Sitting on a Blue-Gray silk sofa in a 51st-floor corner office at American Express Co.'s World Financial Center headquarters, Ted Truscott looked nervously across an imposing polished walnut desk at Kenneth Chenault, the company’s powerful, tightly coiled CEO. It was mid-July 2001, and Truscott, a 40-year-old executive at Zurich Scudder Investments, was on the final round of interviews for the job of global chief investment officer overseeing the company’s asset management division.The two men exchanged pleasantries before turning to business. At last, Chenault leaned forward in his brown leather chair and asked the candidate if he had any questions.
“Just one,” Truscott replied. “Will I have the authority to make changes?”
“Actually,” Chenault said, his voice rising, “I will demand that you make changes.”
Chenault had good reason to be demanding. AmEx’s once-vaunted money management operation was reeling, brought low by faulty strategy and sorry investment performance. A decade before, the credit card giant had unaccountably decided to scale back its asset management group, America’s biggest in 1989, at precisely the moment that the mutual fund industry was poised to take off. Years of organizational disarray and deteriorating returns -- exacerbated by a wrongheaded distribution strategy that excluded outside brokerage channels -- followed. And American Express Financial Advisors, which houses the broker-dealer and money management businesses, had suffered an ugly black eye just a month before Truscott’s interview: A proprietary portfolio of junk bonds and collateralized bond obligations blew up, forcing the credit card company to write off $1 billion -- or a year’s worth of the money manager’s earnings -- six months into Chenault’s tenure as CEO.
Facing his first big crisis in office, and his first major hire, Chenault was looking for a tough, determined new global CIO to clean house at AEFA and make certain that debacles like the portfolio explosion did not happen again.
Truscott, by all accounts, has more than met Chenault’s expectations. A driven, intensely focused executive who routinely wakes at 4:30 a.m. for a five-mile run before heading to the office, arriving by 6.00 a.m. to log a 14-hour day, Truscott wasted little time. He began by injecting a complacent corporate culture with a new competitive fire that was marked by high-profile hiring raids on industry leader Fidelity Investments, which responded by pulling all of its travel-related business from American Express. Then Truscott began to shake up his hidebound organization. He fired about half of the 65 U.S. portfolio managers, signed up several outside firms to subadvise American Express funds, and in a signature move -- contrarian and highly controversial -- broke up the firm’s large, centralized organization into smaller, autonomous units, even as rival money managers consolidated their disparate operations.
“The only way you can have successful asset management is in a boutiquelike environment,” Truscott argues. “Our idea is to have small pockets of entrepreneurial enterprises, all backed by the resources of American Express.”
All of these actions helped galvanize a creaky firm. Says Vincent Daniel, a research analyst at New Yorkbased Keefe, Bruyette & Woods, “Truscott has brought new life to a stagnant operation.”
Still, as set out by Chenault, Truscott’s goal -- to transform American Express into a powerful force in global money management -- won’t be easy. AmEx, with $270 billion under management, no longer ranks among the top 25 U.S. money managers in a business where size means market dominance and profit. Its sales power has shriveled; the ninth-best-selling U.S. fund family in 1990 today ranks 29th. And despite its stature as one of the world’s most recognized brand names, the company had virtually no presence overseas. Truscott made a bold move to correct this glaring weakness in June when he convinced the company to spend $560 million to buy London’s well-respected Threadneedle Asset Management, with $75 billion in its accounts.
Inspired by long odds and cool in a crisis -- he reported for work the week before the September 11 terror attacks that forced American Express to abandon its New York headquarters for eight months -- Truscott is preternaturally optimistic. “There’s no reason,” he says, almost casually, “that we shouldn’t be just as well known for high-quality money management as we are for credit cards.”
That’s a mighty -- and distant -- ambition. To get close American Express will have to overcome significant obstacles. Not least, in the midst of widespread scandals in the mutual fund industry, it must demonstrate to investors that it can be trusted.
Like many of its rivals, AmEx has come under the white-hot glare of relentless investigators. It has so far escaped accusations that it permitted late trading or market timing, the egregious practices that regulators have uncovered at many mutual fund companies. But last month the staff of the Securities and Exchange Commission recommended that commissioners take enforcement action against the company for failing to honor so-called breakpoint discounts, fee reductions for investors who make large mutual fund purchases. Any SEC action would be a blow to American Express, of course, but so far the company has not suffered unusual outflows from institutional or retail clients.
