One on One: "The simplicity side of it really was important to the advisers"

Members of the separately managed accounts industry think of A. Peter Cieszko Jr. as a visionary. The most obvious example of his foresight and cutting-edge style, they say, is the success of the multiple-discipline account.

Although the MDA was created and trademarked by Citigroup Asset Management of Stamford, Conn., at least three years before Mr. Cieszko, 42, came aboard as managing director and head of the U.S. retail and high-net-worth business, the program was virtually unheard of before his arrival. Since he joined the firm in July 2000 from The John Nuveen Co. in Chicago, assets in the MDA program have more than doubled to about $15 billion.

“From our perspective, when it comes to separate accounts, Citigroup is a firm that gets it,” says Paul Fullerton, a consultant at Cerulli Associates Inc. in Boston.

Citigroup Asset Management is responsible for $200 billion in assets under management – $74 billion of which is in separately managed accounts. That alone makes the company about three times the size of its nearest competitor.

Mr. Cieszko is responsible for increasing the assets across all product lines, but the MDA program is where he has made such an impact that money managers across the industry now are scrambling to launch their own versions.

Q The MDA has been around for a while. What has made it so hot over the past 18 months?

A What came about when you looked at the separate-account business was that the traditional approach was one of a single manager, where the client had some specific manager risk. We tried to look at the business and say, “We’re doing well in the separately managed accounts business, but there has to be an easier way.” So we looked at the business and said, “We’ve really gotta create some value here.” We’ve managed money in an MDA approach for five years, and we decided this is something we really need to bring to the forefront, to train and educate the financial intermediaries on this MDA approach.

Q What specifically did you do to get the MDA ball rolling?

A Prior to the last year and a half, when it caught a lot of traction, it was out there; it just wasn’t promoted. There’s not another firm out there that we know of that was doing multiple-discipline-type accounts.

I looked at it, and I said, “Look, this is a simplified solution for the client. It’s a true high-net-worth service, offering style diversification within a managed account.”

Q How much did the fact that it is a simplified solution for the financial consultant contribute to the explosive growth of the multistrategy product?

A I think significantly, because what it did is it offered the financial intermediary and their client simplicity. It offered them performance in regard to the diversification, and it offered them service, where you now go to one place for a point of contact. A portfolio manager can look across an entire portfolio to check on duplication of positions – or if your large-cap-growth manger is selling a stock, is your large-cap-value manager buying that stock? The simplicity side of it really was important to the advisers.

Q When $7 billion moved into your MDAs in 2001, did net flows decline in any other products?

A No. Actually all of our businesses and product lines were up substantially in 2001. We had a record year on gross flows and net flows. When we look at the business, my philosophy has been that we don’t want to limit or control the way we package our investment management expertise. So when we manage large growth, it can be available in a separate account, it can be available in a mutual fund, variable annuity, 401(k), 529s, or when you roll them up into MDAs.

Q And it matches the needs and styles of advisers and brokers?

A I believe that investment intermediaries want to do business with fewer firms with more all-encompassing solutions. So what we found is that as we moved our model and tweaked our model a little bit, it really became very powerful.

Q Salomon Smith Barney’s force of 12,500 representatives was crucial in the growth of Citigroup’s separate-account assets last year, but it now offers multistrategy separate accounts from more outside money managers. How has that affected asset flows?

A It hasn’t. We’re running at sales above last year. Managed accounts last year, we raised over $19 billion in gross sales [$15 billion in net flows], and half of that was in MDAs.

You have to remember that we distribute through Smith Barney, but we also distribute through our private bank. We distribute through the Citibank broker to branch, and we also have a third-party distribution called Salomon Brothers Asset Management, where we actually deliver separately managed accounts to other wirehouses and regional independents, and we are also delivering Salomon Brothers MDA products outside as well. So we are moving it outside of our proprietary distribution channel.

And a lot of people, including Smith Barney’s consulting unit, are trying to develop various versions of how they view MDAs, and that has helped educate a lot more people about the benefits of MDAs.

Q How much of a challenge will newcomers face when it comes to managing money at that level?

A Conceptually, people can say it looks kind of simple. But when you get under the hood and realize that you have to start making decisions that are in the best interest of clients, not necessarily independent managers, and you deal with rebalancing and withdrawals and restrictions and concentrated stock positions and on and on, it gets very intricate and difficult to execute.

So while people are introducing these [new versions of MDAs], I look back and say there’s no substitute for experience in running these types of portfolios.

Q Is Citigroup missing out by not working with unaffiliated money managers?

A The answer is, we are building out today, developing a product, which will be launched later this year. It’s a multimanager, affiliated matched with non-affiliated, MDA lineup that we’ll be announcing later this year for distribution.

Q What companies are you working with?

A We can’t announce it yet, but we are speaking with and have agreements with some of the largest names in the business, from not only the managed-accounts side but from the mutual funds side. We are finishing negotiating that lineup, but it will be some of the highest-quality managers in the business.

Q What other kinds of changes do you see in managed accounts?

A Individually managed accounts are really the centerpiece for a high-net-worth investor’s portfolio. They are the most liquid, the most customizable. So you use that as the core-type offering, and an MDA is perfect for that because you can now customize that to the various risk tolerances, et cetera. What we’re looking at is building out the ability to add alternative investments to that. Whether it’s a market neutral; whether it’s a multistrategy, multiadvised; whether it’s opportunistic long/short – whatever it may be, we’re going to be able to add alternative investments as a portion of the MDA approach.

Q How far are you from that?

A Citigroup Asset Management already offers it in our private bank, but at substantially higher minimums. We’re looking at bringing it downstream with lower minimums. We would have risk parameters of, say, maybe five boxes – conservative up to aggressive. As you profile a client, you will fill in one of the boxes initially. And there are other evolutions. I don’t want to go there yet, because it gets out a little bit. But that is something we’re looking to deliver early next year.

SNAPSHOT

A. Peter Cieszko Jr., 42, managing director and head of the U.S. retail and high-net-worth business at Citigroup Asset Management in Stamford, Conn.

Career: 2000-present, Citigroup Asset Management; 1997-2000, head of distribution in New York for The John Nuveen Co. of Chicago; 1990-97, head of the intermediary distribution network at Montgomery Asset Management LLC in San Francisco; 1984-90, worked with corporate and public pension plans on asset-allocation modeling services in New York for Salomon Smith Barney’s Consulting Group; 1982-84, financial consultant at Merrill Lynch & Co. Inc. in New York

Education: bachelor of science degree in business administration from Villanova University, 1982

Credentials: member of the board of governors of the Money Management Institute in Washington and co-chairman of its executive committee; co-president of the Investment Management Consultants Association in Denver