It has been some two months since the big game, and while some recall the New York Giants upset the heavily favored New England Patriots in the Super Bowl, almost no one remembers the commercials—which cost a hefty $2.7 million per 30 seconds.
For the second year in a row, our firm conducted an online survey testing brand and ad recall among a representative sample of 1,500 viewers. The findings are downright depressing. Just one week after the game, average brand recall was an unimpressive 7%, and not one brand was remembered by 50% or more of Super Bowl viewers. Commercial recall (with no brand attached to the description; i.e., you remember there was an ad “for some movie,” or there was a commercial with a Charlie Brown blimp) averaged 20%.
The worst showing was for “pure recall,” where the respondent remembered both the commercial and the brand it represented. On average, only 4% of viewers could do that. Let’s see, you spend $90,000 a second, and 96 people out of a 100 who watch don’t remember seeing your message less than a week later. (And obviously far fewer people would remember it today.)
The conclusion is inescapable. While advertising during the Super Bowl comes with a certain allure, our research proves it offers a very poor return on investment. Even worse, it is about as far from innovative as you can get. Spending a lot of money to reach as many eyeballs as you can—regardless of whether they are ever going to buy your product? Where’s the new thinking there?
O.K., we’ve persuaded you not to take a Super Bowl ad next year. But where can you get the biggest bang for your innovation buck? Asking the question that way puts you on the right path. Step 1? We need to start by acknowledging we live in the real world, a place where our bosses and budgets require us to justify how every penny we spend contributes to the alignment of business objectives, and communications objectives drive desired financial outcomes. Most of us are on a never-ending search for the magical combination of exponential efficiency and lasting value. So for us it’s not about “how many” people we can touch with our message, but whether we can find the right ones to touch.
Step 2 is finding those “right ones.” There are five places to look. You want customers (or potential customers) who:
•Buy a lot. This is the most obvious one, of course. The more a target group participates, purchases, etc., the greater its value. If you are selling beer, you want to target partyers, not the people who buy the occasional six-pack.
#149;Have decision-making power. The more responsibility target customers have for making purchasing decisions, the greater their value. (Wouldn’t it be great to start a publication called Executive Branch; that would go only to people who work in the White House?)
•Respond to your brand. The more responsive a target group appears to be to your communications, the greater their value.
•Have growth potential. If you are selling vacations homes, you want to go after pre-retirees, not people in their 20s and 30s.
•Offer reachability. The easier and more cost-efficient it is to communicate with a target, the greater its value. It costs a whole lot less to reach ophthalmologists at their annual meeting than it does to take out an ad on the radio.
Step 3, then, is creating a detailed segmentation of your market so you can clearly define the right people to target for the right reasons. You want to understand the entire market so you can eliminate all but those who have the greatest likelihood of becoming your customers, remaining your customers, and even influencing incremental customers for you. That’s actionable intelligence.
When it comes to segmentation, too many companies rely on historical and anecdotal intelligence rather than the hard work (translated: fundamentals) required to identify the five most profitable groups outlined above. Innovative marketers know they have to do the segmentation analysis. It’s the only way to know where to focus to obtain optimal results. Otherwise you are going to spend a lot of time and money trying to reach people who are never going to be your customers.
For somewhere between $150,000 and $300,000, depending on the size of the study, you could define your targets with certainty and confidence and produce a return on investment that is likely to get you promoted. Or you could watch the big game with your peers and high-five when your spot comes on.
It seems to make more sense to invest in a segmentation study that provides infinite potential (best case) or incremental value (worst case) for the next four to five years, instead of aiming for awareness that lasts only four to five days.
March 26th, 2008 | Posted by stockPosted by: Howard Silverblatt on March 26, 2008
Historically, if the New York Yankees loose their opening game (March 31) the S&P 500 is 5% more likely to close up for the year, and the return, on average, is 47% better (6.25% when they win vs. 9.15% when they loose). A very, very sad thing (no one tell Rudy).