Truscott vows to clean up the mess quickly. American Express hired Boston law firm Ropes & Gray to conduct an internal investigation and report to the board of AmEx’s mutual fund group at its regularly scheduled meeting this month. “If the findings warrant disciplinary measures, we will take action,” Truscott says.
“American Express is doing the right thing in sending the message that they are holding themselves accountable,” says Robert Adler, president of AMG Data Services, an Arcata, Californiabased firm that tracks fund flows. “As long as performance holds up, public trust should be a nonissue.”
For AmEx’s asset management to turn around and contribute increasingly to the bottom line, a retail revival is crucial. Of its more than $200 billion in assets (not including Threadneedle), about one third is its own money -- mostly fixed-income investments backing insurance products -- on which AmEx effectively makes no management fees. Of the remaining assets, $66 billon is in higher-fee AXP mutual funds -- one reason so much is riding on a resurgence in this area.
For that, Truscott must solve the two intimately intertwined problems of investment performance and distribution. For years AmEx chose to sell its funds solely through proprietary channels. But as rivals embraced third-party sales, fund supermarkets and open architecture distribution platforms, AmEx’s marketing flagged. Now Truscott wants to break with tradition and allow other financial services companies to sell AmEx funds, but, dogged by a lousy investment track record, he can’t -- at least until his portfolio managers start earning their keep with smart stock picks.
“To aggressively pursue a strategy of outside distribution,” Truscott says, “you get one shot to get it right. You could say we are waiting to take that shot.”
For the moment, though, his hands are tied. AmEx can win over outside distributors only with three-year fund track records that brokers will want to sell, but its 64 retail funds have a long way to go. Thanks partly to Truscott’s changes, AmEx’s returns are finally perking up. But they still labor under a dismal recent history of underperformance that reflects the sleepy culture pervading the group’s Minneapolis headquarters, the legacy of the former IDS Financial Services, which AmEx bought in 1984 as the cornerstone of its push into money management.
Between June 30, 1999, and June 30, 2002, the full slate of AXP funds produced an average aggregate return of 7.35 percent, the third-worst performance record among the nation’s 25 biggest mutual fund families. (Janus Capital ranked as the worst, followed by Alliance Capital Management.) During the three-year period, just one AXP mutual fund ranked in the top quartile of its peers, according to Lipper. One encouraging, if small, sign: Through the first nine months of this year, nine funds made it to the top quartile.
“Assuming performance improves, it could still be two years before AmEx sees higher fund flows,” notes Friedman, Billings, Ramsey & Co. analyst Todd Pittsinger.
That’s on the retail side. The firm’s $40 billion institutional portfolio is also struggling with poor performance. The group’s showcase $2 billion institutional small-cap growth product badly lags behind its rivals, returning 21 percent for the 12 months ended September 30, roughly half the gain posted by the Russell 2000 growth index. Three months ago the State Universities Retirement System of Illinois dropped AmEx from a $320 million Europe Australasia and Far East index account.
Truscott is committed to globalizing AmEx’s money management business, a key mandate from both Chenault and Truscott’s immediate boss, James Cracchiolo, 45, a company veteran who has run American Express’s Global Financial Services division since 2000. In acquiring Threadneedle from his old employer, Zurich Financial Services, at the end of September, Truscott has gained scale -- nudging AmEx up from 28 to 22 in this magazine’s ranking of the biggest U.S. money managers -- while giving the company a valuable new presence abroad.
But the purchase of the institutionally oriented U.K. firm could disappoint. Two thirds of Threadneedle’s assets are held in the portfolios of two Zurich-owned U.K. life insurers, and as part of the deal Zurich can reclaim them in 2011. And those accounts carry fees of just 5 to 10 basis points, versus an average 75 to 100 basis points for the remaining $25 billion in Threadneedle assets. That’s why AmEx was able to beat out rival bids, reportedly including one from Mellon Financial Corp., paying a modest $570 million.
