Total Return.

Consistent performance is crucial for money management firms seeking to attract and retain clients

IN THE ASSET MANAGEMENT BUSINESS, YOU'RE ONLY AS GOOD as your long-term performance, to paraphrase a cliche. For African American-owned money management firms, these words are even more true, especially as competition for new clients heats up.

In BLACK ENTERPRISE'S inaugural overview of black-owned asset management companies, several executives note that firms boasting core portfolios with solid long-term performance have been able to leverage those results into attracting more clients. And African American money managers are aggressively seeking new clients, both public accounts, such as state pension funds, and private money, in the form of company 401(k) plans.

These firms have operated in--and continue to manage money in--a profitable albeit turbulent stock market. Judging by the stats, 1999 was a very good year. The tech-driven Nasdaq composite index, last year's darling of institutional and retail investors alike, posted a record gain of 85.6%, while the Dow Jones industrial average, standard-bearer of the Old Economy, and the Standard & Poor's 500-stock index returned 27.2% and 19.5%, respectively, for the year. And, taking a look at the first quarter of 2000, investors are in for a roller-coaster ride this year as well. As of early April, the volatile Nasdaq was up only 9.27%, while the equally unpredictable Dow was up a mere 3.35%. So investors treasure those money management firms that can make a boatload of dough in a topsy-turvy environment.

How some African American asset managers have approached this ultracompetitive landscape is as varied as their investment philosophies. Some are competing head-to-head with majority-owned money management firms and have won new clients based on their capabilities, rather than their status as minority-owned businesses. Others are expanding into areas not usually associated with asset management, such as small-business consulting, venture capital and real estate, in an attempt to build diverse financial services outfits. And still others are sticking to their knitting, regardless of whether their investment style has fallen out of favor, whether it's a fixed-income or value-investing approach.

BEYOND ASSET MANAGEMENT

One executive looking to branch out is Maceo K. Sloan, chairman and CEO of NCM Capital Management Group (No. 2 on the BE ASSET MANAGERS list), in Durham, North Carolina. At the end of 1999, NCM Capital had about $5.7 billion in assets under management, up from just under $5 billion in 1998. About 63% of NCM Capital's institutional clients are private companies, while 37% are public clients. Just five years ago, that mix was reversed, Sloan says.

But Sloan has ambitions beyond traditional asset management. He seeks to transform Sloan Financial Group, the holding company for NCM Capital, into a diversified financial-services powerhouse, offering everything from a mutual fund family to small-business advice.

As part of his diversification thrust, Sloan launched Equity Capital Partners, a small-business consulting firm, last year. He created the firm to respond to myriad requests he received from minority entrepreneurs seeking advice on starting their own businesses. In return for offering advice and providing a comprehensive business plan, Equity Capital, in some cases, receives a stake in these fledgling companies.

NCM isn't the only firm seeking to expand its offerings: Pittsburgh-based MDL Capital Management (No. 9 on the BE ASSET MANAGERS list) is set to launch load versions of its two flagship mutual funds this May in partnership with Fidelity Investments and SEI Investments.

BEATING THE BIG BOYS

Executives at several asset management firms note that while some institutions, especially public entities, are committed to hiring minority money managers, these set-aside programs often are for much smaller pieces of business. They add that minority firms that accept such small allocations are at a disadvantage, since it's harder to garner larger clients if you're managing such miniscule portions of the pot doled out by private and public institutions. Typically, these allocations start at $25 million, while majority-owned firms usually get pieces starting at $100 million.

One of the major challenges that minority firms face in getting business from public and private institutions is gaining recommendations from white investment advisory firms. "Large majority-owned consultants are the gatekeepers," says Laurence Gray, president of Gray & Co., a black-owned investment consulting firm. "They don't acknowledge the principals' experience at a Scudder, Invesco or T. Rowe Price, where they racked up solid returns. In many cases, the process, philosophy, performance and people are the same. Just the shingle has changed."

Oftentimes, in many cases, black asset managers must rely on minority investment consultants like Gray to make their case, or go directly to the trustees or board of pensions and endowments. And Gray believes this trend will continue since most minority firms are "resistant to the idea" of forming alliances with majority firms. "They have the credentials," says Gray. "They want to maintain their independence."

So, some minority-owned firms, such as Paradigm Asset Management in New York City (No. 6 on the BE ASSET MANAGERS list), make it a priority to look beyond minority set-aside programs for mainstream opportunities. They seek to beat major money management firms at their own game. The result: larger allocations. As of the end of last year, Paradigm managed $3 billion in assets for roughly 32 clients, including American Express, Enron and General Motors.

James E. Francis, CEO of Paradigm Asset Management, says that's what happened when his firm put in a request for a proposal to manage a portion of the $18 billion in assets being released by the Ohio Bureau of Workmen's Compensation. Previously, the agency managed its funds in-house, but then decided to farm out business to external money managers. "They decided they were going to hire minority asset management firms. The maximum allotment, though, was going to be $50 million," Francis explains.

