In a major move to offer institutional and retail clients more investment solutions, Charles Schwab Corp. is acquiring Windward Investment Management for $150 million.
The acquisition of the Boston-based independent RIA represents a departure for Schwab, which is the largest provider of custodial services to independent RIAs. Schwab chiefly focuses on organic growth and the few acquisitions it is has made in recent years-U.S. Trust in 2000 and the private asset management business of State Street Corp. in 2003, for example-have typically involved large institutional businesses.
Windward relies on a quantitative, risk-controlled strategy to manage $3.9 billion in assets, primarily ETFs, for individuals, other RIAs, non-profit organizations, and retirement plans. The high premium that Schwab decided to pay is clearly reflective of the firm's 56% annual growth rate over the last five years, according to sources.
The firm's founder and chief investment officer, Stephen Cucchiaro, and his investment team will remain at the firm. Schwab is clearly betting that it can continue to drive Windward's growth by offering its services to independent RIAs at a lower cost, as well as to retail investors through its managed account platform.
Schwab CEO Walt Bettinger remarked that the emphasis that Windward's investment style places on risk management is "an ideal approach for today's world."
Windward blends active and passive management in search of risk-adjusted returns with an emphasis on downside protection. The approach employs a broad range of global markets and assets, including equities, fixed income, hard assets, real estate and currencies. The company rebalances its portfolios three times a year (sometimes more, depending on market conditions), and invests in indexes through low-cost exchange-traded funds, exchange-traded notes and registered funds. It might use individual securities, such as money market funds when it holds cash as an asset.
The acquisition of Windward comes at a time when Schwab is ramping up the breadth of ETF strategies it offers advisors and retail clients. Bernie Clark, executive vice president for Charles Schwab Advisor Services, said in an interview that Windward uses 40 different asset classes packaged into three different categories: diversified conservative, diversified growth and diversified aggressive. "It's a strategy that performs well to the down side as well as the up side," Clark said.
He added that future acquisitions were a possibility. "We're looking for solutions for advisors-scalable open architecture answers for all our clients," Clark said. "We are going to buy sometimes [to accomplish that]."
Windward's investment products will be offered through Schwab's advisor and retail platforms. Windward will no longer market investments directly to retail investors, according to Schwab
Cucchiaro says Windward has been approached by various firms over the years about forming a strategic partnership with Windward, but that he preferred the company to remain independently owned. He notes the deal with Schwab evolved during the course of conversations resulting from their long-term relationship.
Schwab has provided custodial services to Windward for 15 years and handles two thirds of the firm's assets under management, according to Cucchiaro.
Cucchiaro says the Schwab deal enables Windward to take its portfolio strategies to a broader audience and lets him concentrate on the investment side of the business. "Now I can focus my time on the investment methodology, which is where my passion is."
The deal is expected to close in the fourth quarter.
Windward was profiled in the March 2010 issue of Financial Advisor.