THE VIRGINIAN-PILOT
Copyright (c) 1996, Landmark Communications, Inc.
DATE: Monday, October 28, 1996 TAG: 9610260137
SECTION: BUSINESS WEEKLY PAGE: 10 EDITION: FINAL
TYPE: Cover Story
SOURCE: BY TOM SHEAN, STAFF WRITER
LENGTH: 200 lines
The coffee cups are empty. Charts showing changes in interest rates and stock prices cover the conference-room table.
For more than an hour, Wayne F. Wilbanks and three other portfolio managers have been trading ideas about stocks, inflation rates and the outlook for bonds.
Before bringing their weekly meeting to a close, Wilbanks suggested they look more closely at shares of McDonald's Corp.
Investors unhappy with earnings at the fast-food company had driven down its stock price. But McDonald's considerable cash flow might enable the company to expand aggressively without borrowing from banks, says Wilbanks, president of the Norfolk money management firm Wilbanks, Smith & Thomas Asset Management Inc.
``This could be a hidden gem,'' he says.
With the Dow Jones industrial average and other measures of stock prices at near-record levels, firms like Wilbanks, Smith & Thomas have a harder time finding stocks with above-average earnings growth without paying hefty prices for them.
What concerns Wilbanks and his fellow portfolio managers is the outlook for corporate earnings. Any disappointment in earnings growth could trigger a decline in stock prices, they figure. That, in turn, might depress the firm's investment results.
The four managers would like to to avoid that. It isn't the single investment consideration, but the firm has focused its energy on finding opportunities for above-average results from low-risk stocks and bonds.
``When you have superior returns, every aspect of running the business becomes easier, including bringing in new clients and holding onto existing ones,'' Wilbanks says.
That's partly because competition in the money-management field is abundant. Spurred by the torrent of funds flowing into retirement and pension plans, new investment advisory firms keep sprouting up. Meanwhile, hundreds of banks, brokerage firms and insurance companies are expanding their own money-management operations.
Larger financial institutions are seeking ways to generate revenues that aren't tied to interest rates and are less cyclical than lending, says Jim Scott, principal in William M. Mercer Investment Consulting Inc. in Richmond, a unit of the benefits consulting firm William M. Mercer.
``The perfect way to do that is to develop money management,'' Scott says.
But corporate pension funds and other institutions shopping for money managers increasingly look for ones delivering a broad array of services, including access to overseas investments. That sort of demand will force a consolidation in the industry, Scott predicts.
``There's always going to be a place for the small boutique firm, but there won't be as many of them as in the past,'' he says.
Organized in 1990, Wilbanks, Smith & Thomas has attracted 275 clients and $380 million of assets. Despite that growth, its pool of assets is still small compared to the assets at several other firms based in Virginia.
Each of the 10 largest firms with headquarters in the state manages at least $1 billion. The largest - Crestar Financial Corp.'s Capitoline Investment Services Inc. subsidiary - handles more than $11 billion.
But size isn't the uppermost issue for Wilbanks, Smith & Thomas. ``We're as concerned about managing the business as we are about growing it,'' its president says.
In contrast to financial planners, money-management firms aren't concerned about a client's entire financial situation. But unlike mutual funds, which consolidate one investor's assets with those of other investors, money-management firms typically create a separate account tailored to each client's financial goals.
For their work, money managers collect an annual fee based on the size of a client's account. In most cases, Wilbanks, Smith & Thomas requires a $500,000 minimum to open an account.
Today, its roster of clients is a mix of retirement and profit-sharing plans, endowments, insurance companies and affluent individuals. About 80 percent are from North Carolina or Virginia.
To bring in clients, the firm has relied on the recommendations of accountants, lawyers and stockbrokers, its president says.
However, the key ingredients to the firm's success will be their shared investment philosophy and collegial way of making decisions, its officers say.
``The egos tend to be very big in this business, but we work well together,'' says L. Norfleet Smith Jr., executive vice president and director of operations.
By having a common investment philosophy, the firm's three owners and officers have avoided a `I-told-you-so' attitude when decisions failed to work, adds Norwood A. Thomas Jr., executive vice president, portfolio manager and director of marketing. ``I don't think we've ever left a meeting when everyone didn't buy in'' to the decisions, he said.
A respectable investment record and quick personal access to the officers were characteristics that attracted Edward Russell Jr. to Wilbanks, Smith & Thomas three years ago.
``Their results have been very good, and they've kept me posted on a regular basis,'' says Russell, an attorney with the Norfolk law firm Kaufman & Canoles P.C.
The firm, which occupies part of the 11th floor in the NationsBank building, opened in late 1990 as Wilbanks Asset Management. Earlier, its founder had worked as a futures trader, stock broker and then as a portfolio manager with another money-management firm.