Turning slogans into tax policy
March 22nd, 2008 | Posted by tax
Recent Blog Posts:
Popular Blog Posts:
Subscribe to our RSSTABLE OF CONTENTS
I. INTRODUCTION 747
II. ESTATE TAX REPEAL 749
A. The Economic Case Against the Estate Tax 750
B. The Rhetoric of Fairness 755
C. Budget Politics 759
III. DIVIDEND
TAX CUTS 762
A. Ecconomic Effects 763
B. Perceptions of Fairness 769
C. The Fifteen Percent Solution 772
IV. CONCLUSION 780
I. INTRODUCTION
Throughout his presidency George W. Bush has embraced tax cuts as the hallmark of his domestic policy agenda. During the early years of his administration he signed an unprecedented series of annual tax reduction measures into law. The Bush tax cuts have proved highly controversial. Sympathizers herald them as part of a grand strategy to promote capital formation and fundamental tax reform, (1) while critics decry them as symptoms of a fiscally reckless assault on progressive taxation. (2) At this point, it is probably too early to reach definitive conclusions about the long-term effects of the Bush tax cuts, especially considering the uncertain prospects for extending those cuts beyond 2010. Nevertheless, it is possible to evaluate the rationales articulated by the Bush Administration for its tax cutting proposals, to compare those proposals with the outcomes that ultimately emerged from the legislative process, and to draw some preliminary lessons about the Administration’s approach to tax policy.
This article examines the Bush Administration’s tax cutting agenda by focusing on two discrete episodes: the 2001 quest for estate tax repeal, and the 2003 attempt to eliminate the shareholder-level income tax on corporate dividends. These seemingly disparate episodes reveal a common pattern in the Administration’s portrayal of its proposals. In both cases, the Administration offered simplistic economic rationales based on speculative argumentation and unrealistically optimistic assumptions, without acknowledging the revenue costs and regressive distributional effects of its proposals. The Administration also diverted attention from risks and tradeoffs by using populist slogans to pitch its proposals in terms of fairness and economic opportunity. Despite the Administration’s uplifting rhetoric and rosy economic assumptions, the legislative outcomes in 2001 and 2003 were driven largely by budget constraints and interest group politics. As a result, the final bills that President Bush signed into law fell far short of the lofty expectations raised by the initial proposals. In the face of rampant budget deficits, urgent claims on public resources, and growing inequality of income and wealth, the Administration’s tax cutting agenda may be better understood in terms of politics and ideology than conventional tax policy.
S&P 500 Actual Volatility Hits 70 Year High, Over Half the Trading Days Move At Least 1%
March 19th, 2008 | Posted by stockS&P 500 volatility as measured by daily changes of at least 1% have soared since last summer’s credit issues emerged as a critical issue, and now stands at a 70 year high. Since the bear-market turnaround in 2002, the number of significant daily market moves has gone down from 49.6% to 11.6% in 2006, and was 12.9% for the first half of 2007. Then, with the emergence of the credit uncertainty, market volatility shot up to 38.6% for the second half of 2007 and now stands at 51.9% for 2008 – a level not seen since 1938.
While the current uncertainty over credit and economic policies is at the heart of the market uncertainty, the upcoming earnings season appears poised to add to the volatility. Earning estimates are unusually wide, given how close to the quarter end we are. By now we typically see a street consensus emerge on the company level, with only a handful of outliers. However, the estimates remain wide apart, which means that there are going to be a significant number of surprises out there, which will translate into additional buying and selling pressure.
A Ripe Time for Open Innovation
March 19th, 2008 | Posted by innovWith the economy softening, it’s tempting for companies to turn off the lights and shut the door on innovation efforts until things pick up. But while this might look like a smart move, the impact—lost momentum, team dispersion, and wasted investments—is less than desirable.
It doesn’t have to be this way. One of the best options for recessionary times, and, some would argue, even in expansive times, is to join forces with another entity with complementary innovation goals. Open innovation is about connecting with others to find new ideas and, often, to co-develop and co-market them.
