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SMA Quality, Not Quantity at Lord Abbett


Separately managed accounts have enjoyed tremendous growth in recent years as high-net-worth individuals have been lured by their direct ownership and tax management features. Nowhere in the asset management industry has that growth been more evident than at Jersey City, N.J.-headquartered Lord Abbett, a well-established partnership with $49 billion in assets.

Under the leadership of Mark Pennington, partner and director of advisory services, the firm has taken the managed account world by storm. Armed with a unique strategy of combining a small number of sponsor relationships with a seasoned sales force, Lord Abbett has risen from $3.6 billion in separate account assets at the end of 1999 to more than $14 billion at the end of 2003.

Money Management Executive Associate Editor Kevin Burke recently spoke with Pennington about putting together a successful SMA program and what challenges lie ahead for the industry.

MME: What challenges are you currently facing in presenting separately managed accounts to clients?

Pennington: Right now, there's little customer pull. People are not coming into financial consultants and saying, "Give me some of those separately managed accounts." If you go back three years ago, when the market was booming, people were either trading on their own, or they were going to their financial advisors and saying, "Put me in this Internet fund or I'm moving my account."

If you look at some of those day-trading strategies where investors were chasing what looked like the Holy Grail of their investment future, it turned out that greed was probably driving that investment decision. The flip side of that right now is you have people putting their money in short- term fixed income, or even remodeling their home because real estate is doing so well. Those strategies really are based on fear. Fear and greed are the two largest-driving forces for individuals making their own investment decisions. And investors acting on those emotions typically tend to be doing the wrong thing at the wrong time.

MME: What investment styles are the biggest sellers right now?

Pennington: I would guess growth and value in stocks and bonds, but I couldn't confirm that. You would have to go to a sponsored firm to get that. I know our flows have been incredibly strong. We've had a very robust business in the separate account space. If you go back to September of 1999, we were at $3.6 billion in assets. Now we have over $14 billion in assets.

MME: Who are your typical managed account customers?

Pennington: It could be a person with $1 million to $1.5 million in investable assets, probably 50 to 60 years old with a longstanding relationship with their financial adviser. The minimum account balance at Lord Abbett is $100,000. There are a few exceptions out there, but typically $100,000. Basically, what you need in the separate account space in order to get the adequate diversification with $100,000 minimums is to put at least $500,000 at those minimums to get properly diversified. So, if you have someone with a net worth of $1 million to $1.5 million and they have $500,000 dollars in investable assets, that would be a decent profile.

MME: What would you say is the sweet spot for the SMA business?

Pennington: Well, remember that we are probably a part of an asset allocation. Some people choose to put all their money with us, but I think a lot of people in an open-architecture environment would give a portion of their assets to us. If they hired three or four managers, we would expect to get one-third to one-fourth of that $500,000 to $1.5 million. That's what I would say would be the sweet spot.

MME: How is your firm trying to service the customer differently from your competitors?

Pennington: Our strategy has been a simple one. We want to make a lot of difference to a few people rather than a little difference to a lot of people. We really only embrace sponsor firms that want to approach this business as a client solution versus just another product to sell to their clients. And so what we've done is worked with just eight different sponsor firms, whereas the average manager has 31 relationships. We also have the largest sales force of any manager in the separate account space.

Think of it as three legs of a stool. We have 55 regional managers in the field and 11 portfolio specialists who are intimately familiar with the portfolios. At a moment's notice, they can conduct a conference call or presentation for a client at a portfolio level. The second leg of the stool is education. We put a lot of time and effort into CIMA (certified investment management analysts) education for our regional managers to make sure that not only are they out talking about how we run our business, but also can help the broker work with the investor as a true consultant.