For more than seven decades, Tacoma’s Russell Investments has successfully struck a balance between innovation and stability, adding new products and services and expanding across the globe while avoiding the more outlandish financial fads that sank other companies.
But the past few years have seen more upheaval at Russell than in most of the previous 70 – not least the firm’s impending headquarters move to downtown Seattle. Come October, Russell will occupy six floors of the 42-story tower that used to be called WaMu Center.
Russell Chief Executive Andrew Doman has made it clear that he hopes Russell will inherit Washington Mutual’s former stature as one of Seattle’s marquee companies.
Before it can do that, though, Russell will have to get past one of the roughest patches in its long history.
More than a dozen senior executives have left in the past three years; hundreds of lower-level workers have been laid off. Russell’s hedge fund-of-funds business flopped, parent company Northwestern Mutual had to step in and rescue its money-market funds, and earlier this year it sold off its private-equity business.
Several of Russell’s flagship mutual funds are underperformers by the standards of the company’s own benchmark indexes. And the firm faces increasing competition in its lucrative advisory and index-licensing businesses.
So what exactly is Seattle getting with Russell? A strong performer weathering a bad streak, or a reeling giant unsure of its next move?
“Russell is clearly one of the big players,” said Marcin Kacperczyk, a finance professor at New York University’s Stern School of Business. “But I believe the competition from other investment-management companies has clearly intensified.”
Doman, a 58-year-old former management consultant who is only the sixth CEO in Russell’s 74-year history, said he wasn’t worried about the firm’s ability to meet that competition head-on.
“We want to pit our brains against the very most demanding clients worldwide,” he said in an interview. “The mandate I have from [Russell parent ] Northwestern is really to maximize the potential of this great firm.”
Part of that involves the move to Seattle, which Doman called “a broad and deep catchment area of talent.” Russell, he said, could serve as the nucleus for a reinvigorated financial-services cluster downtown.
But the move also deprives Tacoma of a world-class company that provides hundreds of well-paying jobs to local residents. It’s unclear how many of Russell’s 900 headquarters employees will be willing to follow their jobs 34 miles north.
“We’re very much hoping that absolutely everyone will come,” Doman said. “We’re doing everything we can for that to happen.”
WHAT UNIFIES COMPANY
Russell operates in several areas of the investments industry, many of them obscure to everyday people. What unifies the company is that most of its business lines build directly or indirectly on Russell’s core expertise: rating how well money managers do their jobs.
Pension funds, foundations and other large institutions with lots of money to invest have their pick of thousands upon thousands of money managers from London to New York, Sydney to Mumbai, India. The problem, familiar to anyone who’s scratched their head in the supermarket’s cereal aisle: how to choose wisely from among a host of similar-seeming alternatives?
Russell’s cadres of research analysts pore through data on funds and their managers, looking for who’s best at doing what. If a foundation wants to invest its capital in small Southeast Asian information-technology stocks, undervalued U.S. pharmaceutical companies and European corporate bonds, Russell will point them toward the best managers in each class.
Russell provided advice for $904 billion as of the end of 2009, the company said. More than $787 billion of those assets were held by pension funds, foundations and other institutions, according to the trade publication “Pensions & Investments,” making Russell the seventh-largest institutional-investment consultant in the world.
To help compare managers against common yardsticks, Russell began developing its namesake stock indexes in the early 1980s. It now has dozens of them, slicing up global stocks by size, geography and style (growth or value stocks); perhaps the best-known is the Russell 2000 index of small-capitalization U.S. stock.
Besides using the indexes in its own research, Russell licenses them to other firms, which build mutual funds around them or base futures and options contracts on them. Russell got into the mutual-fund business directly in the early 1980s; as of June 30, the company says, it had $140 billion in assets under management.
But unlike funds run by, say, Fidelity, Russell’s fund managers don’t make all the investment decisions themselves. Instead, they act more like general contractors on a construction project, using Russell’s research to farm out various slices of the fund.
Russell’s U.S. Core Equity Fund, for example, is divided among 14 managers at 11 separate companies, none of which runs more than 13 percent of the fund’s assets; Russell itself directly manages just 5 percent.
Russell argues that this “multimanager” approach not only gives investors one-decision access to an all-star lineup of funds, but also enhances diversification, not only across asset classes but across companies as well.
However, many of Russell’s funds have lagged their peers, not to mention the Russell indexes to which they’re benchmarked. Shares of the U.S. Core Equity Fund, for instance, lost 13.52 percent on a total return basis from July 31, 2008, through the end of this July, according to Bloomberg Finance data. The Russell 1000 index, the fund’s designated benchmark, is down just 8.58 percent over the same period.
Russell also performs a host of other specialized services for its clients, including helping them cut transaction fees, restructuring a fund’s assets with minimal disruption and advising them on how to manage risk through derivatives.
As a private company owned by another private company, Russell doesn’t disclose financial information about its operations. However, it’s clear that the recent financial maelstrom hasn’t been kind to several of Russell’s ventures.
In the early 2000s, Russell decided to enter the world of “alternative investments.” Such investments include private equity, commodities, real estate and, most prominently, hedge funds – those large, mostly unregulated pools of capital that employ arcane and elaborate trading strategies and, for hefty fees, promise above-market returns come rain or shine.
Russell established several “hedge funds of funds” – basically money pools that invested in several different hedge funds at once – and by mid-2007 those funds had more than $6 billion in assets, according to the trade publication “Pensions & Investments.”
But after the subprime-mortgage market collapsed, many of the hedge funds Russell had channeled its investors’ money to found themselves on the losing side of big bets. In April 2008 the firm closed two of its hedge funds of funds, and later shuttered the rest of that business.
That same year, Russell’s money-market funds – which are supposed to be among the safest of all investments – found themselves exposed to Lehman Brothers’ bankruptcy.
According to Northwestern Mutual’s 2009 annual report, the Russell funds held $764 million in Lehman corporate bonds, representing more than 5 percent of their assets. The insurer agreed to lend Russell as much as it needed to backstop the Lehman investment. Northwestern pumped in $519 million in early 2009, though Russell had repaid $24 million by the end of the year.
Raising funds to pay back Northwestern Mutual appears to be part of the reason Russell decided earlier this year to sell its private equity fund of funds manager, Pantheon Ventures. Russell cleared an estimated $365 million on the sale, according to Northwestern Mutual’s annual report.
“We were offered a terrific price,” Doman said. “We’re always willing to consider selling assets if the right price is on the table.”
The financial turmoil also contributed to the unusually high level of executive turnover at Russell over the past three years.
According to former Russell employees who spoke on condition they not be identified, Russell’s executive-compensation plan includes “phantom” stock, whose value rises and falls with the firm’s performance. Because of the Northwestern Mutual loan, these people said, the value of the phantom stock was set to go to zero; several top Russell officials decided to retire before that happened.
Doman, in the interview, acknowledged Russell’s past stumbles but said the firm will continue exploring beyond the plain-vanilla world of stocks and bonds.
“We remain very committed to the alternatives space,” he said. “Our clients want alternatives.”