Algorithm & Blues

Mike Vogel | 10/1/2010

Comeback

Internally, Garvy stresses the importance of keeping talented investment managers satisfied and stimulated and the firm's employee turnover low. Recent results show promise. All told, 42% of Intech strategies beat their benchmarks over a one-year period as of the June 30 quarter after fees. None did so in the prior quarter. And 83% beat the market for the three-year period, compared to just 42% in the first quarter. Janus CEO Dick Weil told analysts in July that Intech's risk controls worked well, allowing it "to come back reasonably quickly with outperformance, and that's key to their success. ... We also recognize that one quarter does not make a trend. They continue to face some very challenging industry circumstances."

Co-CEO Jennifer Young will succeed Robert Garvy when he steps down next year.

Since inception, the annualized return on Intech's original strategy is up 1.13 percentage points after fees against the S&P 500, for a 9.02% annualized return. Over time, that 1.13-point edge means real money — a gain of $154.8 million after fees over the S&P 500 on a $100-million investment made at inception. The annualized return on other Intech strategies after fees ranges from a negative 2.49% to a positive 3.79% against their respective benchmarks.

As for flows, the bleeding continues but it has moderated. After net outflows totaling $9.2 billion in the prior three quarters, net outflows slowed to $1.5 billion in the June 30 quarter.

Recapturing lost business is another matter. The sophisticated people who run huge retirement funds think just like Ma and Pa Investor. After a decade of no gain in stocks, they want more money in fixed-income investments. Particularly ill news for Intech: Casey Quirk, in its annual survey of consultants for institutional investors representing $7 trillion in assets, found demand for U.S. equities way down and found no preference for quantitative firms after poor performance. Institutional investors represent 81% of Intech's business, with the remainder mutual funds.

"Institutional demand for quantitative equity strategies has been pretty subdued" as some investors question math-driven investing strategies, says Sandler O'Neill's Kim. He says investors are going in two directions on the risk curve — either seeking more risk through alternative investments or little risk with fixed-income. He expects Intech's outflows to continue this year as institutions restructure their strategies.

Co-Chief Investment Officer Adrian Banner will become the sole CIO when Robert Fernholz retires in 2011.

Garvy and Fernholz, nearing the end of their careers, have opened ownership of their share of the firm to employees. Garvy, now 67, has a co-CEO, Jennifer Young, who will be his successor when his contract runs out next year. Fernholz, now 69, will relinquish his chief investment officer role in 2011 to co-CIO Adrian Banner, who works out of Princeton with the rest of the research team. Garvy expects to remain board chairman and Fernholz investment committee chair.

As Intech again outperforms, Garvy expects business to build. Based on assets under management, it remains the largest player in its specialty — active-managed U.S. institutional equity quant, according to eVestment Alliance. It ranks seventh among U.S. actively managed institutional equity managers. It executes 1 million trades a year from West Palm Beach.

"Twenty-three years we've been beating the stock market. This is something managers are not supposed to do with market-like risk," Garvy says. "We've had some very significant success, but I think we also have some tremendous opportunities going forward."

Tags: Banking & Finance