Federated Continues SMA Push into Retail
January 26, 2004
It's not easy being the new kid on the block. But sometimes being the old kid on the block is no bed of roses, either.
Federated Investors, which has a total of $193 billion in assets, has amassed $6 billion of that money in separately managed accounts. However, while Federated has been an SMA provider since 1973, the Pittsburgh-based fund giant has only pursued retail accounts in the past two years. And that has made getting onto the top-tier SMA sponsor platforms something of a challenge.
Robert F. Tousignant, national sales manager for managed accounts at Federated, recently spoke with Money Management Executive Editor Lee Barney on how he plans to double those SMA assets over the upcoming years - and get onto the big league platforms.
MME: Isn't Federated a longstanding player in the separately managed account business?
Tousignant: We have been in the separately managed account space since 1973, and we have more than $6 billion, but, granted, most of those separate accounts were institutional, or quasi-institutional - small endowments, federations, etc.
And Federated decided to take that expertise and transfer it over to the retail side two years ago. To date, we have been successful at getting on platforms like Raymond James, Legg Mason, LPL, Lehman Brothers, Bank of America, Janney Montgomery Scott, Ryan Beck and Stieffel Nicholas.
We also have a pretty unique niche in the marketplace in that a lot of Federated's history goes back to servicing trust departments of banks. In the early 1970s, we started to provide money market funds to them, and then, that progressed to selling them fixed-income funds, to equity funds, and now we are actively gathering assets from trust clients.
We are also on what is commonly referred to as turnkey asset management programs like AdvisorPort, Investnet, PMN and FundQuest.
Now, in addition to these major platforms, we are in the process of talking to the top-tier platforms and are cautiously optimistic we will be able to get onto one of their platforms.
MME: Only a handful of sponsors control the SMA space. Smith Barney, for instance, is said to have a 90% market share of multiple-style portfolios. How hard is it to get onto this top tier?
Tousignant: (Laughs.) Very hard. And part of that is really because it isn't about what we have. It's about what they need. If we are talking to a certain firm, and they are in the midst of searching for a small-cap manager, and our discipline does not include that, we have no chance to get on their platform that quarter.
MME: On top of these market-entry difficulties, given the increasing popularity of SMAs among asset managers, isn't it getting awfully crowded out there?
Tousignant: This is becoming a very, very competitive aspect of the business, and I think that because it's growing and it's attractive, and if you don't have a separately managed account group, you really can't offer a comprehensive wealth management program.
So, that's why I think more and more firms, seeing the growth of this business, are saying, "Hey, this is something we have to look at."
MME: What does Federated offer in separately managed account products and services that your competitors do not?
Tousignant: First of all, we offer three equity styles: a core equity, a mid-cap value and a large-cap value. We also offer products on the fixed-income side.
But, quite frankly, when you look under the hood at most of these companies, the distinctions between most of these products are minimal. We happen to have a mid-cap value that is somewhat different than your traditional mid-cap value in that it is a very defensive product. It's a high-yield product.
And, consequently, in today's marketplace, a lot of advisers and their clients are looking for income-related equity strategies. Particularly with changes to the tax law where dividends can be taxed as low as 15%.
That probably would be our unique niche in the marketplace at this point. But further than that, advisers are looking for managers who have differentiated themselves and demonstrated a consistent and a disciplined approach to their style. So, we are continuing to build our investment research capabilities, and we believe that is going to positively attract our investment performance over a longer period of time.
MME: Are you hiring more analysts and researchers or doing more quant work?
Tousignant: It's a combination of both of those, and one of the things we've been fortunate in achieving in the past three years is building our assets at Federated from $150 billion to $200 billion. While other companies have put their expansion plans on hold in the tough environment of the past few years, or have had to cut back, we've had the luxury of being able to add the staff.
MME: Was this because of your fixed-income or your money market offerings?