RCM goes 130/30
As the global equity platform of Allianz Global Investors (AGI), RCM has a clear role alongside its sister organisation PIMCO, the global fixed income platform of AGI.
Its origin is somewhat less clearcut, however. Tracing part of its roots back to Claude Rosenberg's fundamental research-based house, RCM Capital Management, formed in San Francisco in 1970, RCM in its current constellation is nevertheless also the product of a 1997 merger between Dresdner Bank's then Kleinwort Benson Investment Management and Thornton entities.
Allianz, which merged with Dresdner Bank in 2001, was also itself acquisitive by disposition, having announced the purchase of 70% of PIMCO in 1999 and the full acquisition of the San Diego based equity boutique Nicholas-Applegate the following year. Originally operating as Dresdner RCM, the Dresdner prefix was dropped in 2004 on the creation of Allianz Global Investors and the entity has operated as plain RCM since then.
"I think the most apt description of RCM these days is a house that believes strongly in the fact that markets are inefficient. We would seek to capture these inefficiencies through our proprietary primary reasearch, be that macro research, company research or Grassroots," says Andreas Utermann, RCM's global CIO, playing down any perception of RCM as a purely growth house.
Grassroots complements RCM's proprietary research platform of around 80 analysts, and unites some 300 independent, external researchers who are focused on identifying and examining market place trends across the
world. These researchers, and a dedicated Grassroots in-house staff of 12, produce some 40-50 company and industry reports per month, which the company describes as a "reality check" for investment decisions, complementing the traditional sector analysis. Looking closely at individual companies, Grassroots also provides research that is used by RCM's sustainability team.
"That global approach [to research] gives us an extra edge in that we can pick up on trends anywhere in the world, so what we are really about at RCM is alpha. I would not define us by any particular style but by the primary aim which is generating alpha," continues Utermann. "Increasingly, in any event, the way that the investment world is evolving means the style definition is becoming less relevant and alpha generation is becoming more relevant."
Last year was the first for AGI in which equity flows were positive. So what measures has the CIO put in to remedy previous performance deficiencies?
Utermann admits that performance was "really abysmal" when he joined the firm in October 2002. "There were many reasons for that," he explains, "including organisational turmoil following the various acquisitions, markets falling very significantly and a number of people being very disorientated by that. When I joined the firm I determined we had very significant investment talent within the firm everywhere and that underperformance was attributable primarily to factors other than lack of
investment in talent. So what I did not do is fire a lot of people when I joined, which surprised some observers externally and internally."
Utermann emphasises that "the performance enhancement programme, for the firm as a whole and for RCM in particular is now a thing of the past and this has not been a current concern for the last 18 months,". He explains that the key challenge at RCM was simplification of teams and transparency of targets.
"There was plenty of fine tuning of investment processes but ultimately the real issue is simplification and creating accountability by setting very clear targets and creating transparency around those targets.
"What I did do was to simplify things greatly in two ways. Number one, overlapping capabilities at RCM globally were abolished - for example we had four global equity teams - and we established centres of excellence for individual skills or products so there was not competition within different parts of the firm. The second piece of simplification was to set a very clear and unambiguous target for all investment professionals. That was to say, we needed relative outperformance on 70% of our assets on a three-year rolling period, starting 1 January 2003 and we need 60% in any individual year.
"We had equivalent performance targets for analysts where we introduced Starmine, a sell side measurement tool, as the first buy side firm to do so globally," Utermann adds, and traders are subject to an equivalent performance measurement regime.
Utermann also stresses that there are unambiguous targets linked to pay. "These also need to be entirely transparent and this needs to be communicated in a transparent fashion so everybody knows in the organisation how everyone else is performing so there are no mysteries, no myths being created and no energy being expended or pretending you are performing well when you are not and the other way around. And that of course started with myself. I was responsible for global asset allocation and I set up virtual portfolio, strategic and tactical. The performance of that portfolio was measured independently and published internally on a monthly basis."
Incentivising staff is also a key issue. Apart from PIMCO, in which Allianz took a 70% stake, Allianz Global Investors has historically bought its firms outright.
Allianz has taken steps to better align the long term financial interest of senior staff and the investment companies themselves by introducing equity incentive plans. This started with Nicholas Applegate and is understood that similar schemes will be rolled out at Pimco and RCM in due course.
Unlike other equity firms, which have introduced single strategy hedge funds alongside existing long only strategies using the same managers, Utermann did not opt for this approach. Despite the merger in early April of Allianz's two hedge fund units - AGF Alternative Asset Management and Allianz Hedge Fund Partners - to create one Paris-based group, Utermann stresses that hedge funds only play a small role in AGI overall and are not a significant portion of the business.
He believes single strategy funds have a role to play, but says if this business becomes too significant it has potential to "disrupt processes in the firm, to disrupt the culture of the firm, and to distract from the significant task that we have which is to achieve outperformance for all our remaining clients".
He adds: "Given that RCM and the other equity companies have significant long-only equity businesses in their own right, I think if we were to push single strategy long-short funds we would do a disservice to our existing clients."
However, he is not concerned about missing the boat: "I believe that we will see a convergence of hedge fund land and long only and we are already seeing that in long-short extension strategies, which we are already implementing. Therefore, I think hedge funds will come under pressure in terms of their fee structures and their own recruitment, and we will be able to generate alpha in a very similar fashion to hedge funds in due course without having them disrupt our performance model."
The CIO says RCM is actively implementing long-short extension, also frequently known as 130/30, in some of the portfolios, which he describes as "a more optimal use of the alpha generation capabilities that we have".
Long-short extension is often seen as an approach most suited to managers with a quant background. Given that the most a traditional active long-only manager can do is underweight a stock to zero, critics say that it may be difficult for managers without a culture of shorting - or indeed houses without a quant driven process to provide clearcut signals - to adapt to the discipline. Utermann, however, believes that the solution lies within the research process he created.
"The way I structured research when I joined was to say we carry out sector research on a regional level and that every analyst has to have a portfolio on their sector, short and long. Therefore we have a good series of data pertaining to our calls both on the short side as well as on the long side." Interestingly, for a long-only house, Utermann says the calls on the short side are as good as they are on the long side.
"Creating long-short portfolios is a fund management challenge but is not an intellectual challenge from the way our analysts approach analysing companies," he continues. "The implementation on the portfolio management side is tricky still but it is not philosophically an issue."
In terms of products, Utermann says RCM is already implementing traditional portfolios that use the flexibility to short. He says there was a CIO offsite late last year in Frankfurt where every region reported on its activity in the area of long-short extension, which was due for review in April this year.
What is the reaction among clients? First of all, answers Utermann, RCM is implementing long-short extension particularly swiftly where people want performance, which is in the retail arena. But there is institutional interest, he says.