``I had always wanted to manage investments rather than be in sales or trading,'' the 36-year-old Wilbanks says. ``Working in brokerage and trading were the fastest ways to get into the business.''
Two years after launching the firm, Wilbanks was joined by Smith and Thomas. Smith, now 34, had been working in mortgage banking and knew Wilbanks well.
Thomas, meanwhile, had spent a career building the trust department at a North Carolina bank. ``I thoroughly enjoyed what I was doing, but I had been there for 37 years,'' says Thomas, now 63. ``Wayne was my son-in-law, and I was at the age when I could take early retirement'' from the bank, which he did.
Since 1994, the trio has hired two investment professionals to help manage portfolios: Carl Turnage, a former bank trust officer and Lawrence A. Bernert, a former stockbroker.
Over time, the firm has devoted greater resources to investment research but has stuck to a strategy of picking stocks with strong earnings prospects at reasonable prices.
``What you're selling to clients is a discipline for investing,'' Wilbanks says. ``You can't change your suit each day depending on the climate.''
On the stock side, the firm's investment process begins with a field of 7,000 candidates. That's reduced to 75 or so stocks likely to generate 12 to 15 percent increases in annual earnings. Each week, Wilbanks, Smith, Thomas and Bernert gather to discuss the investment prospects and assess the firm's current holdings.
For most of this year, they've kept slightly more than half the assets they manage in stocks. Another 40 percent have been in bonds and other fixed-income investments. The remainder have been in more liquid investments like short-term Treasury securities.
On occasion, the firm's officers hit the road to check on companies they've considered investing in. Two weeks ago, Wilbanks and Thomas met with the management of Oakwood Homes Corp., a Greensboro N.C.-based manufacturer and retailer of mobile homes.
What impressed them was the stream of income that Oakwood derives from financing the sales of its homes, Wilbanks says as he recounts the meeting.
``The company's one concern is the economy going into the tank,'' he says. Oakwood's chief executive officer explained to the two visitors that, ``We've tightened up credit big time. We're not going to provide financing to the guy with nine credit cards.''
With shares of Oakwood trading in the $26 range and at 19 times its per-share earnings, there's some risk that the stock could drop on news of a faltering economy, Wilbanks acknowledges to the others.
``We've got to be ready to ride it down 15 to 18 percent,'' he says.
While refining its methods for investing, the firm has defined its plans for growth, which includes goals for assets, number of clients and the size of staff it will need. Still, the officers acknowledge their wariness about expanding rapidly.
``It's easy to grow,'' Thomas says. ``We don't want to grow at the expense of what we already have.'' ILLUSTRATION: [Cover, Color photo]
[Color Photos]
VICKI CRONIS
The Virginian-Pilot
Wayne Wilbanks
Norwood A. Thomas Jr.
MANAGING MORE MONEY
SOURCE: Wilbanks, Smith & Thomas Asset Management Inc.
VP
Wilbanks, Smith & Thomas Asset Management, Inc.
Headquarters: Norfolk
Founded: 1990
Assets under management: $380 million
Mix of assets: 52 percent in stocks; 40 percent in bonds and
other fixed-income securities; 10 percent in cash-related
investments
Number of clients: 275
Locations of clients: 42 percent in North Carolina; 38 percent in
Virginia; 7 percent in Illinois; 5 percent in Alabama; 3 percent in
other states; 5 percent overseas
Number of employees: 12
Owners and officers: Wayne F. Wilbanks, president and chief
investment officer;
L. Norfleet Smith Jr., executive vice president and director of
operation;
Norwood A. Thomas Jr., executive vice president and director of
marketing
BIG PLAYERS
The largest money management companies based in Virginia:
1. Capitoline Investment Services Inc. (unit of Crestar Financial
Corp.), Richmond, $11.4 billion of assets under management.
2. Strategic Investment Management, Arlington, $5.9 billion.
3. Strategic Fixed Income Limited Partnership, Arlington, $5.4
billion.
4. Mentor Investment Group (unit of Wheat First Butcher Singer),
Richmond, $5.16 billion.
5. Thompson, Siegel & Wlamsley Inc. (unit of United Asset
Management), Richmond, $4.98 billion.
6. Lowe, Brockenbrough & Tattersall Inc., Richmond, $4.56
billion.
7. Sovran Capital Management (unit of NationsBank Corp.),
Richmond, $3.05 billion.
8. Virtus Capital Management (unit of Signet Banking Corp.),
Richmond,$2.02 billion.
9. Richmond Capital Management, Richmond, $2 billion.
10. JMH Capital Management (unit of John Hancock Mutual Life
Insurance), Arlington, $1.7 billion.
Source: Pensions & Investments magazine, May 13, 1996 by CNB