Russell’s recent move to Seattle from its historic location in Tacoma, Washington, just a few miles to the south, had the inevitable effect of pleasing urbanite employees happy to work and live in the bigger city and inconveniencing others who liked the old panoramic view over Commencement Bay and who faced a longer commute or higher real estate prices.
Just as you can’t please everyone when you move office, Russell seems to have recognised the pitfalls inherent in trying to be different things to different people at different times. Over the past decade, the firm - founded by Frank Russell in the 1930s and expanded by George Russell after the Second World War before acquisition by Northwestern Mutual in 1999 - has made serious efforts to spread the multi-asset, multi-manager approach in the UK and continental Europe. But while in the early years of the last decade it sought to underplay its consulting heritage, at other times it has emphasised it and downplayed the multi-manager business.
So what is Russell? For Pascal Duval, EMEA CEO, a French national and commodities trader turned consultant, the component parts are more than a disparate collection of investment management businesses. They came along because they were needed to meet client needs - transition management, for example, or creating indices at a time when there were no objective benchmarks.
Consulting is part of Russell’s DNA, Duval claims; the firm is the fourth-largest consultant in the US, and a leading provider in multi-manager, FX agency and indices. It can also claim to have invented the multi, multi-manager approach. “Russell pioneered investment consulting in the US and rapidly moved to manager of managers,” says Duval. “The rationale was not George Russell saying ‘I want to build an asset management company’; it was one founding client saying, back in 1980, ‘my governance doesn’t keep pace with your recommendations.… here is a small portion of my portfolio - why don’t you manage it?’.”
Years ago, some criticised Russell for perceived conflicts of interest between consulting and multi-manager activities. Yet those criticisms have been swept away as the likes of Mercer and Towers Watson have followed Russell into what has become known in Europe as fiduciary management.
Now, Russell’s various activities create an eco-system of activity that benefits the whole, Duval claims. Equity indices, for instance, generate valuable data: “We have 10,000 stock prices moving by the second and from that we can use, build, test and assemble portfolios to get smart beta IP which we can implement in portfolios through trading capabilities.”
And putting the pieces together is the key. “Impartial implementation is fundamental for clients and their covenants, so the combination of the multi-manager and consulting, and the ability to track any single basis point through transition management and FX, allows Russell to address the needs of clients that need to tackle an outcome. We are not, per se, an emerging market or a US manager but we do need them as building blocks,” continues Duval. “Consulting is fundamental because it helps to route the capital in the light of the conditions of the specific client.”
In UK consulting, the firm has hired Nick Spencer from GAM and Crispin Lace from Mercer. But Russell also wants to capture market share in fiduciary management, both in the UK and wider Europe. In June 2011, the firm reported European fiduciary assets of €9bn in an IPE survey (out of total group assets then of €156bn) with 17 UK clients accounting for €5.3bn, one client in the Netherlands (the pension fund of the insurer SBZ) with €3bn and three small clients in Ireland. By contrast, BlackRock claimed assets of €36.3bn and 13 clients across Europe.
Russell last year hired Heath Mottram from Royal Mail Pension Fund to head fiduciary management in the UK, along with Gary Yeaman from Shell in 2010 and, this year, Colin English from Mn Services in a clear bid to market to, and service, pension funds.
Duval also has some firm views about the UK’s pension landscape.
“In markets like the UK, pension funds were in a contribution holiday 20 years ago,” Duval recalls. “Now they are heavily underfunded. Over those 20 years, those funds paid millions of pounds in fees to best-in-class actuarial companies and investment consultants. It’s easy to victimise the trustees; what is actually as bad, is the traditional model, with specialist consultants and different specialist managers, where you focus on the benchmark and the performance. This is not working because you don’t have a holistic view.”
Duval, who still advises a handful of consulting clients himself - which helps him to “listen, learn and be challenged” - concludes that it is unhealthy for consultants to lead clients to fiduciary management without independent assessment from a third-party adviser.
In the Netherlands - where a lot of providers (including Russell) have one or two large clients but have not grown their business beyond a toehold in the market - Duval claims Russell is a primary contender, due to its proven track record in the US and its key client SBZ. He is also planning a joint venture that he envisages combining Russell’s asset allocation and implementation with the services of an independent risk manager and a plan administrator to provide a turnkey solution that capitalises on the consolidation trend among Dutch pension funds and which focuses on smaller funds of around €200m and upwards. In France, Russell is positioning its services to the insurance sector (which, in any case, accounts for the bulk of institutional assets) and has sponsored EDHEC Risk Institute’s Solvency II Benchmarks chair.
Duval is also keen to explain where Russell has gone wrong in the past and what it has done to rectify its mistakes, in particular in hedge funds between 2007 and 2010. Its flagship multi-strategy fund of hedge funds became seriously entangled in illiquid credit instruments in summer 2007 and by December that year, following redemptions, Russell concluded that a writedown was necessary. In January 2008, Russell decided to gate the fund and in March 2008 it not only liquidated the fund but also suspended its management fee. In July of that year, Russell paid back 50% of the assets at a positive NAV, repaying a further 45% in quarterly distributions from August 2008 to December 2010. Duval says that clients later appreciated the fairness of Russell’s approach, even if they were unhappy at the time.
‘This was my worst and at the same time my best experience,” recalls Duval. “It was the worst experience in terms of portfolio management failure. We made portfolio management mistakes. We invested in assets that were not liquid when we were running a fund with monthly liquidity. We were over-exposed to asset-based lending and other specialist credit strategies that became largely impaired.
“You can take some comfort by saying we were not the only ones but I had $2bn of investors who trusted me and Russell. At the same time, it was the best experience because it was transparent. Every decision we made was transparent and we spent hours in explaining those decisions.”
Since 2010, Russell has been building a mostly US-based manager and strategy research team and is working on sleeves to create model hedge fund portfolios for various strategies. It has not yet launched a new hedge-fund product, apart from within its fiduciary management offering.
Duval says Russell is also working on a private-equity strategy. “The big opportunity for UK pension funds and local authorities is to negotiate and capture some of the bad bank assets, to reconfigure them into pension-friendly long-term assets,” he says, pointing to the example of social housing loans on bank portfolios. “That is where private equity has some intelligence to put to play. You can try to manage short-term volatility but at the same time I am a long-term investor, I own the illiquidity risk, I have the right to get it.”
As the OCED and the European Commission investigate the nature of long-term institutional investment, Duval also wants Russell to participate in the wider debate.
There is every chance that it will have something wise to say.