Robeco to Advisors: Go Dutch

Robeco Investment Management, a unit of the largest independently owned money manager in Europe, snatched up four American asset managers and is now targeting U.S. retail financial advisors for the first time. Will advisors bite?

You may not have heard of Robeco Investment Management, but you can certainly tell it comes from a wealthy family. For starters, Robeco's corporate headquarters are located in a 32-story office building in Midtown Manhattan, prime real estate in the heart of New York's money-management district. There is another good reason why you might surmise that Robeco is well-established: It runs money for 12 of the nation's largest institutions, including the nation's biggest pension fund, the California Public Employees' Retirement System (CalPERS), for which it manages more than $500 million in assets.

OK, so that's only about 2 percent of CalPERS' assets, but Robeco's small pieces of big pension plans say something about the stature of the company, or, at the very least, its parent, Robeco Group, a Dutch asset manager with $187 billion in AUM. And that is: You can't win those kinds of investors without having some real talent. Further bolstering the company is the fact that Robeco Group is itself owned by Rabobank Group, the third-largest privately owned bank in Europe. (Rabobank is a household name in Europe, indeed, around the world, for its sponsorship of the Rabobank professional cycling team, which participates in major road races, such as the Tour de France.) It's nice to have a colossus as a parent. But Robeco's United States unit's challenge is still formidable: To transport and rebuild Robeco Group's status across the Atlantic and win assets in a competitive marketplace. It helps that Robeco purchased several American asset managers over the past 10 years. But since they were primarily institutionally oriented, Robeco must still successfully market them to retail financial advisors. Not an easy chore these days.

Says Geoff Bobroff, a mutual fund consultant in Greenwich, R.I., “It's become a narrower marketplace in the last five years with a handful of firms controlling the market. Plus you have big firms like BlackRock and Legg Mason also trying to get into the space. The retail channel is both crowded and fickle.”

To help get a foothold on these shores, over the last decade Robeco Group acquired four respected American asset-management companies: Weiss Peck & Greer, a New York-based fixed-income manager in 1998; Sage Capital Management, a New York-based, fund-of-hedge-funds manager in 2002; and Boston Partners Asset Management, a value equity manager in Boston, in 2003. But only Harbor Capital Advisors of Chicago, which it acquired in 2001, has any real presence in the retail marketplace. And it remains a standalone fund family separate from Robeco Investment Management.

All told, Robeco Investment Management (excluding the sub-advised Harbor Funds) has $28.5 billion in assets but only $4 billion in retail assets. The acquisition strategy was to identify small- to medium-size managers that were specialists in a particular style and combine them on a single platform with the support of a large but separate holding company. Oh, and then to go after you.

“We're looking to grow our intermediary business from 10 percent of assets to 33 percent in the next year to two years,” says Paul Heathwood, Robeco Investment Management's senior managing director and head of sales. “We're targeting sophisticated, corner-office advisors who seek alpha generation through different delivery mechanisms.” Translation: Expect their wholesalers to be hitting the road and visiting branch offices in your town.

Robeco expects the primary driver of growth among intermediaries to be the separately managed account business as opposed to mutual funds even though Robeco, the parent, also owns the revered Harbor Funds. After two years, Robeco is making strides: It has already partnered with Smith Barney, the largest SMA platform, where it will distribute its institutional investment strategies via separate accounts, commingled vehicles and mutual funds.

Robeco works with 66 independent advisor firms and several hundred financial advisors, including broker/dealer reps and RIAs. The firm is also currently in talks with two large national firms to get on their SMA platforms. You won't find the firm on every broker/dealer list, since it seeks quality over quantity-with, say, distribution agreements between five and 10 b/ds. Like other asset managers, its strategy is to focus on the research teams/professional buyers to get on the platforms and cross-sell its products. The firm is now participating in advisor conferences, issuing press releases and working with the media but has yet to launch a formal advertising campaign.

But there is one nettlesome hurdle: Robeco and its recent U.S. acquisitions have good reputations institutionally and strong long-term track records, but its American fund families haven't been so hot over the short run. Of the 44 funds Robeco owns that have at least a three-year track record (including the Harbor Funds), 55 percent are in the top half of their respective categories over the past three years, according to Morningstar. Twenty-five percent are in the top quartile, and only 9 percent are in the top decile. Over a 10-year-period, its funds have markedly better results. Robeco executives say this is due largely to one fund, the Robeco Boston Partners Small Cap Value II Fund, which bled $220 million in assets in the last two years. Still, unimpressive performance can turn off investors, who, all too often, chase hot dots. The mutual fund complex has suffered outflows of $66 million in 2004, $83 million in 2005 and $150 million in 2006, according to Financial Research Corp.

An Old Unknown (in the USA)

Robeco has been an asset manager since 1929, when a group of 15 leading Rotterdam businessmen launched a business club named Rotterdamsch Beleggingsconsortium (later shortened to the more manageable Robeco). The consortium evolved into a separate legal entity and launched its first global equity mutual fund, Robeco, in 1933. Today, the firm's $187 billion in assets makes it Europe's largest fund manager. It also may be the largest fund manager you've never heard of.

