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Better returns on wealth

Firm offers its big-money expertise to (somewhat) smaller clients.

When Jonathan J. Hirtle worked in wealth management at Goldman Sachs Group Inc. in the 1970s and 1980s, it drove him crazy that clients with billions in assets always outperformed smaller accounts with tens of millions in assets.

"What's missing? Why aren't we delivering?" Hirtle, a Pittsburgh native who worked in the investment bank's Philadelphia office, recalled asking himself.

Hirtle decided that the multibillion-dollar clients got better returns because they could afford a chief investment officer with a staff providing complete access to the world of investments.

The desire to provide the services of a chief investment officer to people with mere millions was the seed from which grew Hirtle, Callaghan & Co., the West Conshohocken investment advisory firm that Hirtle cofounded in 1988 with Donald E. Callaghan, another Goldman Sachs vice president.

Billing itself as an organization of chief investment officers, Hirtle Callaghan now oversees more than $13 billion for 350 clients, including pension funds, foundations, endowments and family groups. Family accounts range from $5 million to $500 million.

Hirtle Callaghan does not work "bottom up," picking stocks and other investments. Instead, it hires third-party specialists, such as Aberdeen Asset Management in Philadelphia, and helps set overall strategies.

By placing itself between the investment committee of an institution and money managers on a full-time basis, Hirtle Callaghan differentiates itself from most consulting firms that help institutions pick who manages their money.

"We needed a CIO firm," not just a money management firm, said Karen Simmons, president of the Chester County Community Foundation in West Chester. The foundation hired Hirtle Callaghan to oversee its $25 million endowment after a year-long search in 2002.

The CIO niche that Hirtle Callaghan carved out for itself in the late 1980s is attracting more competition now, with former university chief investment officers setting up their own firms, but Hirtle Callaghan has strong momentum with 30 percent annual growth in assets under management, according to Hirtle.

The company employs 55, and last month had 20 new hires lined up, Hirtle said. An expansion of its quarters on the fifth floor of West Conshohocken's Five Tower Bridge from 17,000 square feet to 30,000 square feet is in the works.

The company also has offices in Atlanta, Chicago, Phoenix and Pittsburgh, and just hired someone to run a Boston outpost. Plans are under way to set up shop in Florida, New York and Texas in the next two years.

Tomorrow, 150 clients are expected at the company's 13th annual investor conference at the Four Seasons Hotel in Center City, which includes an address by Michael Lewis, author of Liar's Poker and Moneyball.

Among them will be Steven Tuttleman - a son of major Philadelphia philanthropist Stanley C. Tuttleman - who has been a client of Hirtle Callaghan since the mid-1990s. He has recommended the firm to family members, and now monitors about 30 family accounts at the firm.

"My basic approach to investing? I think it's a minefield," said Tuttleman, who got to know Hirtle during the Goldman Sachs days. "Because of that minefield approach, I'm aware of agendas that people have."

For example, in his experience, investment advice from wealth managers who work for investment banks never seems to be entirely disinterested. If they recommend investing in emerging-market equity, it will usually be through a fund run by their bank. "I always wondered how their money managers happened to be the best of breed," Tuttleman said.

Hirtle Callaghan is independent of the managers it uses, and charges a straight percentage fee on assets under management, wherever the money is invested. For example, the company charges 37 basis points a year on $100 million in assets. That works out to $370,000.

"We charge the same fee whether you're in hedge funds or munis," Hirtle said.

He said the company has about $1 billion of its clients' money invested in eight to 10 different styles of hedge funds. Typically, the fees on such a "fund of funds" is 1 percent of the amount of money invested plus 5 percent of appreciation. While Hirtle Callaghan must pay hedge-fund fees, it says it keeps them down through economies of scale.

Offering hedge funds, private equity, and other alternative investments is an important part of Hirtle Callaghan's diversification strategy because they counterbalance fluctuations, reducing the risk and increasing the reward when done right.

That's one reason Hirtle Callaghan won the business of overseeing the $13.4 million endowment of Alderson Broaddus College in Philippi, W.Va., president Stephen Markwood said. "We thought they were better at diversifying than the previous company," he said.

Hirtle said: "We go for breadth. We want more decision points" because that increases the chances of success.

But while diversification can be good for returns, it can also be bewildering. Forty years ago, a chief investment officer would choose among blue-chip stocks, municipal bonds, treasury bonds and cash, Hirtle said.

Now, with the explosion of investment products and the "exponentially more powerful" sales forces selling those products, there are hundreds of thousands of decisions to be made.

For most of its history, Hirtle Callaghan kept a low profile, figuring that "a sighted whale is a harpooned whale," Hirtle said. But now the firm is surfacing more, applying last year for a ranking in Barron's list of top U.S. wealth managers.

Hirtle was clearly pleased to rank 33d, just below Brown Brothers Harriman, another firm with Philadelphia roots that has been in business decades longer than Hirtle, Callaghan.

At a Glance

Hirtle, Callaghan & Co.

Headquarters: West Conshohocken

Founded: 1988

Chief executive officer: Jonathan J. Hirtle

Vice chairman: Donald E. Callaghan

Business: Serves as chief investment officer for institutions and wealthy families

Assets overseen: $13 billion

Employees: 55EndText