Truscott has some room to make the Threadneedle acquisition work because AmEx is in generally good shape. Sharp cost-cutting by Chenault has strengthened margins, improving the bottom line. In the first nine months of this year, the company earned $2.2 billion on $18.8 billion in revenues, up from $2 billion on revenues of $17.6 billion in the same period in 2002. AmEx stock recently traded at $45, versus a September 2001 low of $25.
But the CEO is looking for stronger profits and increased assets from his new money management chief, and Truscott knows what he needs to do to get there. “Every move I make,” he says, “every decision, hire and expense, it’s all done with one goal in mind: to improve performance.”
THE SON OF A BUFFALO, NEW YORK, SCHOOL-teacher and a homemaker, Truscott began his career at Chemical Banking Corp. in 1983, following graduation from Middlebury College, where he had become fluent in Mandarin Chinese after spending his junior year in Taiwan. Truscott signed on as a junior analyst at Chemical Bank’s Asian lending division, but when the bank began cutting back on its foreign credit research, he transferred to the structured finance division and worked on debt-equity swaps in Latin America. In his spare time he earned an MBA from New York University while serving as a volunteer fireman in Floral Park, Long Island, where he lived with his wife and three young children.
“He was the hardest-working guy I ever saw,” says George Ross, formerly the chief credit officer in the capital markets division of Chemical and now a senior credit officer for Citigroup.
Intrigued by the possibilities of emerging markets, in early 1992 Truscott moved to Scudder, Stevens & Clark, a Boston-based asset manager, as an analyst for its closed-end Argentina fund. In the winter of 1993 the young analyst began researching stocks for Scudder’s Latin America fund, launched in December 1992 by senior portfolio manager Ed Games. Attracted by the company’s clean balance sheet, Truscott made a killing as an early buyer of Quilmes Industrial, the largest beer producer in Argentina. Recalls Maureen Allyn, who retired as chief economist at Zurich Scudder Investments, “You just knew right away that Ted Truscott was a superior talent.”
Truscott experienced firsthand the Latin America boom and bust and learned what it takes to navigate in a market storm. For two years Scudder’s Latin America fund pulled in cash and delivered strong returns, with assets peaking at $800 million in early December 1994. But when the Mexican peso collapsed later that month, assets plunged, bottoming out at $500 million in mid-1995.
While emerging markets were unraveling, Truscott fielded calls from irate investors and urged them not to panic -- and for the most part, they didn’t. “This was Ted’s first real challenge, and he performed brilliantly,” recalls Games, now retired. “I can still remember thinking it was never going to get better, but Ted stayed even-keeled.” In 1996, when Scudder research director Cornelia Small was promoted to head of equities, Truscott, then 35, moved up the ranks to take her old job.
In late 1997, Scudder decided to sell out. The firm’s aging partners were eager to cash in their ownership stakes, and CEO Edmond Villani was convinced that the money manager was too small to compete with the industry’s behemoths. At the time Scudder boasted solid performance, with 15 of its 41 funds earning three- or four-star ratings from Morningstar -- a splendid reflection of Truscott’s success as head of research. But as a company Scudder had missed out on the 401(k) boom and was increasingly hurt by its pure no-load status, as most fund families relied on brokers and fund supermarkets to sell their products.
The $130 billion-in-assets firm was on the block for a few months before Zurich Insurance Group agreed to pay $2 billion for a 70 percent stake. Scudder settled for a price equivalent to 2.2 percent of assets, below the thenindustry average of 3 percent.
Zurich decided to combine its various asset management groups into one entity, Scudder Kemper Investments, and tapped Truscott as head of research. He quickly rose to the challenge. Encouraging analysts to build proprietary earnings models and rely less on sell-side reports, Truscott inspired his staff to think more creatively. He also instituted a new system of evaluating analysts, which involved comparing the returns of their buy recommendations with the median return of their industry sector.
Two years later Truscott was promoted to co-head of equities. By this time, as the tech stock bubble was inflating, Scudder’s value focus weakened a deteriorating performance record. Many at the firm, including Scudder Kemper CEO Villani, made a case for launching new tech funds and a venture capital affiliate, but Truscott insisted that it made no sense to chase the Nasdaq darlings. “As a shop we were good at core equity and international equity, so we were out of the sweet spot -- growth,” he says.