After snatching up the four reputable boutique shops, Robeco then co-branded the funds under the Robeco name. In May of 2005, managing director Peter Gorman was hired to help build out the firm's retail distribution operation. Gorman helped take Sims Capital Management from $100 million to $2.5 billion in assets. In March of 2006, they hired another managing director Richard Hein, who is familiar with the due-diligence process at b/ds because he was the head of institutional sales at both Prudential Securities and UBS. They continue to hire seasoned pros; for example, Timothy Kimokeo “Kimo” Blaisdell joined Robeco in early 2007 as a senior vice president on Robeco's sales and client relationships team and heads the firm's office in Honolulu. Previously, he was the CIO of the $10.7 billion State of Hawaii Employees' Retirement System.

Now armed with eight retail mutual funds and 30 other institutional investment strategies, the firm is targeting financial advisors, from RIAs to registered reps. “We want to focus on research teams, get products approved and on platforms, and then right there you've gone a long way to being available on a broad scope within these distribution partners,” Gorman says. “And once we've helped elevate the name of Robeco we can begin bringing other products into the fold.”

Robeco has also launched two international stock indexes and partnered with Claymore in bringing two fundamentally weighted ETFs to market. “Partnering with Claymore gives us 150 salespeople out in the marketplace,” says Gorman. He now has 10 wholesalers as opposed to having an army of wholesalers like, say, an American Funds. In addition to positioning its domestic portfolios, Gorman says it will bring its European product lineup, such as Switzerland-based Sustainable Asset Management (SAM), which provides environmentally conscious funds like the SAM Water Fund.

For now, the acquisition spree is on hold. Robeco Investment Management CEO William Kelly has said publicly that the company is focused on building the business organically, and he expects big things from the firm's large-cap value, core fixed-income, quantitative equity and hedge fund strategies. The strategy, he has said, is to sell its U.S. funds through a global distribution arm. But things haven't exactly gone as planned. In 2005, Kelly predicted that the firm would grow from $26.4 billion in assets under management to $50 billion in five years. Two years later, it's seen only modest growth, now holding $28.5 billion in assets.

Growing Pains

Gaining acceptance in the retail asset-management business will be a long, treacherous road. For one, the competition is fierce: There are about 500 financial firms offering mutual funds in the U.S. and, as of March 31, there were 8,078 retail funds, according to the Investment Company Institute. “Getting a foothold in the retail channel will be tough because it's pretty crowded,” says Jeff Tjornehoj, senior research analyst at Lipper. “And Robeco's retail funds aren't particularly outstanding, so there hasn't been a lot of interest from investors. Neither Boston Partners nor Weiss Peck & Greer have an outstanding retail base.”

Indeed, as noted, its retail funds have been experiencing net outflows, reflecting their tepid performance of late. For example, even its flagship fund, Robeco, a global equity fund, has posted a 6.4 percent return over the last 10 years, below its benchmark, the MSCI World Index, which yielded a 6.9 percent gain as of March 31, 2007. On a five-year basis, Robeco is down 0.7 percent, whereas the MSCI is up 2 percent.

“Every investor in the Netherlands knows that not all of their funds [in a pretty broad range] are No. 1 performers,” says Freddy Van Mulligen, an analyst at Morningstar UK. “But they have also a few very good funds in fixed income and emerging-markets equities.”

And passing muster with research teams at the b/d outfits is a rigorous process that is only becoming more onerous, industry insiders say. “The opportunity is there but the competitive game is a lot tougher and the level of scrutiny that retail funds now get in this gatekeeper function is much higher,” said Bob Pozen, chairman of Boston's MFS Investment Management, speaking at a National Investment Company Service Association conference in February. “In order to get your funds qualified to be sold on Merrill's or Citigroup's network, you've got to go through an analysis with the gatekeepers that's no different than what you'd have to go through if you want to manage the IBM pension fund.”

While the firm has successfully garnered some $35 billion in assets from intermediaries in Europe, it will have a tougher time in the U.S. Eve Kaplan, a fee-only financial planner at Kaplan Financial Advisors in Berkeley Heights, N.J., and a former portfolio manager for Robeco Group in Rotterdam, says, “They will have to pedal very hard to make an impression here.”

But Robeco's non-U.S. identity may actually serve them better in attempting to win business here. “Robeco has a longer-term view than U.S. companies, which tend to focus on quarterly earnings,” Kaplan says. It's much more of a drip, drip, drip mentality. And if the U.S. subsidiary follows the path of its European counterpart, the firm should be in great shape. “[Robeco has] a very tight cohesive approach and very low turnover of portfolio managers.”

ROBECO'S RESULTS

Robeco's lineup of ‘40 Act mutual funds have lagged of late with the exception of its long/short equity offering.

Fund Ticker YTD 1-Year Return 3-Year Return 5-Year Return Expense Ratio
Robeco Boston Partners All-Cap Value BPAIX 0.56% 12.65% 13.76% N/A 1.34%
Robeco Boston Partners Large-Cap Value BPLIX 0.47 13.94 13.63 8.58 1.11
Robeco Boston Partners Long/Short Equity BPLEX 1.48 25.99 14.95 7.87 2.75
Robeco Boston Partners Mid-Cap Value BPMCX 4.69 15.99 15.34 11.58 1.25
Robeco Boston Partners Small-Cap Value II BPSCX 2.48 9.83 10.99 12.38 1.77
Robeco Weiss, Peck & Greer Core Bond Institutional WPGCX 1.52 5.26 2.79 5.43 0.43
Robeco Weiss, Peck & GreerLarge-Cap Growth WPGLX 1.88 8.40 6.69 2.92 1.40
Robeco Weiss, Peck & GreerTudor Fund WPGTX 3.54 16.29 11.46 11.57 1.43
Source: Morningstar data as of 4/2/2007
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