There are many examples of successful open innovation efforts today. Some take the form of pan-industry innovation networks that share in the risks and rewards of their findings. Others are straightforward co-development projects between strategic players.
Here are some current examples: Dossia is a consortium of large employers—including AT&T (ATT), BP, Intel (INTC), Pitney Bowes (PBI), and Wal-Mart (WMT)—that have come together to develop portable electronic medical records for their employees.
Continental Automated Buildings Assn. (CABA) hosts the Internet Home Alliance, a cross-industry network of leading companies such as Whirlpool (WHR), HP (HPQ), Cisco (CSCO), and Intel, engaged in collaborative research to increase use of Internet-based services in the home. Then there’s Netflix , which entered into a partnership with LG Electronics to create its own set-top box that will stream movies and other video content.
As you can see, companies can take any number of approaches to open innovation. Mike Docherty of Venture2, an open-innovation consulting firm, says that “Scouting for technologies on the outside is the easy part. The leaders and long-term winners in this area are [corporations such as] P&G (PG) and GlaxoSmithKline , which are going beyond transactions and developing long term co-innovation “relationships” with a group of external partners.
No matter what form these open-innovation efforts take, they offer companies several important advantages over traditional innovation methods. The most obvious benefit is risk reduction —combinations like these share the financial underwriting and require less manpower from each organization than if they’d gone it alone. And that’s good news for the chief financial officer who must justify expenditures. But there are also other less obvious benefits:
Higher levels of brainpower applied. As the old saying goes, “two heads are better than one.” When companies with aligned interests come together, there is a better chance the problem at hand will be more broadly defined and there is less chance of falling prey to group-think. Such broadly defined problems increase the chances for more holistic, breakthrough solutions to emerge.
Validity. Especially in open-innovation situations that involve a potential provider and a customer, the team has access to field conditions where the essential issues lie. The reference points and shared values that teams derive by working with users on a daily basis helps them zone in on the right problems up front.
Solving the right problems is half the battle of innovation, primarily because working on the wrong problems is so costly. Think foregone investment, market share, profits, and the negative career implications associated with failed efforts.
Quicker to scale. One of the biggest reasons you see entities coming together is to make a given partnership scale up quickly should its efforts be successful. In the Netflix/LG Electronics deal, LG gets ready customers (who it expects will buy millions of its new boxes), while Netflix gets a new media platform that makes it more competitive. This means access to something new to the world that could only have been co-created.
Before initiating and/or participating in open innovation efforts, bear in mind a few important things that need to be aligned from the outset:
Identify partners who share a common vision. Obviously, things can move more quickly if companies already have a relationship, but that is not essential. And sometimes partners can be found in existing networks where you can “meet” and perhaps “date” before getting “married” into a tighter co-development relationship.
For its Digital Kitchen initiative, CABA was able to unite diverse companies including Whirlpool, Bell Canada, Cisco, Direct Energy , and Microsoft (MSFT) to explore the future of the kitchen as the nerve center of the house. If the effort is successful, we should see one or more solutions from some subset of these participants.
Have a big idea with clear goals. Start with a big idea—after all, one of the advantages of open innovation is that a team of companies can accomplish more than one alone. But the effort also needs clear goals and milestones that partners commit to. The members of Dossia dared to breach the mammoth task of creating portable electronic health records with the clear goal of providing them to all of their employees by the end of 2007.
Plan two team workspaces—one physical, one virtual. It’s important for the team to meet in person at the outset of the effort, any time the team is working to draw conclusions from their separate analyses or when decisions are being made. Other than that, concentrate on using virtual tools to post and share documents and communicate through regularly scheduled calls.
Manage IP. Managing intellectual property is always the stickiest part of collaborative innovation. The most successful efforts seek to build win-win cultures where both parties benefit in equal measure. Although it should be an expectation to involve lawyers at some point, it is often unproductive to have them driving the early meetings before the parties have had the chance to explore the commercial or investment requirements of the partnership.
