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Columbia Threadneedle Is Still Finding Its Way

Columbia Threadneedle has made strides toward a unified global brand but lacks the track record of a long-term dedication to shareholders' best interests.

Morningstar recently issued a new Stewardship Grade for Columbia Threadneedle. The firm's overall grade--which considers corporate culture, fund board quality, fund manager incentives, fees, and regulatory history--is a C. What follows is Morningstar's analysis of the firm's corporate culture, for which Columbia Threadneedle also receives a C. This text, as well as analytical text on the other four Stewardship Grade criteria, is available to subscribers of Morningstar's software for advisors and institutions: Morningstar Advisor Workstation(SM), Morningstar Office(SM), and Morningstar Direct(SM).

The rebranded Columbia Threadneedle Investments (effective early 2015) represents a continued drive toward globalization for the asset-management business line of  Ameriprise Financial (AMP). U.S. mutual funds still follow the original Columbia brand, while those strategies sold outside of the U.S. primarily use the rebranded moniker. This global push remains a steady theme that has been in place for several years now. Particularly as outflows continue in the U.S., global diversification remains a key component to Columbia Threadneedle’s growth plans. Under the direction of CEO Ted Truscott and CIO Colin Moore, the asset manager prefers tailoring the brand for local presence. And while the company has made strides toward one cohesive culture, still more work remains. Particularly in the United Kingdom (the original home of Threadneedle Investments, prior to the completion of the acquisition), the asset-management team is still finding its way. After several departures, Diane Sobin and a core of long-standing managers have been actively strengthening the London-based leadership.

Being owned by Ameriprise offers some advantages. For example, the $14 billion enterprise can provide resources to successfully expand globally, which has been a top priority for several years. According to Morningstar equity analysts, James Cracchiolo, chairman and CEO of Ameriprise, can be credited with running a conservative investment strategy since it was spun off from American Express in 2005. He brings more than 25 years of experience in the financial-services industry and kept the company well capitalized in the period leading up to and following the 2008-09 financial crisis. Cracchiolo was also the force behind Ameriprise's $1.2 billion acquisition of Columbia Management's long-term asset-management business from Bank of America in 2010. The deal doubled Ameriprise's assets under management and administration, providing it the size and scale to be more competitive in the U.S. market for mutual funds. Still, a publicly traded entity also has to work hard to avoid conflicts of interests between its stockholders and its fundholders. For example, higher fees and increasing assets under management both serve to boost profits but can work against the best interests of fundholders.

Columbia Threadneedle has one of the more complex histories among asset managers, marked by a series of important organizational developments. One major action came in May 2010 when Ameriprise Financial, then already owner of the previously independent RiverSource, Seligman, and Threadneedle funds, as well as an army of financial advisors, bought Columbia's long-term asset-management business, including the Acorn funds and their advisor, Wanger Asset Management, from Bank of America for around $1 billion in cash. A second, more recent substantive change was the 2015 rebranding of Ameriprise’s asset-management businesses to Columbia Threadneedle Investments. Funds distributed in the U.S. will maintain the Columbia branding, while U.K. funds will primarily maintain the Threadneedle moniker. But the rebranding is meant to highlight the organization’s combined capabilities and the encouragement of its investment managers to share ideas.

Despite the melding of previously separate entities into a unified brand, the firm continues to have a multiboutique feel to its asset-management complex. Moore helped create a common research platform as well as central quantitative and risk-management groups. These are available to all the shop's equity funds, but managers aren't forced to use them, and funds can have their own dedicated analysts and other resources as long as they're able to justify the expense. Long-tenured managers like Scott Davis of  Columbia Dividend Income (LBSAX) and Guy Pope at  Columbia Contrarian Core (LCCAX) have provided fundholders with consistent leadership and healthy long-term performance records. But they have each built a team differently over the years and tap into the firm’s centralized research pool when it is advantageous, but not consistently. In fact, the central research team is not especially crucial for either fund. Portfolio managers have considerable leeway to do their own thing, as long as they stick to an identifiable strategy and justify the risks they take; as Moore puts it, "We don't tell you what to do, but we make sure you do what you say." Moore prefers that each manager’s unique process remain his own.

This accountability on the part of portfolio managers to the parent firm is supported by the fact that fund managers have mostly adopted Columbia’s monitoring of five “P’s”: product, philosophy, process, people, and performance expectation. This common framework has helped to stitch together a coherent culture from a wide-ranging collection of smaller historical entities. The idea in all this is that Columbia funds should be consistently good, rather than occasionally great. That's a reasonable description of the lineup's recent performance. Of the 95 Columbia funds with five-year records as of May 2016, 31 ranked in their category's top quartile over the previous five years, while only 10 ranked in the bottom quartile. These are similar figures to fund results 18 months prior. At the same time, no Columbia funds suffered catastrophic losses in 2008 like those suffered by some other families. The firm's five- and 10-year success ratios, which measure the percentage of U.S. open-end funds that both survive and beat their benchmark over a given time period, are below the average for other fund families, but that is partially still an artifact of all the consolidation in the Columbia fund lineup. Similarly, Columbia's five-year manager-retention rate increased slightly to 89% as of May 2016, up from 84% as of November 2014. But that number, too, which is among the lowest for U.S. firms of similar scale, has been affected by all the fund mergers and liquidations that often occur after one firm acquires another. Improvement going forward could indicate that both portfolio managers and leadership are comfortable and that the firm has been able to attract, develop, and retain investment talent.

