Strong price may be up to money manager
Weiss owns just 5% of company but runs highly respected funds
By KATHLEEN GALLAGHER [email protected], Journal Sentinel
Sunday, December 7, 2003
It may look like it’s just Richard S. Strong controlling the potential sale of Strong Financial Corp.
After all, the 61-year-old founder and former chairman owns about 90% of the firm.
The next biggest owner is Richard T. Weiss, the Strong vice chairman and portfolio manager who was named last week to lead the company’s investment department. Weiss owns just 5% of Strong.
But the money management business is all about the amount of higher-fee equity assets you control — an area where Weiss excels.
“It will be very important for the buyer to know that Dick Weiss is on board,” said Marshall Front, chairman of Front Barnett Associates LLP in Chicago. Front headed Stein Roe & Farnham’s investment counseling business in the late 1980s, when Weiss worked there.
“He’s very respected as a money manager.”
He’s also a big moneymaker for Strong.
As of Oct. 31, Weiss and his team managed about $8 billion — or 35% of Strong’s nearly $23 billion of equity assets. The $4.5 billion in Weiss’ Strong Opportunity and Strong Common Stock Funds, which have a management fee of 0.75% of assets, would generate an estimated $33.8 million in gross revenue.
The rest of Weiss’ $3.5 billion of assets would carry lower management fees, perhaps 0.5%, which would generate an estimated $17.5 million from institutional investors.
So Weiss, who likes to keep years of data about companies’ private market values on his desk, likely is contributing at least $50 million of gross revenue each year.
That number is more important than it was four months ago, given the damage done to Strong’s brand by allegations that the company allowed, and Richard Strong profited from, improper trades.
“If you want Strong, the brand is worth very little to you at this point,” said Paul Herbert, a mutual fund analyst at Morningstar Inc. in Chicago. “You get the assets so you can charge fees on them. As for managers, you only want the cream of the crop.”
Weiss’ Strong Opportunity Fund had an average annual return of 11.89% for the 10 years ended Nov. 28, compared with 10.63% for the Standard & Poor’s 500 index and 10.32% for the Russell Midcap Index, according to Bloomberg Analytics.
The biggest issue with Weiss is that he manages a lot of money already for his style, and he doesn’t accept new investors’ money, so a buyer wouldn’t be able to grow assets with him, Herbert said.
Weiss declined to comment for this story.
Ognar funds tainted
Some observers suggest Strong’s growth stock investment team and its former leader, Ronald C. Ognar, might also have some say in the fate of the company.
Ognar, like Weiss, is a vice chairman of the company, and his team manages $5.2 billion.
“If someone were to buy the firm and want to maintain (Weiss and Ognar) at the firm, they would likely have to offer those two big incentives to stay,” said Robert J. Bu-kow-ski, senior consultant at Alpha Investment Consulting Group in Milwaukee.
But Ognar said in May he was stepping down from heading the team. And allegations that Strong provided portfolio information to Canary Capital Partners LLC and allowed the New Jersey hedge fund to make improper trades focused on four of the Ognar group’s funds.
“That Ognar group, I don’t know if you’d want to hold onto them,” Herbert said. “Given the taint from the Canary scandal, why take the chance?”
Weiss has so far avoided any involvement in the scandal. Littman/ Gregory Fund Advisors Inc., for whose Master Select Funds Weiss manages some money, said in a recent shareholder report that Strong’s legal counsel and Weiss both said he had no involvement.
“We have been assured by Weiss that he had no knowledge of these activities and that the funds he manages were not involved,” wrote Ken Gregory, president of the Orinda, Calif., firm.
It all adds up to Weiss having maximum leverage right now.
“He is going to be influential regarding whatever the price is because the firm is worth a higher price with him enthusiastically there than it is without him there,” said Michael J. Steppe, partner and chief investment officer at Brookfield Investment Partners, Brookfield.
“It will likely be a condition of any transaction and the buyer will make it very rewarding financially for Dick (Weiss) to make the transition,” said Front Barrett’s Front.
A tough sell
But that doesn’t mean a transaction will come easily.
“On the whole, you have a tainted firm with poor-performing funds that for years has been facing the betwixt and between issue of being a midsize shop,” said Russel J. Kinnel, head of equity research at Morningstar Inc. in Chicago.
Many big mutual fund companies such as Fidelity, T. Rowe Price and Vanguard tend not to make acquisitions, and many midsize fund companies with a full line-up wouldn’t find Strong’s “random hodgepodge” of funds appealing, Kinnel said.
“Big investment banks and regular banks might be interested in adding assets, but at the same time, one would think they wouldn’t pay big multiples,” Kinnel said. “I would think it will be a tough sell before a settlement (with regulators), yet at the same time, that would help them with the settlement — so it’s a little tricky.”
Strong could command a price of about 2.5% of assets, or about $1 billion on Strong’s $40 billion of assets, according to some estimates. But a buyer might want to pay based on where assets are a year from now, not where they are today, said Steven D. Schwartz, a senior vice president and life insurance and asset management analyst in the Chicago office of Raymond James.
No one at Strong is providing any hints.
“We all — the leadership of the firm and every associate at Strong — share a common objective, and that is to do what is in the best interests of our clients and our firm,” Kenneth J. Wessels, Strong’s new leader, said in a statement.
The question is whether the clients’ and the firm’s interests jibe with those of Richard Strong and Richard Weiss. And neither of them is talking.
