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Rittenhouse's Growth Formula Makes it No. 2 in IMAs

Rittenhouse Financial became No. 2 in managed accounts by focusing on quality, large-cap growth issues. That didn't help much in 2001. But for a reputation for service makes Rittenhouse popular with advisors.

When George Connell founded Rittenhouse Financial in the Philadelphia suburb of Radnor 23 years ago, it was a small trust company and straight-ahead equity shop for institutional accounts. Now, with $17.5 billion under management, it is the second-largest player in the individually managed account business with a 4.9 percent market share, according to researcher Cerulli Associates.

The journey from boutique shop to No. 2 in IMAs behind Brandes Investment Partners accelerated in 1997 when Connell sold the firm's money management business, Rittenhouse Financial, to Chicago-based muni-bond giant John Nuveen, while keeping the trust business (Rittenhouse Trust) for himself.

Today, through 46 sponsor platforms, Rittenhouse offers two investment options: a large-cap equity growth portfolio and a balanced portfolio. Clients can buy a tax-free municipal bond portfolio through Nuveen. The top wirehouses — Merrill Lynch, Salomon Smith Barney, UBS PaineWebber, A.G. Edwards, Prudential and Morgan Stanley — account for 80 percent of Rittenhouse's business.

Run by a 20-person portfolio management team and a 170-employee staff, the business is split into retail separate accounts (worth roughly $14 billion in assets) and institutional and private clients (worth around $3.5 billion).

The appeal of Rittenhouse's staple growth portfolio is its ability to act as a core foundation for high-net-worth investors. “Rittenhouse has established a proven discipline in picking large-cap growth stocks, [with] a defensive style that has an important part to play in a lot of investors' portfolios,” says Chuck Widger, CEO of Brinker Capital in Valley Forge, Pa., an investment management consulting firm that has offered Rittenhouse products in its IMA program for 12 years. “The older person still needs growth in his or her portfolio.”

Widger credits Rittenhouse with having a clear, coherent style of investing that has proven itself over time. “They had a change in the portfolio team when George Connell left, but the style still works,” he says.

So much so that competitors, including MFS Investment Management, Phoenix Investment Partners and Invesco US Institutional, are trying to emulate its formula. A conservative, large-cap growth manager, Rittenhouse relies on a well-respected consultant sales force of 26.

Rittenhouse had a tough 2001, but what large-cap growth manager didn't? It has excellent long-term performance, investing in 30 to 40 stocks with a very low turnover (which in turn can keep the tax bite low). What makes Rittenhouse unique is its conservative overlay on the growth style.

Managers buy shares that are A-rated by Standard & Poor's or Value Line and have consistently growing dividends. Yet, the firm isn't fixated on valuations such as p/e multiples, but rather seeks the sustainability of earnings, which must be fairly predictable and at or above the growth rate of the S&P 500. The portfolio shies away from heavily cyclical names and automakers, and favors health care and financial services companies, as well as significant industrials and consumer discretionary stocks.

Rittenhouse garnered a reputation for great customer service long before Nuveen entered the scene, says Michael Lewers, Rittenhouse managing director. “We made a commitment to the business in the late 1980s and reinvested into the business. During the rough years in 1993 and 1994 when growth stock managers were out of favor, we held clients' hands and when the market turned, that was our next leg up,” he says.

Rittenhouse also holds the hands of the brokers. Consultants dial in to all investment management meetings so they can tell brokers about the holdings in the portfolio and how it fits in with various asset allocation models.

“They meet regularly with advisors to talk through issues with their high-net-worth clients and offer solutions,” says Rittenhouse spokeswoman Laurel O'Brien.

Chris Davis, Money Management Institute executive director, likens Rittenhouse's consultants to Xerox's tiger team. “Thirty years ago, Xerox dominated the copy industry not because they had a superior product but because they had a superior service to fix or replace it.” Rittenhouse will call on consultants, if needed, to solve a unique problem whether it's a business retention or tax management issue, or a unique issue dealing with the customization of a client's portfolio.

Rittenhouse: Top Ten Holdings

U.S. Large Cap Growth as of 1/31
Pfizer 5.5
American International 5.2
General Electric 5
Tyco International 4.8
Wal-Mart 4.4
Colgate Palmolive 4.3
Home Depot 4.2
Microsoft 3.9
Amgen 3.9
Medtronic 3.9

Rittenhouse: Portfolio Facts

U.S. Large Cap Growth as of 12/31
Trailing Performance
3 Years 5 Years
Annualized Return -1.35 11.17
S&P 500 -1.03 10.7
Beta 0.88 0.95
R-Squared 83.83 88.4
Sharpe Ratio 113.05 105.29
Source: Lockwood
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