Word: pension
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Before long, the new money managers had impressive track records to back up their boasts. A survey by the Frank Russell Co., a pension-fund consulting firm, showed that over the past ten years, independent investment advisers have earned an average annual return of 12.6% on the money in their care, while banks could muster only 8.3%. As a result, the independents' share of the tax-exempt fund business, which includes pension and profit-sharing plans, has ballooned since 1975 from 20% to 37%, ahead of the banks' 35% and the insurance companies' 28%. Upstart independent firms...
Until a few years ago, banks and insurance companies handled most pension money. Almost as cautious as gnomes guarding caves full of gold, the bankers tended to favor bonds and the safest stocks for retirement funds. During the inflation-plagued 1970s, however, many corporations, unions and local governments became unhappy with the returns they were getting on pension money. Increasingly, they turned to mavericks like LeBaron, who promised to outperform the banks by buying and selling a broad range of securities more aggressively...
...independents charge $100,000 to $200,000 annually to manage a $20 million fund, in contrast with the $50,000 that a bank typically asks. Naturally, clients who pay the high fees are demanding. Says Peter Vermilye, an industry pioneer who built up Alliance as an independent pension-fund manager before joining Citibank as chief investment officer: "If you cost more, you have to show you can walk on water...
...trying to do so, money managers run the risk of drowning. Fayez Sarofim, an Egyptian-born pension-fund adviser based in Houston, did remarkably well for his clients in the mid-1970s by holding stocks of international oil companies. But when oil prices started sagging in the 1980s, so did the market value of Sarofim's investments. He has lost several big clients and perhaps $1 billion of the $9 billion or so he was managing...
...emphasis on performance has made the pension business intensely competitive. Says Dave Williams, chairman of Alliance: "We're hired, fired and retained on the basis of our investment results." He admits that his company once lost Monsanto as a client after managing its pension fund for only six months. The industry's mortality rate is high. Though hundreds of new investment advisers set up shop every year, the total number of competitors dipped slightly, from 6,041 to 5,760 during 1982. Predicts Citibank's Vermilye: "Over half of these new firms will not be around...