Since the non-set-aside portion was a great deal larger, with allocations of between $400 million to $800 million, Paradigm decided to "compete head-to-head" with big institutional money managers like Goldman Sachs Asset Management and J.P. Morgan Asset Management. Paradigm's moxie paid off. The firm won a significant chunk of that contract.

Another coup was snaring a contract from the City of San Jose (California) Employees Retirement System to manage $100 million. Again, Paradigm was competing with major asset management firms across the country. "It was another hard-fought battle. In three out of four of the searches we were involved in [last year], we were up against only majority firms," he adds. "In the San Jose deal, we were clearly the underdog."

In addition to winning new clients Paradigm also built up its in-house research efforts through what Francis refers to as "intelliservices." He branded the firm's research arm, and aggressively promoted its capabilities to existing and potential clients. The three-person division performs original research and studies for its clients, such as analyzing the long-term performance of large-cap stocks compared with small-cap stocks. In fact, a report the unit published on how valuation ratios help forecast long-term equity returns was chosen as, "The Paper of the Year" by the Journal of Portfolio Management, a top honor in the money management industry.

Later this year, Paradigm plans to offer two enhanced index funds, one based on the small-cap stock indices, the Russell 1000 and the Russell 2000. An enhanced index fund is a portfolio that seeks to achieve superior returns, but mirrors the risk profile of the average it's based on.

VALUE MANAGERS STICK TO THEIR STYLE

With growth stocks--particularly hot technology names--grabbing all the attention in 1999, value stocks were definitely out of favor. For instance, the granddaddy of value-oriented asset management firms, 17-year-old Ariel Capital Management of Chicago (No. 4 on the BE ASSET MANAGERS list), managed to gather more assets despite grumbling from some impatient investors about its patient approach. "In terms of gathering assets, it was a big year," says Mellody Hobson, senior vice president with Ariel Capital. "We took in $1.3 billion in new assets, and most of that was from new, separate accounts." Ariel had $3.7 billion in assets at the end of last year. Its client mix is 23% corporate, 52% public and 25% nonprofit organizations.

Hobson notes that Ariel is making "a major effort" to get Ariel's mutual funds added to 401(k) and 457 plans across the nation. Already, a number of private companies and public entities offer Ariel's portfolios to their employees, including Johnson Publishing, the National Basketball Association, the city of Riverside, California, and the state of Illinois. The firm's long-term goal is to "get those big Fortune 500 companies" to add the Ariel mutual fund family to their defined contribution plans.

Randall Eley, president and CEO of the Edgar Lomax Co. (No. 10 on the BE ASSET MANAGERS list), based in Springfield, Virginia, like other value managers, maintains that "1999 was a challenge for us."

Eley dealt with challenges on two fronts. First, last year wasn't a good one not only for value stocks--shares whose price-to-earnings ratios are cheaper than those of competing companies or a specific stock market index--in general but for specific large-cap value stocks as well. "As a result, it was a year in which you could have good positive performance but appear to have not done well," he says, in comparison with sizzling technology stocks or even certain small-cap shares. Eley manages the Edgar Lomax Value fund, a member of the BE Black Mutual Fund Index (see "Fantastic Voyage," Moneywise, April 2000).

Second, 1999 was the first year Edgar Lomax achieved $1 billion in assets under management, which Eley concedes is "a pretty large step" for a smaller money management shop. The firm brought aboard three staffers, increasing the number of employees to 12. Edgar Lomax also added two important new clients, winning the business of the State Retirement and Pension System of Maryland and the Prince Georges County (Maryland) Police and Fire Service Pension Plan.

Later this year, the Edgar Lomax Value fund will achieve another milestone: it will become eligible for a rating by Morningstar, the Chicago-based mutual fund research firm, when it celebrates its third anniversary this December 12. Once that happens, he'll be able to push for additional channels of distribution for the fund, such as mutual fund supermarkets run by firms like Charles Schwab and Fidelity Investments.

BOND MANAGERS STAY THE COURSE

As anyone who follows the fixed-income market will tell you, 1999 was a bad year for bonds, with the 30-year U.S. Treasury bond suffering a negative return of 1.4%. So the trick for fixed-income shops was to outperform their stated benchmarks and, at the very least, hold on to their assets. In addition, some African American-owned money management firms established themselves as experts in a particular niche, such as global fixed-income.

"As you know, the bond market had negative returns last year, so that's primarily the reason we had little growth" in assets under management, says Gerald B. Smith, chairman and CEO of Smith Graham & Co. Investment Advisors (No. 7 on the BE ASSET MANAGERS list). Houston-based Smith Graham managed $2.2 billion in assets by the end of 1999, and while it did garner new clients, growth in money under management was a flat 4.5%, says Smith. The firm has 42 institutional clients, with about 60% of them coming from the public sector. Among its clients: State of Florida Treasury, Philadelphia Employees Retirement Plan, Honda and Enron.

