A midwest city caught in a twister of change
Where once the machine gun-toting Al Capone ruled over bluesy Chicago, His Airness, Michael Jordan, now reigns. Indeed the windy city on the shores of Lake Michigan in the heart of the States has changed dramatically in many ways.
'The hog butcher of the world no longer is,' proclaims Dean Dranias, president of Dresner Corporate Services and a Chicago investor relations veteran. 'Investors have jumped on the technology bandwagon.'
'Chicago is not just Sara Lee, Ameritech and Quaker Oats anymore. Now it's the silicon prairie,' chimes in Jeff Zilka, managing director of Hill & Knowlton.
For all its jazzy style, though, America's 'Second City' ranks only number six in equities under management in the US. 'The money management community here does not loom as large as in Boston or New York,' explains Zilka. 'Chicago is a major financial center, but the leading components are the banks, followed by the futures industry, the brokers and finally money management.'
That balance may be changing, however, with bank consolidation - even continents away - boosting Chicago's asset management footprint to Jordanesque proportions.
Edward Dunleavy, director of equity research at investment bank Everen Securities, spent much of his career at Salomon Brothers in New York and London: 'My perception of the Chicago style used to be a midwestern regional bent toward basic industries. But since the downsizing of the 1980s, and when I look at the investment community now, I don't think there is a Chicago style anymore. Investors here are no different than in New York, Boston or San Francisco: growth-oriented, diversified, running the gamut from value to high-tech.'
Dranias, a Chicago native, charts the changes: 'In the 1980s, businesses began to leave Chicago for the sun belt and the suburbs, and the city became more of a service community than a manufacturing hub. Bankers started to look confidently at the IPO market, especially technology and healthcare, while the vehicles and tools available to investors became very sophisticated.'
Another Chicago native, Ted Pincus, chairman of the Financial Relations Board, shuttles back and forth between New York and Chicago and still believes in a Chicago style distinguished by a long-term investment outlook. 'There are fewer swingers. Chicago investors tend to have more conservative investment postures,' he remarks.
Adds FRB vice-chairperson Danni Case, 'Chicago's investment style, like many cities, reflects the origins of the business base. Here it was broad-based industrial companies, and there's still an appetite for certain sectors: rust belt industrial companies, real estate, and consumer plays like Sara Lee or Wrigley,' she says.
Case says Chicago investors have always bought undervalued companies and solid, emerging growth stories, a focus that has seen them flourish during the last decade. For example, Ralph Wanger of Wanger Asset Management has grown the Acorn Fund to the point that he's one of the city's most famous native sons. His wife, Leah Zell, sister to real estate magnate Sam Zell, manages Wanger's international fund.
Perhaps Chicago's greatest success story is Brinson Partners, the former asset management arm of the First National Bank of Chicago. Spun-off in 1989, Brinson Partners was acquired by Swiss Bank Corp in 1995 and put in charge of the Swiss firm's institutional asset management. That makes Gary Brinson the chief investment officer for some $158 bn in investments worldwide. SBC's prospective merger with Union Bank of Switzerland catapults Brinson Partners to a total of $355 bn under management.
On the sell-side, venerable William Blair & Co has leveraged its blue-chip origins to become a momentum-driven firm, leading numerous IPOs and establishing a reputation in technology and medical care. Then there's Mesirow Financial, with a mid-cap, value orientation, and Vector Securities, a life sciences boutique in nearby Deerfield.
Case notes that Chicago boasts a lot of boutique firms and small, independent money managers that have broken away from larger firms, such as Barrington Research or Jim Oberweis in Aurora, Illinois, who specializes in micro-cap and small cap companies. Achieving star status lately is portfolio manager Mike Fasciano, whose roots are as an analyst and whose kick-the-tires research style has been racking up strong returns. The city also has growth-driven players, like Richard Driehaus at Driehaus Capital, who focuses on small and mid-cap companies, as do the Ariel funds.
Case predicts that even more indy players will be spawned by the recently announced $27.1 bn merger of Banc One and First Chicago NBD, forming the dominant bank in the midwest. Indeed consolidation is reshaping the fund management landscape. Since ABN Amro acquired Chicago Corp and LaSalle National Bank, the Dutch giant has made Chicago its north American foothold for over $85 bn in assets under management worldwide.
Another characteristic of Chicago investors, is that 'they're marked by desire to do even more due diligence than normal,' according to Pincus. 'It's a very management-oriented town,' adds FRB senior partner Diane Rohlin. 'Investors here really want to see the people. They want more than just a video.'