Instead, it is often more productive to understand each company’s legal culture, its successes and failures in past relationships, and any assets being brought to the table. These things can inform a more casual letter of intent that can guide the early stages until more is known. That document would include the fundamental goals of the united effort, an agreement in principle regarding the resources being brought to the table, and what the expected timetable would be to draw up a more exact picture of the future business relationship. When exploratory activities result in a tangible concept of what the parties will produce and a business model is formulated, then it is time to formalize a business contract.
Create a new mindset. In many cases, organizational culture can be an obstacle to open innovation. Internal groups often perceive open innovation as a code word for outsourcing, when it’s really an issue of redefining some internal roles and rethinking your innovation organization much more broadly. Success requires a top-level vision and a lot of internal communication as the initiative is rolled out. But, says Venture2′s Docherty, “it’s almost magical to watch the transformation as companies actually become more innovative when they learn to partner with creative companies and entrepreneurs on the outside.”
Open innovation is a leap of faith. The job of leadership is to make it a short leap. But given how many recent collaborative efforts have been successful, I put open innovation on the top of my list of core competencies for the foreseeable future, recessionary times or not.
March 18th, 2008 | Posted by stockStocks are celebrating another Federal Reserve rate cut, but don’t expect the celebration to last. As my editor noted this morning, sometimes the stock market is a little like your bipolar uncle. Enjoy his good days, but on the bad days stay out of the way.
(UPDATE: I was right.)
This is a good day for sure. Once again, investors hope the Federal Reserve, along with other federal policy makers, has found clever solutions to the subprime mess.
But we’ve been here before.
Before rate decisions on Oct. 31 and Dec. 11, the markets were moving higher on hope of a deep Fed cut. When those hopes were dashed (with mere quarter-point adjustments to the Fed funds rate), stocks sunk back into their depressed state.
Then on Jan. 22 and Jan. 30, the market got what it wanted. The Fed cut rates by 0.75-points on Jan. 22 and another half-point on Jan. 30.
For two days after each cut, there was celebration on Wall Street. Then the euphoria wore off, and we found ourselves stuck with the same stubborn problems: A weakening economy and dysfunctional credit markets.
Since the credit crisis began, it’s the same pattern over and over again.
Will this time be any different? Probably not.
But maybe, just maybe, the Fed and other policy makers are now so engaged – not just through rate cuts but through other creative solutions — that they finally make some progress against the credit turmoil.
The Innovation Engine: The Upside of Recession
March 13th, 2008 | Posted by innovPop quiz, hot shot: What do MTV, Trader Joe’s, and the iPod have in common? Yes, of course, they’re all now ubiquitous and make our lives much more agreeable.
But to us, the most interesting thing about all three is that these great brands were born during recessions. (Trader Joe’s: 1958; MTV: 1981; iPod: 2001, if you are scoring at home.)
And therein lies a point everyone seems to be forgetting in the midst of the current economic slowdown. If handled correctly, a downturn can be a good thing for your company. It can give you the opportunity—and the funds—to innovate and get a substantial leg up on the competition. But only if handled correctly.
It is never going to happen if your company—or your department—goes into the recession saying, “We have to tighten our proverbial belts; let’s cut spending 22.73% across the board.” People are going to be demoralized. And even worse, that is what most firms are doing, and you are never going to gain a competitive edge doing the same thing as everyone else.
Cutting across the board is the coward’s way of dealing with a downturn. It assures that no one is going to yell—how could anyone possibly object to sharing the pain equally—and it gives the timid a built-in excuse to fail. (“Gee, I know no one liked our new product, but they slashed our budget 22.73% right before launch, so, it wasn’t my fault.”)
But suppose you use the recession not as an excuse or a reason for hiding under your desk but rather as a catalyst for innovation? Instead of cutting everything by 22.73%, why not see the downturn as a chance to whack 90% (or the whole darn thing) out of stuff that isn’t working well?