To combat this ennui in the bond market, Smith Graham emphasized to clients its expertise in the global fixed-income market, and beefed up its research and investment staff to better anticipate long-term trends. "We strengthened our team over the course of last year," explains Ronald Johnson, chief investment officer with Smith Graham, a recent addition to the firm. "Our clients saw that we were serious about dealing with changes in the marketplace, and we affirmed our belief that performance begins by having a team of professionals capable of competing in the markets of tomorrow."

Some steps Smith Graham took to outperform its benchmarks included purchasing bonds in hot sectors. For example, the firm emphasized buying foreign bonds and triple-B-rated bonds, those most likely to receive ratings upgrades. Smith Graham shunned such issues as single-A-rated bonds, those more likely to be downgraded.

These actions helped the firm's core portfolios outperform their benchmarks. For example, its Extended Cash product--its short bond portfolio--had a total return of 6.1% for 1999. That's much higher than Lehman Brothers' One to Three-Year Government index's return of 4.4%. And its Global Unhedged product had a return of 4.7%, slightly outperforming the 4.1% return of the J.P. Morgan Global Government Bond index.

Naturally, an ongoing goal for African American money management firms like Smith Graham, Paradigm and the others is to be judged on their ability to run money for institutions, as well as their long-term performance numbers, rather than their status as minority-owned firms. "We want to pierce this glass ceiling. We want to deliver new and innovative products," says Paradigm's Francis. "We're looking for those $1 billion relationships."

2000 TOP 10 ASSET MANAGEMENT COMPANIES SUMMARY

BLACK-OWNED ASSET MANAGEMENT COMPANIES           1999

NUMBER OF EMPLOYEES                               200
ASSETS UNDER MANAGEMENT                  $ 32,345.461
(In Millions)

As of December 31, 1999

Prepared by B.E. Research. Reviewed by Mitchell $ Titus L.L.P.
B.E. ASSET MANAGERS

THIS
YEAR   COMPANY                    LOCATION

   1   BROWN CAPITAL              Baltimore,
       MANAGEMENT                 Maryland

   2   NCM CAPITAL                Durham,
       MANAGEMENT GROUP INC.      North Carolina

   3   RHUMBLINE ADVISERS         Boston,
                                  Massachusetts

   4   ARIEL CAPITAL              Chicago,
       MANAGEMENT INC.            Illinois

   5   UTENDAHL CAPITAL           New York,
       MANAGEMENT L.P.            New York

   6   PARADIGM ASSET             New York,
       MANAGEMENT CO. L.L.C.      New York

   7   SMITH GRAHAM & CO.,        Houston,
       INVESTMENT ADVISORS L.P.   Texas

   8   EARNEST PARTNERS           Atlanta,
                                  Georgia

   9   MDL CAPITAL                Pittsburgh,
       MANAGEMENT INC.            Pennsylvania

  10   THE EDGAR LOMAX CO.        Springfield,
                                  Virginia

                               CHIEF             YEAR
COMPANY                      EXECUTIVE          STARTED

BROWN CAPITAL              Eddie C. Brown        1983
MANAGEMENT

NCM CAPITAL                Maceo K. Sloan        1986
MANAGEMENT GROUP INC.

RHUMBLINE ADVISERS         J.D. Nelson           1990

ARIEL CAPITAL              John W. Rogers Jr.    1983
MANAGEMENT INC.

UTENDAHL CAPITAL           John O. Utendahl      1992
MANAGEMENT L.P.

PARADIGM ASSET             James E. Francis      1989
MANAGEMENT CO. L.L.C.

SMITH GRAHAM & CO.,        Gerald B. Smith       1990
INVESTMENT ADVISORS L.P.

EARNEST PARTNERS           Paul E. Viera         1998

MDL CAPITAL                Steven L. Sanders     1992
MANAGEMENT INC.

THE EDGAR LOMAX CO.        Randall R. Eley       1986

                                      ASSETS
                                      UNDER
COMPANY                    STAFF   MANAGEMENT(*)

BROWN CAPITAL               20       5,760.000
MANAGEMENT

NCM CAPITAL                 30       5,668.968
MANAGEMENT GROUP INC.

RHUMBLINE ADVISERS          10       4,213.000

ARIEL CAPITAL               37       3,700.000
MANAGEMENT INC.

UTENDAHL CAPITAL            17       3,200.000
MANAGEMENT L.P.

PARADIGM ASSET              12       3,003.493
MANAGEMENT CO. L.L.C.

SMITH GRAHAM & CO.,         25       2,200.000
INVESTMENT ADVISORS L.P.

EARNEST PARTNERS            25       2,000.000

MDL CAPITAL                 12       1,500.000
MANAGEMENT INC.

THE EDGAR LOMAX CO.         12       1,100.000

(*) In million of dollars, to the rest thousand. As of December 31, 1991. Prepared by B.E. research. Reviewed by Mitchell & Titus, L.L.P.