.2%, according to the Investment Company Institute. However, from that point to the end of June of this year, the assets of the value fund are up over 14%, while total mutual fund assets are roughly the same. So, while outflows haven't stopped, they've slowed.
The most important lesson in all of this is to make sure that you have a strong brand to fall back on in case of a crisis, according to David Srere, a group director at Siegelgale, a New York-based strategic branding firm.