A forceful advocate, confident of his own judgment, Truscott swayed Villani and other skeptics. Scudder ultimately scuttled its new-product plans.
“Ted was the only one who stood up to Villani,” recalls one former co-worker.
Of course, growth stocks soon proved to be a terrible bet. “Truscott and his team refused to embrace the New Economy, and you have to praise them for that,” says Allyn, Scudder’s former chief economist.
In April 2001, Zurich chose to put Scudder up for sale as it focused on its core insurance business. Truscott, by then CIO for the Americas, decided to look for a new job. He soon got a call from James Phillips, an executive recruiter with TMP Worldwide in Stamford, Connecticut, who had been hired by American Express.
“From what we had learned,” says Phillips, now head of Beacon Search Group in Manhattan, “Truscott was one of the few reasons that Scudder hadn’t completely fallen apart.”
Despite Scudder’s performance troubles and the strains of its integration with Zurich subsidiary Kemper Investments, the fund family lost remarkably few of its top investment professionals. Truscott gets the credit for that.
American Express was looking for someone with global experience, Phillips adds, and Truscott’s stint as a Latin America fund analyst, as well as his tenure as a senior executive with Zurich, made him a strong prospect.
Cracchiolo and Chenault interviewed seven candidates from a pool of 100 and quickly agreed on their choice. “Ted had the leadership skills we needed,” Cracchiolo says.
TRUSCOTT KNEW HE WAS JOINING A COMPANY with an exceptionally powerful brand name. But only gradually did he come to appreciate how the AmEx money management arm had become the neglected offspring of its parent’s abandoned, hodgepodge campaign to expand into financial services.
After inventing the credit card in the 1950s and dominating the business through the 1970s, AmEx faced strong competition from Visa International Services Association and MasterCard International in the early 1980s. Thinking to diversify, AmEx jumped into financial services, acquiring Sanford Weill’s Shearson Loeb Rhoades in 1981 for $900 million, creating one of the first financial services conglomerates, Shearson/American Express.
Three years later the company bought Minneapolis-based mutual fund giant IDS for $773 million. At the time, $17 billion-in-assets IDS ranked as the second-biggest mutual fund family in the U.S., trailing only Fidelity. And IDS funds were stellar performers for the one-, five- and ten-year periods through June 30, 1983, when all eight IDS equity funds beat the Standard & Poor’s 500 index.
That same year the AmEx board tapped Harvey Golub, a McKinsey & Co. consultant who had helped put the IDS deal together, to take over as IDS CEO from Walter Scott, who retired. In 1984 Shearson/American Express snared Lehman Brothers Kuhn Loeb, one of Wall Street’s oldest private partnerships, for $360 million. Three years later Shearson Lehman Brothers acquired E.F. Hutton & Co. for $1 billion.
Money management was a central focus of the company’s push into financial services, and for years the attention paid off handsomely. For nearly a decade after the IDS deal, the steadily growing mutual fund group delivered strong performance and enjoyed above-average profit margins. In 1989 American Express money management -- which included both IDS and the various asset management divisions of Shearson Lehman Hutton, the brokerage and investment firm that was 61 percent owned by AmEx -- overtook Fidelity to rank as the No. 1 U.S. money manager.
This success notwithstanding, the parent company was beginning to wobble. The all-important credit card business was struggling, facing increasingly effective competition from Visa and MasterCard as well as a rebellion among restaurants, rental car agencies and hotels that resented AmEx’s high user fees. In 1991 the company lost $150 million, partly because of a $265 million write-off to cover delinquencies on the firm’s Optima card, which had been introduced in 1988.
Meanwhile, AmEx’s ambitious bid to build a financial services empire was coming undone. Shearson Lehman was in total disarray. E.F. Hutton never recovered from its involvement in a 1985 check-kiting fraud scandal, or Black Monday two years later. In 1990 AmEx scrapped the Hutton name and restructured the brokerage business into Shearson Lehman, which also housed an asset manager, Boston Co., acquired in 1981 for $270 million. It was a prestigious name in the institutional world but not without its own checkered past: The same year as the ill-fated Hutton takeover, an accounting error at Boston Co. caused it to overstate earnings by $30 million.
