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Friday, April 16, 2004

Arnott and AMG Butt Heads

by: Theresa Sim

Robert Arnott, chairman of First Quadrant, notified colleagues that he was quitting due to "strongly held views about [parent company] AMG's business practices", reported John Hechinger of the Wall Street Journal on Friday.

Arnott will officially leave the firm on April 30th, but AMG officers notified company employees in late February.

First Quadrant is one of the 17 affiliate companies that make up the Affiliated Managers Group. Other affiliates include Essex Investment Management, Third Avenue Management, and Skyline Asset Management. Shunning total acquisitions, AMG instead acquires between 50 to 70 percent of each affiliate; the parent manages over $90 billion in assets and distributes 150 investment products.

Arnott’s disputes with the executives at the parent company started in 2001, reported Hechinger. The dispute concerned control of compensation and the partnership agreement between First Quadrant and AMG.

AMG policy is to let affiliates "retain control of the operational management and distinct culture that shaped their success through a customized revenue sharing agreement that leaves day-to-day operations (including compensation and budgeting decisions) to the management of the Affiliate."

Arnott’s allegations contradict this policy. In an email to the Journal, he said he was pressured by an executive at AMG to cut the salaries of two partners in First Quadrant’s London office by 90 percent. AMG officials declined to comment.

Another dispute between Arnott and AMG was over a renegotiation of the partnership agreement between First Quadrant and AMG in 2001. AMG states on its website that each affiliate relationship is individually negotiated, with the remaining 30 to 49 percent interest "more broadly distributed among the management partners, providing both senior and junior managers the motivation to increase the value of their equity."

After Arnott notified the company that he was quitting, AMG moved to shift equity from Arnott to "the next generation," Darrell W. Crate, AMG's executive vice president and chief financial officer, told Hechinger.

Arnott gave up operational oversight of First Quadrant and the title of chief executive officer in 2002. MutualFundWire was unable to determine if the percent ownership of First Quadrant changed, as well.

Arnott started a subadvisory firm, Research Affiliates, in 2002. The firm is the subadvisor to PIMCO’s All-Asset Fund, a fund that seeks investments outside of stocks, bonds and commodities.

According to Hechinger’s report, the disagreements appear to be limited to Arnott. First Quadrant’s chief operating officer, Curt Ketterer, commented "I've worked with all these guys [at AMG]. They've been and continue to be outstanding business partners and very supportive of me and all the employees."

Darrell W. Crate, executive vice president and chief financial officer of AMG stated that the other eight partners at First Quadrant do not "share Mr. Arnott’s views," reported Hechinger. The spokesperson at First Quadrant did not immediately return calls seeking comment. 

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