Indeed, at Everen Securities, Dunleavy says his team of 34 analysts is distinguished by how in-depth they look at companies. Where most firms look ahead two years, Everen analysts build five-year models for the income statement, balance sheet and cash flow. 'That causes them to think much more deeply than they would normally,' he says. 'Some CFOs say we're the only ones asking these kinds of questions. That's exactly what we want to hear. We try and get as deep into the organization as possible.'
Everen places a high priority on meeting management, and regularly hosts company presentations for investors in their downtown headquarters. They also use their nationwide 'Everen network' to broadcast such presentations for their retail sales force.
Since a management buy-out from Kemper Insurance over two years ago, Everen has been recreating itself to focus on eight industries: consumer, energy, financial institutions, healthcare, industrial, real estate, technology - but only software, internet and services - and, new this spring, telecommunications.
By the numbers
You can't compare Chicago to New York or Boston in terms of numbers, but in terms of quality of investor, it's right up there,' comments Nick Trikolas, managing director of the Carson Group's Chicago outpost. He cites a client that, while not even from the midwest, recently held its earnings meeting in the city. 'It was heavily attended by a lot of local institutions, and even investors from other midwest cities.'
For that matter, any company touching down in Chicago would do well to take day trips to other midwestern money centers. A three-hour drive away, Milwaukee is home to investment bank Robert Baird and investors such as the Marshall Funds, Firstar Investment Research and Management Company (Firmco) and Heartland Advisors. Minneapolis, with its specialty in medical and technology industries, has the powerful presence of both brokerage firm Piper Jaffray and American Express Financial Advisors, while St-Louis focuses on financial services, and Cleveland investors specialize in heavy industry.
'If a company is under pressure,' advises Trikolas, 'look to the State of Wisconsin Investment Board in Madison, Wisconsin, whose approach is to focus on overlooked and neglected stocks.' Swib is also well known for its bottom-up small cap portfolios.
For those sticking to Chicago, getting around is easy. High finance is concentrated around LaSalle Street in 'the Loop', encircled by the famed El train, while other headquarters are found north of the Chicago River near the section of North Michigan Avenue known as 'the Magnificent Mile'. However, companies organizing roadshows may find it difficult to convince investors to trek out of the Loop to big hotels like the Four Seasons. Instead, the Metropolitan Club in the Sears Tower plays host to most presentations, while the private Union League and Standard clubs are also popular.
Trikolas says more companies are organizing their own investor meetings rather than relying on sell-side firms. So when the Carson Group launched its Chicago office last year, it included spare offices and a large conference room with audiovisual facilities for out-of-town clients.
The FRB's Diane Rohlin advises a measure of restraint when planning Chicago meetings. 'Analysts and investors here are much more content-driven than visual-driven, and just aren't charmed by CEOs who give overly-polished, slick presentations. When it comes to multimedia, they're not used to it and they don't want it.'
Many companies use brokerage-sponsored investor conferences as a springboard to make the most of a Chicago visit. Robert Baird hosts a large growth conference in Chicago in May, while William Blair & Co typically holds its annual conference in late June. Salomon Smith Barney's metals analyst, Michelle Galanter Applebaum, draws many companies to a large gathering each spring.
When it comes to media relations, Hill & Knowlton's Zilka says midwestern companies have a prime audience here. 'Chicago is blessed with very strong bureaus for all the major print media outlets: Dow Jones, Bloomberg, Reuters, Wall Street Journal, Business Week and Forbes,' he says. 'They all want to meet midwest companies when they come through Chicago.' The Financial Times has also recently established a Chicago bureau.
In contrast, the Chicago Tribune's parochial business section doesn't impress, says one observer: 'It could have been the titan of the midwest. Instead it's the lapdog of the Fortune 200.' Another commentator refutes this, insisting that the Tribune business page has improved greatly over the last year.
Meanwhile, Crain's Chicago Business has been cast in the role of the stone-throwing outsider by regularly scooping the Tribune. Zilka says Crain's has done a good job with up-and-comers, with smaller growth companies using it to their benefit.
For the last word on Chicago, turn to Dresner's Dranias, who bushwhacked midwestern IR trails decades ago: 'Chicago has always flourished at the center of the nation,' he concludes. 'Some would say it has been staid and conservative, but it's always been a little bit of a swashbuckler, and now it's getting even more aggressive. The future of Chicago lies in a major move into the technology sector while retaining the flavor of a very cosmopolitan yet down-to-earth place.'