Cutting off funding to your laggards would free up a lot of money to back the one, or possibly two, big ideas you have been working on, ideas that have a chance to become breakthrough brands. If you want to be less aggressive, you could place more resources behind the existing ideas/programs/products that are already working well.
Two key assumptions are necessary to make this possible: First, you should already have in a place a solid strategy, one that has identified your company’s competitive advantage, so you know where to place your relatively big bets. If you don’t have a sound strategy, you are at a huge disadvantage. And two, it assumes you have the intestinal fortitude to react to the recession in a way that is not like everyone else.
If you are the chief executive officer, you can make this gutsy call on your own—assuming, of course, you get the board to go along (BusinessWeek.com, 1/29/08). The rest of us probably need to take a two-pronged approach.
First, when the word comes down from on high that you need to belt-tighten, go through the usual drill. Explain you probably can fly everyone in for a meeting three times a year instead of four, and why you can get by with 12 people in the department as opposed to 13.
But then go to your boss, and say, “Instead of dealing with the need to cut like everyone else, why don’t we use these hard times as an opportunity,” and then outline how you plan to create an MTV, a Trader Joe’s, or an iPod of your own, complete with an aggressive launch timeline to ensure it is firmly established in the marketplace when the recession ends.
As Harvard Business School professor John A. Quelch noted recently, “It is well documented that brands that increase advertising during a recession, when competitors are cutting back, can improve market share, and return on investment at lower cost than during good economic times.”
You can also point out that what you are advocating will leave your company perfectly positioned once the recession ends. While your competition is withdrawing, you will be charging ahead, taking market share. Maybe neither argument will carry the day. But if it does nothing else, this kind of innovative thinking gives the boss another reason to keep you around, no small thing when the phrase “reducing headcount” is in the air.
Recessions by definition are temporary. Great companies and great executives don’t abandon their growth strategies in light of temporary setbacks. They attack aggressively, while everyone else is pulling back.
March 12th, 2008 | Posted by stockMy article, “Dividends: The Sweet Spot,” was published on Businessweek.com today. In it, I explore opportunities to buy stocks that also offer healthy dividend yields.
Some advice for the dividend-hunting investor didn’t make it in the final article — namely some interesting thoughts from Dan Genter of RNC Genter Capital Management. He and his firm stick to guidelines when they buy dividend stocks.
Namely:
1. If you’re buying a stock for its dividend, look closely at the company’s financials just like a bondholder would.
2. Look at the “integrity of [the firm’s] dividend policy.” You especially want a consistent payout over the last five years.
3. If you’re really serious about dividends, stick to dividend yields of 2.5% or more. If you accept lower yields on some stocks, Genter thinks you’re more likely to try to make up for it on other stocks. This could compromise your standards, causing you to take higher risks to get higher yields.
4. Stick to companies with a market capitalization of $3 billion or more. Smaller firms are more vulnerable to economic conditions.
5. “You really have to watch that payout ratio,” Genter says. The payout ratio is the percentage of earnings that are paid out in dividends. Don’t buy any companies with a payout ratio over 60% — that’s a sign the firm is sending too much cash to shareholders. A payout ratio of 80% or 90% is unlikely to be sustainable.
In a recent conversation with my friend and colleague, Roger Martin, dean of the Rotman School of Management at the University of Toronto, he mentioned that a student had asked him: “What is it about entrepreneurs that enables them to live so far on the edge? Do they thrive on the adrenaline of risk-taking?” This made me think of another question that I frequently encounter when people find out that I love ice climbing: “How can you live with the risk? Do you actually enjoy flirting with death?”
I think that these are all the same question, founded on the same implicit but ill-founded assumption: that risk equates to danger. Now, I am not going to try and convince you that there aren’t people who do love the rush of throwing the dice—with their life or their bank account. But just because someone won a multimillion-dollar windfall by buying lottery tickets with their retirement fund, or survived running a treacherous river without any training, the fact is not altered that what they were doing was gambling, not investing. The end result is as unrepeatable as it can be inadvisable.
