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Battered by the credit crunch, Cleveland-based banking company KeyCorp lost $908 million in the first half of this year, versus a year-earlier profit of $684 million, and its stock price as of September 22, $13.50, was 42 percent below its December 31, 2007, close of $23.45. Even so, the $101.5 billion-in-assets KeyCorp is reaping the rewards of steps it took in 2004 to overhaul its money management unit, Victory Capital Management.

Guided for the past four years by former Gartmore Global Investments executives Robert Wagner and David Brown, the KeyCorp unit, with $65 billion in assets under management, has grown at a two-year compound annual rate of 18.4 percent through 2006, according to the most recent data available. That puts it on Boston-based Cerulli Associates’ ranking of the fastest-growing institutional managers, a list dominated by bigger firms like BlackRock and affiliates of Goldman Sachs Group and Morgan Stanley. And the profits are growing too: KeyCorp’s institutional and capital markets business, which includes Victory, reported $231 million in second-quarter revenue, 45 percent above the year-ago quarter, and net income of $42 million, up 11 percent. Though KeyCorp faces the inevitable speculation that it might sell the firm to raise capital, it has shown no outward sign of moving in that direction. KeyCorp CEO Henry Meyer III has said he views Victory as a crown jewel.

Wagner, chairman and CEO of Victory, and Brown, COO, made an early decision that has been critical to their success: They persuaded the parent bank to compensate portfolio managers and senior executives as if they worked for a stand-alone money manager — in other words, based on Victory’s, rather than KeyCorp’s, results. Being able to "link our business to the performance of our business," says Brown, "enabled us to retain our top talent."

The approach, which few bank-owned money managers use, paid off in 2007, when Victory brought in more than 100 new institutional mandates. Its employees made more money than ever — Wagner and Brown won’t comment specifically on the pay scales — despite the bank’s deepening troubles. Victory continues to grow, having nabbed a contract from the $50 billion-in-assets Massachusetts Pension Reserves Investment Management Board for Austin Capital Management, a Victory subsidiary.

At the same time that MassPrim was hiring Austin, it was firing five other high-profile, long-only managers, including Legg Mason, as part of a comprehensive strategy to dramatically increase its allocation to alternative asset classes. Wagner and Brown had made the bet that traditional managers needed to have hedge fund and other alternatives capabilities to keep up with institutional investors looking for uncorrelated assets and bought Austin in April 2006. "We’re one of four funds of hedge funds to be selected by this huge retirement system. This is a defining moment for Austin," says Brown. Victory has tripled Austin’s assets under management, to about $3 billion from $900 million at the time of the purchase.

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