JPMorgan Exits Mount From a Star Bond Team Said to Feel Slighted

  • Pension funds have threatened to withdraw $1.5 billion
  • Ohio fund managers said to see independence chipped away

When star bond manager Doug Swanson took a leave from JPMorgan Chase & Co. in October, the bank called it temporary. But he’s not returning, nor are a half dozen other key employees who have left recently.

The departures aren’t just normal churn, investment consultants say. They result from a clash between JPMorgan’s outpost in Columbus, Ohio -- where the exits took place -- and New York headquarters, according to people familiar with views of the employees in the unit. The issue: Money managers in Columbus, who outperformed their bond colleagues in New York during the financial crisis, felt marginalized as the firm integrated its global fixed-income operations, the people said.

Some JPMorgan clients are noticing. Just in the last few weeks, pension managers including the Los Angeles Department of Water and Power have threatened to yank about $1.5 billion in funds citing the unusual attrition rate, public documents show.

The discord comes at a piece of JPMorgan’s asset management arm that oversees almost a third of its fixed-income assets. The bank says it hasn’t changed its commitment to the fixed-income operation in Columbus, which manages about $140 billion. But the unit has seen its independence chipped away as more responsibility is shifted to New York, the people said.

‘Tremendous Consistency’

"Our investment philosophy and value-driven style in Columbus has not changed,” JPMorgan spokeswoman Kristen Chambers said in a statement, noting that assets under management by the group grew by $6 billion this year through April. "There is tremendous consistency in our Columbus fixed income team, despite recent retirements."

Swanson didn’t respond to requests for comment. The fund manager, 56, retired after 32 years with the company, the bank said this week. A “deep bench of talent ensures continued, consistent coverage on our value-driven strategies,” Chambers added.

Investing Styles

The Columbus bond operation was a holdover from when JPMorgan acquired Bank One Corp. in 2004, yet it has been crucial to the bank’s fixed-income business. Even as JPMorgan melded the equity operations of Bank One with its own, it let the Columbus bond unit stand alone, where Swanson ran the flagship $30 billion Core Bond Fund since 1991. The bank even has a bond-trading floor in Columbus, one of only three that JPMorgan’s asset management division runs. The others are in New York and London.

The group’s assets have more than tripled from $42 billion in 2008, the bank said.

The investing style of the Columbus unit run by Swanson differed from bond funds managed in New York. He employed a value-driven approach, focusing on uncovering individual bonds to hold for the long haul. The New York team favors a total-return philosophy. Epitomized by fund managers including Bill Gross and Jeffrey Gundlach, a total-return approach typically also includes top-down bets on the economy and interest rates that require more attention to macro events.

Swanson’s credentials were burnished when the 2008 financial crisis hit. Avoiding questionable mortgage-backed securities, his fund outperformed, gaining 4 percent in 2008. But a similar fund run in New York was obliterated. It lost 24 percent that year, almost all its assets by 2009 and had to be merged with another fund run by the Columbus team.

Stellar Reputation

Swanson’s Core Bond Fund has since grown from about $5 billion under management to more than $30 billion. Its annualized gains of 5.2 percent in the last ten years compared with a 0.25 percent yearly advance for its benchmark, according to data compiled by Morningstar Inc.

Swanson’s reputation had grown so stellar that Mercer, a consulting firm, said in a February 2015 report that it was "not confident that the firm has sufficient leadership and technical expertise to thrive" were he to leave. Mercer declined to comment for this story.

“He’s not particularly well known to the investing public because they are not very showy with their opinions but they go quietly about their business,” Cara Esser, a Morningstar analyst, said of Swanson.

Team Slighted

Unhappiness has grown in recent years as headquarters consolidated oversight within fixed-income, two of the people said. A series of organizational changes in the last three years gave more power to New York executives, moves that were seen as slighting the Columbus team.

Gary Madich, a Columbus veteran who had been designated to run the combined units, was elevated to a vice chairman role with little day-to-day oversight toward the end of 2013, and then left the bank two years ago. Bob Michele, who joined the firm in late 2008 and ran the New York fixed-income operation, was elevated to the head of global fixed income last year.

The Columbus money managers were also frustrated that, despite Swanson’s sterling track record in tough markets, their ideas for developing new fixed-income products using his value philosophy went nowhere in New York, said the people.

Public Sign

Swanson’s announcement in September that he was taking a leave was the first public sign of tension in the Columbus operations. It followed the departure of three members of his team for outside opportunities or other areas within the bank. 

A JPMorgan spokeswoman told InvestmentNews in September that Swanson took a leave of absence to spend time with his family. But the protracted eight-month leave was seen internally by some as a way to give his successor, Barbara Miller, time to acclimate to the new role and help JPMorgan retain as much of the funds’ assets as possible, said one of the people familiar with views inside the unit.

Then, two months ago, senior money managers, Henry Song and Mark Jackson, quit. Chris Nauseda, who was part of the Core Bond fund and was with the firm for 35 years, plans to retire by July 1, according to investment-consulting firm Callan Inc. Song and Jackson didn’t respond to requests for comments.

Mercer earlier this year called the two departures “discouraging given that both portfolio managers were senior and we view this as a significant loss.” 

The moves also caught the attention of other firms that advised pension funds on their holdings.

The Los Angeles Department of Water and Power is monitoring its more than $900 million retirement-fund investment with the team. The Ohio police and fire pension fund has decided to pull $540 million in holdings, citing the personnel moves as one of the reasons. Funds affiliated with the North Dakota state investment board and the University of Maine are also weighing their holdings with JPMorgan.

Warning Letter

“The volume of exodus in a short period of time became concerning even though it didn’t directly affect our mandate," Jeremy Wolfson, chief investment officer of the Los Angeles fund, said in an interview. “These were senior departures.” The fund is in touch with JPMorgan on the developments, he said.

Callan issued a warning in a letter to clients in April.

“Callan is deeply concerned about the changes to the structure and the impact to the team," Brett Cornwell, an investment consultant at the firm, wrote. “We believe these changes are significant enough to prompt a careful review for existing clients and may warrant potential replacement."

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