In August 1992 AmEx, in need of cash, sold Boston Co. to Mellon for $1.5 billion, but the setbacks continued. In 1992 Shearson Lehman lost more than $100 million. In February 1993, with AmEx stock down 40 percent from its 1987 high, the board forced out longtime CEO James Robinson III and installed Golub in his place.
At this critical juncture, Golub decided to dismantle the financial services conglomerate that American Express had spent billions assembling. Investment banking, brokerage and most of the firm’s asset managers, he decided, would be sold or spun off. The one exception was the successful IDS mutual fund family, which Golub never considered giving up.
At the time, Golub’s strategy -- to conserve cash and focus on the firm’s core business, credit cards and travel services -- seemed sensible. In retrospect, though, it’s clear that AmEx dramatically scaled back its presence in asset management at precisely the moment the business was set to explode. Between 1994 and 2000, mutual fund industry assets more than tripled from $2 trillion to $7 trillion; fund assets at American Express Funds doubled from $50 billion to $109 billion.
Golub’s overhaul began immediately. In July 1993 he jettisoned Shearson Lehman, selling off the Shearson retail brokerage business to Sandy Weill’s Primerica. In early 1994 he spun off Lehman to shareholders.
In the meantime, the new CEO kept a close eye on IDS, which accounted for nearly half of AmEx’s $1.4 billion in net income in 1994. The following year Golub renamed the IDS funds the AXP Funds, after the AmEx stock symbol, in an effort to leverage the company’s brand name. IDS was renamed American Express Financial Advisors.
Golub made some strategic blunders. AmEx had a long-standing company policy that forbade its powerful army of financial planners (then about 9,000-strong) to sell anything but the company’s products. Golub loosened the restriction slightly in the mid-1990s, allowing planners to sell the products of two outside fund families. But for the most part, he reaffirmed an approach that placed an increasingly onerous burden on AmEx planners as the mutual fund industry began to move to an open architecture system in which rivals sell one other’s products. Golub was convinced that AXP’s own fund sales would suffer if American Express financial planners were allowed to sell competitors’ products.
Financial planners might have been more tolerant of the AmEx policy had its funds posted strong track records, but performance was weak across the board. Between 1995 and the end of 1999, only one of AmEx’s 30 stock funds, AXP New Dimensions, consistently beat the S&P 500 over one-, three- and five-year periods. Most of the other funds were in the bottom half of their Morningstar categories.
American Express’s beleaguered sales force was soon in near open rebellion. “The whole operation had just become exceptionally mediocre,” notes Jonathan Satovsky, an AmEx financial planner based in New York City. “I couldn’t recommend AXP Funds with a straight face.” Like others, Satovsky turned away a lot of customers looking for hot tech funds.
American Express was hit with a double whammy. Because AXP retail funds were such poor performers, financial planners found them a hard sell, which meant reduced fees for the asset management group. And because the planners were prohibited from selling rival products, they found it difficult to attract clients. That translated into reduced sales commissions for AEFA.
Increasingly, too, American Express was the odd man out in the money management industry. The business was rapidly changing as fund families struck deals with brokerage firms to sell their products. Fund company sales, it turned out, were not dictated solely by strong performance track records -- such is the power of a brokerage sales force motivated to move the merchandise. Some of these third-party distribution arrangements, most notably, the use of trading commissions generated by the funds to pay for brokerage distribution, are now under scrutiny by regulators.
To many observers, AmEx’s sorry track record was an inevitable by-product of a corporate culture that prized collegiality and discouraged star turns. At the simply furnished Minneapolis headquarters of AmEx money management, portfolio managers often arrived at 8:00 a.m. and walked out at 4:00 p.m., and their pay was at the low end of the industry scale, with most portfolio managers making about $100,000 a year. “The corporate culture just didn’t accommodate having highly paid star portfolio managers,” says Peter Anderson, who served as CIO from 1996 to 2001.
Golub decided that AmEx money management urgently needed new leadership. In the summer of 2000, working closely with Chenault, his No. 2 and heir apparent, the AmEx CEO created a new post, chief of the financial services group, which consisted of asset management, insurance and the American Express Bank, to turn the money management business around. For the post he tapped Cracchiolo, a widely admired executive who had been running the Travel and Related Services business since 1998.