So if it’s not the thrill of gambling, what does distinguish the serial entrepreneur and the ice climber from the population at large? For a start, they understand the very clear distinction between risk and danger. Second, and—perhaps most importantly—they know that there are ways to approach an otherwise dangerous task in such a way that the risk is reduced to an acceptable level.
In fact virtually everyone knows this, at least in some domain. For example, driving in good weather on a 12-lane freeway in a well-maintained car is something that a trained driver would not hesitate to do. Yet it could be near suicide (or murder) for someone who had never been behind the wheel of a car, or who was driving a vehicle without brakes. What is curious about human nature is that we sometimes seem unable to translate knowledge from such everyday examples into our workaday life.
Why do entrepreneurs and ice climbers repeatedly prompt questions of flirting with death and disaster? My best guess is that a lack of familiarity prevents nonpractitioners from seeing what lies behind the surface: the serious and conscientious preparation that such people bring to their respective activities. To illustrate this, let me tell you a bit about ice climbing.
Anyone who has ever walked on a frozen lake, gone ice skating or tried curling knows that ice is slippery and that it takes practice to move with any kind of confidence. Now imagine that the ice sheet is vertical rather than horizontal. This should give you some sense of the challenge of ice-climbing. But then remember there are four things that the prepared ice-climber brings to the base of any climb: training, tools, fitness, and partner(s)
The need for training is pretty obvious. One has to know what one is doing. Just as you have to learn the rules of the road in order to drive on the freeway, the ice climber has to be educated about technique, the appropriate use of tools and procedures, reading the ice, and the evaluation of objective hazards.
Tools have improved significantly over the past decades. Strapped to one’s feet, in a manner not unlike roller-skates (but much more secure) are crampons. These have one or more long, sharp, surrogate toes that you can kick into the ice, thereby giving purchase to your feet. In each hand one has a short, curved, ice axe that is designed to enable one to smoothly drive the pick into the frozen water, thereby giving you something to hold onto. In the event that someone above knocks off some ice, one wears a helmet to protect the head. For protection in the event of a fall, one has a rope firmly tied to a harness around the waist. While ascending, the climber regularly sets a hollow titanium screw into the ice. This forms part of a system of running anchors.
The rope attached to the climber’s waist is clipped to the anchor, from which it runs to another person who is anchored below, paying out rope—but also positioned to catch the climber with the rope, should a fall occur. Properly placed, the ice screw will hold the load, with the ones below it as backup.
Fitness is critical. It doesn’t matter how good my training is or how good my tools are: If I am halfway up a climb and run out of strength, I am a liability both to myself and my partner. The middle of a route is not the time or place to suddenly realize that it might have been a good idea to do some jogging, pull-ups, or other conditioning before setting out. If people want unnecessarily to put their lives at risk, I guess that is their prerogative. But they have no right to jeopardize that of their partner in the process.
This last point relates to the fact that the whole exercise is based on trust; trust in our training, our assessment of the situation, our tools, fitness, and—especially—our partner. You wouldn’t consent to being driven on the freeway by someone you didn’t trust, or who was impaired in one way or another. Nor would any reasonable person put their life in the hands of such a person in the mountains. Your partner is someone you trust with your life. Perhaps because of that, a partner is also the kind of person who makes the experience doubly enjoyable, being shared.
If all four of these factors are well considered and adequately addressed, the recreational ice climber can undertake routes with a margin of risk that is comparable to a typical urban bicycle commuter. If any or all of them is not adequately addressed, the consequences could be catastrophic.
The lessons for business are simple: the four considerations employed by the ice climber are exactly the same as those used by the serial entrepreneur or the effective business person. Of course it could be argued that the rich scope of business constitutes a much more amorphous challenge than a frozen waterfall. But that makes it all the more rash to proceed without carefully considering the following:
Training: What, in fact are the skills that would best equip me to engage this problem? Are they evident in my team? If so, how do I hone them? If not, how do I bring them onboard?
