Out of the woods? - plans of chairman and chief executive Stephen R. Timbers to renew mutual funds company Kemper

Chief Executive, The, Dec, 1996 by Jonathan Burton

For most of his nearly 30 years in the investment business, Stephen B. Timbers concerned himself with identifying and buying growth stocks at what he considers a reasonable price. Now he is committed to one of the riskier bets of his long career: revamping the stale Kemper family of mutual funds into a fresh contender. The Kemper funds' chief executive knows that without a powerful makeover, Kemper's asset base and market share will suffer. And change must come soon; this rapidly consolidating business is becoming a place where only the strong or the specialized survive.

In investment parlance, Kemper is a value play - a known brand with a venerable history that in recent years has fallen out of favor. Kemper funds have been in disarray since 1994 after two abortive takeover attempts of its parent, Kemper Corp., first by General Electric and then by insurer Conseco. During the turbulence, Kemper lost talented fund managers and staff, and the uncertainty crippled recruiting efforts. Finally, in January 1996, Swiss insurance giant Zurich Insurance Group bought Kemper's financial-services business, since renamed Zurich Kemper Investments.

Just closing this difficult chapter has brought a measure of stability to Kemper. A new parent gives the Chicago firm the muscle to lure top fund managers and to aggressively push marketing and distribution. With $80 billion under management, including $41 billion in mutual funds and $34 billion of institutional and pension assets, Kemper is a clear force. The firm's strength - and most of its mutual fund assets - have been on the fixed-income side of the investment spectrum. Kemper's equity offerings - where the real money has been for mutual fund companies - generally have lacked the superior stock-picking performance that inspires investor loyalty. Tellingly, just $12 billion or so of Kemper's mutual fund assets are in equities; Timbers would like to triple this number by 2000, when he hopes to have at least $125 billion under management, targeting $80 billion in mutual funds and $45 billion of institutional money.

Only an improved track record will help Kemper regain the confidence of stockbrokers and financial planners who recommend funds to their clients. But Timbers is one of those rare investment professionals who has lived through a bear market, a sobering experience that offers some cushion against the tough times at Kemper. He understands that markets eventually recognize good value in a beaten security and bid up its price. This is his goal: to fashion Kemper into one of the growth vehicles he knows so well.

"You have to have excellent investment performance," says Timbers, 52, a soft-spoken native of Madison, WI, who left New York and Chemical Bank to become chief investment officer of Kemper Financial Services in 1987. "If you don't, it's hard to do everything else right. But if that's all you do, I don't think you'll succeed."

Timbers has identified four additional building blocks to Kemper's success: popular brand recognition; a broad product line; effective distribution; and excellent support services, such as telephone help and readable monthly statements. "if you look at who is winning in the business, you'll see they are doing those five things well." He rattles off examples: Fidelity, Vanguard, Putnam, Franklin, American Funds, and AIM, each with a better track record than Kemper.

The fund industry repeatedly claims that past performance is no guarantee of future returns. But past performance, in fact, is both the top and the bottom line for Kemper and every other fund company. Equity funds that sell today, for better or worse, have received three-year rankings of four or five stars from fund-rating service Morningstar Inc. Without this endorsement, a fund is not likely to see a cascade of cash inflows; it may even see net redemption of assets. Since a fund company's income is linked to a percentage of assets under management, the more it controls the more it makes. So fund families clamor for super funds and star managers.

Kemper has three five-star equity funds, and nine five-star fixed-income funds. Timbers claims that performance has improved in recent years, a feat not yet reflected in Morningstar's data. In an effort to spice up Kemper's equity menu, he is acquiring investment management companies and building from within. Deciding that Kemper needed a value player to complement its growth-stock orientation, he snared New Jersey-based Dreman Value Advisors and the talents of contrarian fund manager David Dreman, who has a reputation for venturing into market situations where others fear to tread. It proved a wise choice that won new investors.

"They didn't have a value component, and they purchased our firm," says Dreman, whose disciplined approach to underappreciated stocks has generated above-market long-term returns. "Steve's a good executive, astute in knowing talents of various people and taking an organization and broadening it."

Toward that end, Timbers plans to launch an aggressive growth fund and put greater emphasis on international equities. There is also a never-ending quest for talent. "You find people with good reputations and great records and bring them in," he says. "They not only help you in terms of running the fund, they help you in terms of sales." Timbers also intends to make Kemper a familiar name in retail funds from Europe to Asia. For example, as France, Germany, and Italy move slowly toward self-directed retirement plans and privatized social security, Timbers wants Kemper in the forefront with investment products and advice.