There can be complications associated with autonomous management teams. This was on display in 2015, as leadership changes highlighted key manager risk and rattled the Acorn funds team. The longtime manager of  Columbia Acorn (LACAX), Rob Mohn, announced his unexpected early retirement in April 2015 in the wake of weak performance and significant outflows at his charge. Without a successor identified, Zach Egan and Fritz Kaegi joined the management roster on the Acorn flagship, though they maintained responsibilities at  Columbia Acorn International (LAIAX) and  Columbia Acorn Emerging Markets (CAGAX), respectively. Mohn departed by October, but replacement and new lead portfolio manager Matt Litfin was not hired until December. Meanwhile, there were other manager and senior leadership changes, including a new COO, Alan Berkshire, previously of Nuveen Investments. Meanwhile, Chuck McQuaid, Columbia Wanger’s former president and CIO, retired from the firm May 1, 2016, after having stepped down from his leadership roles while still working part-time. Both Litfin and Berkshire’s hirings were significant investments on the part of the asset-management team, a plus for fundholders, though new leadership creates some uncertainty in the overall direction at the unit and a changing of the guard could lead to changes in how the group fits in the Columbia Threadneedle fold.

Overall, the firm has had about $11 billion in net fund outflows for the 12 months through May 2016, and to some extent the firm’s outflows are tied to broader changes in the industry; broadly speaking, investor money has shifted into areas where Columbia is not as prominent as some of its rivals, such as passive and alternatives funds. Still, recent outflows could also be attributable to the recent changes at the Acorn funds, because money leaving those funds represents about 40% of Columbia’s total $19.6 in outflows for the 12 months through May 2016. Many of the firm's recent moves, especially its global push, can be seen as attempts to get where the money is going, and the firm has also been trying to sharpen its sales and distribution efforts in order to improve flows. Significant outflows over long time periods can lead to personnel turnover and pressure on profits, so Columbia's efforts to improve in this area bear watching.

In fact, Columbia Threadneedle brought in an entirely new U.S. retail leadership team in 2015. The team has worked to merge or liquidate funds that struggled to attract interest, enhanced existing strategies, and launched eight new U.S. open-end funds between March 2014 and May 2016. The company’s history with new fund launches is inconsistent. In April 2011, the firm launched a series of three absolute return funds, newly popular at the time, that are designed to provide a steady return with low correlation to the broad market. The funds were not very successful, putting up mediocre performance numbers and struggling to attract assets. As a result, the funds were closed in early 2015. In another endeavor in May 2011, Columbia completed the purchase of Grail Advisors, a Registered Investment Advisorthat offers actively managed exchange-traded funds, another growing area of the fund world. The purchase included five active ETFs that Columbia converted into clones of popular mutual funds from its lineup. At the time, Columbia announced plans to launch a dozen more active ETFs, but those plans were put on hold and the shop liquidated three of the five ETFs. But the firm continues to find its way with ETFs and announced in May 2016 that it acquired Emerging Global Advisors, a suite of strategic-beta (or what others call “smart” beta) portfolios focused on emerging markets ($900 million in assets, nine emerging-markets equity ETFs). The firm later launched several new equity strategic-beta ETFs, including sustainable global equity income, effective June 2016.

For several years, Columbia has continued to focus product offerings where there has been the most demand from clients: income provision, enhanced diversification (including liquid alternatives as well as the absolute return funds), downside/risk protection, real wealth protection (including a commodities fund and a global inflation-linked bond fund), and tax efficiency. In addition, Columbia works with Blackstone Alternative Asset Management, part of hedge fund giant Blackstone. Global head of investment solutions and portfolio manager Jeff Knight includes  Blackstone Alternative Multi-Strategy (BXMIX) in the Columbia Adaptive Alternatives (CLAAX) strategy. This fund of funds has trailed its multialternative peers since its launch in March 2015 and has been slow to attract assets, with only about $200 million as of May 2016. On the other hand, Knight’s tactical-allocation fund, Columbia Adaptive Risk Allocation (CRAAX), has grown to about $600 million since 2014.

Finally, Columbia announced that it would end its eight-year subadvisor relationship with Marsico funds as of September 2015. (Tom Marsico previously bought his funds back from Bank of America in 2007.) Five open-end mutual funds previously managed by Marsico asset managers were assumed by Columbia portfolio managers including John Wilson and Tom Galvin. In addition, a variable portfolio fund previously managed by Marsico is now managed by Aziz Hamzaogullari at Loomis Sayles. Meanwhile, financial advisors at Ameriprise appear eager to accept Columbia’s willingness to hire subadvisors at several key funds. The Active Portfolios lineup of five funds managed by subadvisors including AQR, Dimensional Funds, and TCW attracted about one fourth of all asset inflows for the 12 months through May 2016. As of June 2016, the funds are about 15% of total U.S. open-end assets.

Overall, Columbia's efforts to create a cohesive culture with consistent performance are admirable, though the company lacks the track record of key competitors who have demonstrated a long-term dedication to shareholders' best interests. It will take time to ensure stability in the management ranks and fund lineup and to demonstrate that the firm can effectively execute its strategy. For now, Columbia thus earns a C for its Corporate Culture.

Gretchen Rupp does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.