NEW ENGLAND HAS ITS OWN WAY TO SPELL GROWTH: H-A-R-R-I-S. PRICE APPEARED HIGH FOR HARRIS ASSOCIATES, BUT HAS BEEN WORTH IT

New England Investment Cos. LP appeared to be paying a steep price back in September 1995 when the Boston-based money management holding company beat out First Chicago NBD Corp., Conseco Inc. and Union Bank of Switzerland to acquire Chicago money manager Harris Associates LP.

After all, New England had agreed to pay $319 million for a long-independent partnership in the process of transferring ownership to a new generation of talented junior partners frustrated over not having a commensurate slice of the firm’s equity. New England need only look at the talent-pool drain Boston-based Liberty Mutual Insurance Co. had to contend with following its purchase of Chicago’s Stein Roe & Farnham Inc. (Stein Roe is now part of Liberty Financial Cos. Inc.)

a vital contributor

From today’s perspective, however, few acquisitions have worked so well. Harris Associates’ assets under management have swelled more than 2? times to about $19 billion, from $7.1 billion when New England acquired the firm two and a half years ago. Harris’ Oakmark family of no-load mutual funds, which now includes five equity funds and one balanced fund, attracted $3.3 billion in net sales last year, vs. $884 million in 1996, according to Financial Research Corp. in Boston. The firm’s year-old Oakmark Select fund, which returned 55% last year, drew $769 million in sales. “Harris is a vital contributor to our bottom line,” says a New England spokesman.

Though company executives decline to break out its affiliates’ specific contribution to New England’s overall profits, it’s clear that Harris — which represents just 14% of New England’s $125 billion total assets under management — has become the company’s most important driver of internal earnings growth.

For example, Harris’ management and advisory fees to New England grew more than 53% last year to an estimated $125 million, from $81.4 million in 1996. That $43.6 million increase is more than half of the $82 million management fee growth New England says it enjoyed last
year, after subtracting the impact of acquisitions.

“On a ‘same-store sales’ basis in 1997 it’s very clear that Harris was the most important contributor of growth,” says James Hanbury, an analyst with Schroder & Co. Inc. in New York.

This is not to say that New England is solely dependent on the continuing success of Harris Associates to maintain its earnings and revenue growth. Fixed-income manager Loomis Sayles & Co. LP — which runs nearly half of New England’s total assets — saw its assets under management expand 27% last year, according to a company spokes-man. And Oakland, Calif.-based Jurika & Voyles LP, which New England acquired in January 1997, increased its assets 23% to $6.88 billion from $5.6 billion.

“The main thing is that the other affiliates seem to be growing OK,” says Mr. Hanbury. “If New England never had bought Harris, they would still have growth. But you can’t deny that of New England’s three biggest affiliates, Harris is clearly doing the best.”

DOUBLE THE AVERAGE RATE

The reason Harris contributes so mightily to New England’s management fee growth is because its fees, though modest by fund industry standards, are about double the average rate charged by New England’s other institutional-oriented affiliates. Harris charges an average 0.89% annually, or $8.90 for every $1,000 under management, vs. the average 0.44% that New England collected last year.

Of course, the real test of enduring harmony between Harris and New England has yet to play out. As part of the sale, Harris managers signed five-year employment contracts. Non-compete agreements extend an additional three years. At Stein Roe, several veteran managers left after their agreements expired to launch money management firms.