The Billion-Dollar Boys

A new breed of money managers shake up once staid pension funds

Few people have heard of Dean Le-Baron, but thousands of Americans unknowingly depend on him for a large part of their financial security. From a computer-filled command post on the twelfth floor of the Federal Reserve Bank building in Boston, LeBaron manages more than $10 billion of other people's money. Every day, LeBaron and his competitors make stock and bond transactions that can earn, or lose, millions of dollars for their clients. Their decisions can shake markets and send the prices of individual stocks into orbits or nosedives. For their skill and nerve, they receive salaries that sometimes run well into seven figures. LeBaron belongs to an elite corps of independent investment managers entrusted with an ever enlarging share of the pension funds for American workers.

The size of this pool and thus the power that the money managers wield have grown prodigiously. In 1950 pension funds held $17 billion. Today they are a $1 trillion treasure trove. By 1995 the total is expected to reach $3 trillion. Through these funds, some 60 million Americans own about 30% of all the equity capital in U.S. corporations. That makes a mockery of Karl Marx's prediction that capitalism would end in revolution as fewer and fewer people owned the means of production.

Until a few years ago, banks and insurance companies handled most pension money. Almost as cautious as gnomes guarding caves full of gold, the bankers tended to favor bonds and the safest stocks for retirement funds. During the inflation-plagued 1970s, however, many corporations, unions and local governments became unhappy with the returns they were getting on pension money. Increasingly, they turned to mavericks like LeBaron, who promised to outperform the banks by buying and selling a broad range of securities more aggressively.

Before long, the new money managers had impressive track records to back up their boasts. A survey by the Frank Russell Co., a pension-fund consulting firm, showed that over the past ten years, independent investment advisers have earned an average annual return of 12.6% on the money in their care, while banks could muster only 8.3%. As a result, the independents' share of the tax-exempt fund business, which includes pension and profit-sharing plans, has ballooned since 1975 from 20% to 37%, ahead of the banks' 35% and the insurance companies' 28%. Upstart independent firms Like Alliance Capital Management in New York City, Capital Guardian Trust in Los Angeles and LeBaron's Batterymarch Financial Management in Boston have become serious challengers to such pension-fund giants as Prudential Insurance, Equitable Life Assurance Society and Citibank. One example of the trend: General Motors plans to reduce the portion of its $17 billion of pension funds handled by banks. The company says it will hire more nonbank managers to improve its funds' performance.

The independents charge $100,000 to $200,000 annually to manage a $20 million fund, in contrast with the $50,000 that a bank typically asks. Naturally, clients who pay the high fees are demanding. Says Peter Vermilye, an industry pioneer who built up Alliance as an independent pension-fund manager before joining Citibank as chief investment officer: "If you cost more, you have to show you can walk on water."