“Golub and Chenault recognized that Cracchiolo had thick enough skin to make tough choices,” says Bruce Harting, an analyst who follows American Express for Lehman Brothers. Among his toughest choices: forcing several top executives, including CIO Anderson, to walk out the door.
Golub, Chenault and Cracchiolo all agreed that Anderson, a 19-year company veteran, could not get the job done; Anderson retired in the spring of 2001, prompting the search that brought in Truscott.
Truscott reported to work in Minneapolis on September 6. Five days later the twin towers fell.
Truscott was in Minneapolis on a conference call with New York staffers when the first plane hit. That afternoon he spoke to Chenault, who was in Salt Lake City, and joined the senior leadership making disaster recovery plans. After AmEx’s headquarters in the World Financial Center suffered extensive damage, Truscott became one of a small group of executives charged with reassuring clients that the business was not at risk. “We had to get the word out that client money was safe,” he says. To ease any skittishness, Truscott appeared in television interviews and hosted nationwide conference calls with thousands of AEFA salespeople.
In retrospect, the intense days and weeks after 9/11 thrust Truscott faster and more deeply into the heart of the AmEx organization than he might have been without that tragedy. That helped him jump-start his overhaul of the money management group.
TRUSCOTT MADE HIS FIRST MARK WITH A HIGHLY contrarian move. Although many large money managers, including Merrill Lynch Investment Managers, Morgan Stanley Investment Management and UBS Global Asset Management, have lately begun consolidating their sprawling operations into more centralized structures, Truscott chose to decentralize, scaling back the Minneapolis headquarters, expanding existing satellite offices and opening several new ones across the country. Boutiques, he believed, could deliver superior performance far better than large centralized structures.
Truscott had another goal in diminishing the status of the Minneapolis headquarters. He was intent on destroying the legacy of the old IDS, whose investment professionals, he felt, were too often short on talent and energy. Many of the Minneapolis staffers, the CIO concluded, “simply didn’t cut it.”
Says Truscott, “The system had to be shocked.”
No move was more shocking than Truscott’s brazen raid on Fidelity’s investment staff. In February 2002, after getting the green light from Chenault, Truscott recruited three top-performing large-cap Fidelity stock pickers, Douglas Chase, Robert Ewing and Nick Thakore, along with analyst Telis Bertsekas. The four defectors set up shop in a new Boston outpost that AmEx opened for them -- the first time the company had opened a satellite office for a money management operation.
“It wasn’t my intention to kick the giant in the shins,” Truscott says of Fidelity, but that’s precisely how the move was seen -- and not just at AmEx and Fidelity, but throughout the asset management industry. Truscott served notice that American Express was committed to the money management business.
Says Kerry O’Boyle, a Morningstar analyst: “American Express proved the seriousness of its commitment to asset management with its raid on Fidelity. A lot of people sat up and took notice.”
Two months after the raid, Truscott named Theodore manager of AXP Growth Fund, handed Chase the reins of the newly launched AXP Large Cap Equity Fund and gave the equity portion of balanced fund AXP Mutual to Ewing. Truscott expanded his recruiting efforts in Boston, luring investment professionals from MFS Investment Management and Wellington Management Co.
The raid infuriated Fidelity, which abruptly canceled its agreements with American Express for both travel services and corporate charge cards. To this day Fidelity employees may not use American Express cards for their business travel -- they must leave home without it.
AmEx won’t reveal how much business was lost as a result of the raid. “I’m sure it was a large account, but AmEx has many large accounts with many large corporations,” says Truscott.
Today the Boston office, where Truscott works one day a week, is home to three portfolio managers and 22 analysts, two of whom also have portfolio manager responsibilities. Together they run 11 funds. AXP Growth now ranks in Lipper’s 36th percentile; before Thakore arrived it had languished in the bottom quartile. AXP Global Technology Fund, which Bertsekas runs, now appears in the top quartile, up from the bottom quartile.
After the Boston explosion Truscott’s shakeup accelerated. He shifted two institutional growth portfolio managers, Duncan Evered and Paul Rokosz, from Minneapolis to San Diego, where one of AmEx’s top stock pickers, Gordon Fines, had begun to work part-time four years before, creating one of the firm’s rare success stories in money management. (Fines chose San Diego to be near his aging father.)