Tools: What tools are relevant to the problem? What are the potentially useful processes, technologies or other instruments that might give me purchase and protection throughout the exercise?
Fitness: How does one prepare? How rusty are my skills? What would constitute a warm-up exercise, or a “preliminary heat” that would let me find out if I were ready for the game?
Partners: No matter how good you and your team are, in most significant cases you will need partners. Do you have the right ones? My approach in this is simple: Get the best. If you can’t, you might want to question the wisdom of proceeding. After all, if they aren’t working for you, they may be working for someone on the other side of the table.
These basic points provide a skeleton on which you have the opportunity to flesh out your creativity. The more innovation and insight that you bring to determining the answers pertaining to each of these four points, and the more effectively you execute on the answers, the lower the risk of your endeavor and the higher the probability of success.
Are there any guarantees? Few. Yet if you fail, which you might, at least there is a higher probability that you will live to try again. But remember, business—like life—never was about certainty (as long as we rule out the proverbial death and taxes).
Finally, what struck me most about the question from Roger’s student—a student in an MBA program at Rotman—was the implicit assumption that risk was the domain of the entrepreneur, not him. If there is a single message in all of this, it is this: The most dangerous way of all to play it is so-called safe. Safe leads to atrophy and certain death—of spirit, culture, and enterprise. There is not a single institution of merit or worthy of respect in our society that was not created out of risk. Risk is not only not to be avoided, it is to be embraced—for survival.
Anyone for ice climbing?
Legg Mason’s big Citi deal keeps the hurt on
March 7th, 2008 | Posted by stockMark Fetting has been president and CEO of Baltimore-based money manager Legg Mason (Symbol: LM) for less than six weeks but what exciting weeks they’ve been! Today, the firm announced yet another write-down to cover for structured investments gone bad in its cash funds. S&P downgraded the shares to “hold” from “buy,” noting that “continuing struggles, combined with tough markets and recent fund underperformance, will continue to adversely affect fund flows and average asset balances.” The company’s shares are off just 2% but they’ve dropped 15% in 2008.
It’s got to be hard any time you succeed the founder of a company in the big chair, especially when that founder was as successful as Fetting’s predecessor, Raymond “Chip” Mason, was for most of his tenure. In 38 years at the helm, Mason built the firm from a small regional brokerage into a money management powerhouse with almost $1 trillion in assets.
Most of Mason’s moves were spot on, buying Western Asset Management, the bond titan, for a song back in the mid-1980s, for example. But Mason’s last move — his biggest by far — hasn’t turned out nearly as well. Swapping his brokerage force to Citibank (C) in return for Citi’s fund division may have seemed like the perfect way to cement his legacy. But Mason and his team struggled to keep investors, many of whom were pushed into the funds by Citi’s various brokerage squads. Now it’s an open market and investors are checking out. Ironically, it’s probably some former Legg Mason brokers, now at Citi, suggesting their clients dump their former Citi funds, now run by Legg.
Adding to Fetting’s woes are problems at the nearly $150 billion of cash funds Legg Mason got from Citi (some are actual money market mutual funds, others are less-regulated imitations). Seems Citi had stuffed many of the funds full of asset-backed securities issued by structured investment vehicles, or SIVs, which in turn were backed by subprime mortgages. Oops. Fully 6% of Legg’s cash business was invested in SIVs last October and that was after the firm had already been selling the stuff as fast as possible. As of the end of February, the SIV exposure was down to 2.2% in cash funds totaling $174 billion.
Fetting & Company will no doubt be working the phones for the next six weeks, trying to complete a turn around that’s grown more difficult and complex in the past six months. Then he can get on with turning around stock fund performance. Legg Mason star manager Bill Miller’s had two bad years in a row and he’s down 19% already this year. It’s quite an initiation for a new CEO,. At least he’ll be battle tested for the next market meltdown.