Strong wants firm to be a big player
Fund company leader viewed as pushing edge
By KATHLEEN GALLAGHER [email protected], Journal Sentinel
Sunday, October 5, 2003
To many Strong Funds shareholders, he’s a patriotic guy who regularly offers up homespun anecdotes drenched in folksy wisdom and signs his letters “Dick.”
To many investment professionals, Richard S. Strong is a growth- obsessed, hard-driving competitor — a man who commands respect for what he’s accomplished but is viewed as always pushing to get an incremental edge.
To most who know him, the man and his firm are barely distinguishable.
Strong, 61, is founder, chairman and majority owner of Strong Capital Management Inc., the Menomonee Falls investment company with $43 billion in assets under management that he built from the ground up into a national player in the mutual fund industry.
He’s a complex man who does more listening than talking, favors hiring hard-working, academically successful farm kids over Ivy League MBAs and is known for conducting quirky interviews in which he never asks a question directly related to the job he’s hiring to fill.
He’s also driven by the dream of making his firm one of the biggest in the industry — as evidenced by the T-shirts he distributed to all Strong employees several years ago with the slogan “Number 2 in 2002” printed on them.
“The desire to be a big player just seems to drive a lot of the actions,” said Paul Herbert, a mutual fund analyst at Morningstar Inc. in Chicago. “You see a lot of the other firms — you don’t even have to look outside Milwaukee — who are more content to be niche players.”
Strong’s midsize mutual fund company is still far from breaking into the top rungs of its industry, based on assets under management. The fund complex has been held back by mediocre to poor investment performance, manager turnover and rising expense ratios, Herbert said.
Company representatives disagree. They point to Lipper Inc. data that says 71% of all Strong funds, including money markets, rank in the top half of their peer groups for the year to date. For the last 12 months, 73% rank in the top half and 75% rank in the top half since inception, Strong spokeswoman Stephanie Truog said.
But on Sept. 3, Strong encountered a new head wind. New York Attorney General Eliot Spitzer implicated the company, but did not charge it, in a scheme to allow a New Jersey hedge fund to trade in and out of five of its mutual funds more often than other shareholders. In exchange, Spitzer said, Canary Capital Partners LLC deposited money — Strong has since said $500,000 — in Strong’s hedge funds.
Some predict that Strong, already the target of lawsuits over the Spitzer allegations, faces a painful period of public scrutiny and condemnation because of heightened customer awareness of ethics and corporate governance.
Others, such as Robert J. Bukowski, say there’s precedent in the mutual fund industry for allowing such market timing. “It’s a recognized hedge fund strategy,” said Bukowski, a senior consultant at Alpha Investment Consulting Group in Milwaukee.
Strong difficult to keep down
Either way, if Dick Strong has proved one thing during his career, it’s that he is difficult to keep down.
“In this industry, Strong has as many blots on its record as just about any company you can think of,” said Roy Weitz, publisher of FundAlarm.com, an online newsletter that warns which mutual funds to sell.
In 1994, Strong and his firm were sanctioned by the Securities and Exchange Commission for making improper trades among its funds in the late 1980s and not telling investors about conflicts of interest. Two years later, in response to an action filed by the U.S. Department of Labor, Strong Capital agreed to reimburse certain pension accounts $5.9 million over related allegations.
Less than a year later, in February 1997, Strong again attracted unwanted headlines when it bailed out three of its money market funds that were holding short-term debt of Mercury Finance, a used- car lender that had failed to meet a payment. Strong said then the default involved fraud and that it was doing the “right thing” by reimbursing investors.
But many professional investors who thought the Mercury Finance securities too risky viewed the incident as yet another example of Dick Strong’s aggressive style of investing.
Strong declined to comment for this story, but Truog provided a statement.
“Strong employs over 1,300 associates — most of whom live right here in the Milwaukee area — who come to work each day for the sole purpose of helping investors achieve their financial goals through education, outstanding service and quality investments,” Truog said.
Eighteen investment industry professionals — from firms big and small, national and local — were interviewed for this story but did not want to be named. Most said they view Dick Strong as an aggressive investor and marketer.
Several said Strong’s aggressive approach is masked in his firm’s marketing materials. For example, the Mercury Finance bonds Strong held in its money markets — which are advertised as the safest fund investments — were rated below investment grade by at least one rating agency and, as a result, many other money market fund managers had passed on them.
“Entrepreneur-driven firms tend to have more of an aggressive reputation, and Strong is solidly in that camp — it’s aggressive in terms of products and marketing strategies,” FundAlarm.com’s Weitz said.
Several investment professionals said they thought Strong’s aggressive style stopped at anything illegal.
“Even though Dick is aggressive, any potential wrongdoing I don’t think he would have approved of,” said George V. Reis, president of George V. Reis Investment Group Inc. in Two Rivers.
Most said they believe Strong is involved in most of the decisions made at the firm, which is not surprising, given his penchant for control and attention to detail.
Strong wants the window shade in a certain position when he arrives at the Heinemann’s on Mayfair Road for breakfast. He once interrupted a meeting at company headquarters to call the janitor about a screw in a light plate switch that wasn’t vertically aligned.
“Here’s a guy who started a company from scratch and basically grew it to a $43 billion investment management company, which by far he owns the most of. I don’t think he’s any different from how anyone else would be in his situation in wanting to control his company,” Bukowski said.
Strong remains in top ranks
That desire for control may explain why others have come and gone, but Strong is the lone constant in the top ranks of his firm.
Four executives — Bruce Beh-ling, William D. Corneliuson, Andrew A. Ziegler and John Dragisic — moved through the top ranks of management until Strong formed its Office of the CEO in 1998.
In the past year, two high-ranking employees who had the cachet to sometimes disagree with Strong left the firm.
Bradley C. Tank left Strong in July 2002 after big markdowns on several bonds in the funds he oversaw. Tank, the most senior member other than Strong of the now four-member Office of the CEO, didn’t return a reporter’s phone call.
The other top executive, Jody R. Lowe, Strong’s longtime managing director of communications, severed ties with the firm this year.
“I worked with Dick Strong for 16 years, and I have tremendous respect for him and for what he’s done,” Lowe said. “He started his company from scratch and has built it into an extremely successful business. And he has hired a lot of very talented, ethical people.”
Strong has also been good for Milwaukee, many said, because his firm breeds talent, backs local schools and supports local causes, such as the Boys & Girls Clubs and the Milwaukee Youth Arts Center.
“He’s been an enormously positive influence on the investment community in Milwaukee,” one local investment professional said. “He’s employed a lot of people and brought a lot of business opportunity to Milwaukee because of what he has accomplished.”
Will Strong lose clients over this newest round of bad press?
The firm has held its own so far, with just $69 million of net withdrawals from its stock funds in September, Truog said.
Weitz says Strong will be fine. A big reason professionals lose clients is that they fail to communicate, and Strong’s firm is good at communicating, he said.
And Strong is good at surviving.
“You can think of him like a runner trying to break out of the pack and sometimes he smacks into the SEC or Spitzer,” Weitz said. “You knock him down, he’ll come back again, and he’ll try to find another opening.”