Truscott also farmed out two of the more beleaguered AXP funds, Progressive and Discovery, with combined assets of $280 million, to subadvisers Gabelli Asset Management, Pilgrim Baxter & Associates and Wellington Management Co. Discovery, which traditionally had resided in the bottom quartile, is now in the middle of the pack.
A hands-on CIO, Truscott didn’t pull any punches when he moved to change the roster of portfolio managers. In June 2002 alone 20 of the 65 portfolio managers lost their jobs.
Truscott attacked on two fronts: AmEx performance was dismal in bonds as well as stocks. Aside from presiding over the collateralized debt obligation and junk bond meltdown that cost the company $1 billion in 2001, the fixed-income team ran 16 bond funds whose performance was almost universally subpar during a bond market bull run. AXP Selective Fund, one of the firm’s largest fixed-income funds, with $1.4 billion in assets, underperformed the Lehman Brothers aggregate bond index by nearly 8 percentage points in 2002.
To turn the business around, Truscott recruited Michelle Keeley as head of fixed income. A former colleague from Zurich Scudder, she replaced Fred Quirsfeld, who retired in December 2001.
With Truscott’s support, Keeley recruited three new portfolio managers and restructured the staff from a group of generalists into seven specialty teams covering different sectors of the bond market. The approach is working. While the flagship AXP Diversified Bond Fund ranked in the bottom quartile in 2002, for this year’s first six months it appears in the top 30th percentile.
“Change can be unsettling,” says Keeley, “but the place needed it.”
None of Truscott’s moves addressed the parochialism of American Express money management until he engineered the June 2003 acquisition of Threadneedle from Zurich Financial. To close the deal Truscott logged two 12-hour negotiating sessions, followed by an all-nighter.
The acquisition is a gamble, most notably because of the low-fee insurance accounts that Zurich may reclaim in 2011. But the acquisition clearly offers AmEx money management a presence in overseas markets -- potentially an extremely valuable asset for an organization that had no overseas operation apart from a small financial planning joint venture with Mitsui Mutual Life Insurance Co. of Japan.
Says Kevin Pakenham, a banker in the London office of Putnam Lovell, an investment firm specializing in money managers, “Threadneedle provides American Express with some great opportunities for leveraging its distribution.”
With $75 billion under management, Threadneedle is far from a boutique, but Truscott has no plans to change his new federation of small, autonomous money management units to accommodate the new outsize outfit. “Threadneedle will be a large piece, but it’s going to have its own focus, international investing, and that’s consistent with our belief in creating pockets of specialty talent,” Truscott says.
Adds Threadneedle CEO Simon Davies, “We really get the sense that Truscott and senior management genuinely back the idea of maintaining a federal structure of investment factories.”
Of course, Truscott’s decentralized approach for AmEx asset management is no guarantee that the Threadneedle deal will succeed. Any major acquisition poses integration problems, and cross-border mergers have been especially fraught. Merrill Lynch’s troubled $5.23 billion acquisition of Mercury Asset Management in 1997 is a case in point.
Paul Manduca, who served as Threadneedle CEO from its founding in 1994 through 1999 and is now head of Deutsche Asset Management, Europe, suggests that Truscott’s intense management style may need to be tempered as part of the Threadneedle integration. “Ted can be an in-your-face kind of guy, and the English aren’t like that,” he says. “In London, Truscott’s biggest hurdle will be overcoming cultural sensitivities.”
But no challenge will be greater than the shift to third-party distribution. When he does make his move, Truscott will need to tread carefully. All third-party arrangements are under close examination in the wake of the scandals roiling the fund industry, as the common practice of using trading commissions to pay for brokerage shelf space comes under fire. Last month Putnam Investments announced that it would no longer consider fund sales in directing its brokerage commissions.
As Truscott has made clear, American Express cannot even contemplate a new retail distribution strategy until its three-year performance record has dramatically improved.
“Performance drives this business,” he notes.
Now, like never before, his performance, and that of American Express, is under intense scrutiny from colleagues, competitors, investors and regulators -- from just about every corner of the beleaguered money management industry.
