Boston makes second debut - as financial center. Mutual funds, banks help jettison stodgy image in burst of innovation
Thomas Lucey, executive vice-president of the Boston Company, was talking about the city that gave his firm, established in 1875, its name. ``The image of Boston throughout the world is that Boston is the mecca of that good-old safekeeping business,'' he said. ``We are the fiduciary headquarters.'' Boston is more than that. It is the center of the nation's mutual-fund industry. It has a healthy banking business, serving thriving high-tech and defense industry companies. The home of baked beans is also the headquarters of major insurance companies.
``Boston continues to be a high-growth economy,'' says Alexander Ganz, assistant director of policy development and research at the Boston Redevelopment Authority, the city's planning and development agency. ``It has been experiencing virtually uninterrupted growth in employment and development since 1976.''
William Brown, chairman of the Bank of Boston, the nation's 12th-largest bank, with $34 billion in assets, admits that ``Boston doesn't have the possibility of becoming an international financial center like London, New York, or Tokyo. But because of its mutual funds and because of its college funds, Boston obviously is a sophisticated financial center.''
With its emphasis on the investment banking and securities business, New York has the image of ``real sharks, Gucci loafers, silk suits,'' Mr. Lucey says. By contrast, Boston and its financial industry have ``a squeaky-clean image, old New England, Connecticut Yankee.''
``Believe me, we play on that,'' he says.
Boston has been getting added attention lately as the headquarters of the presidential candidacy of Massachusetts Gov. Michael Dukakis.
The city's reputation for fiduciary conservatism has its negative side. But Lucey claims Boston has ``got rid of the stodgy part of that image. We are innovative.''
Boston money managers introduced such innovations as stock lending and the use of futures and stock options. They pioneered index funds, some computer techniques, and other fancy investment strategies. That ingenuity has helped Boston grow as a financial center. Indeed, it is primarily the services, including the financial industry, which have given this old city a solid economic boost.
Boston's growth leveled off only a little during the 1981-82 recession. Moreover, the city's rapidly growing financial sector with its 1,000 or so institutions was hit less hard by the October 1987 stock plunge than New York was. ``A minimal fallout,'' claims Mr. Ganz. For example, Fidelity Investments, the nation's largest mutual-fund group, with some $82 billion in assets, has shrunk its work force from a peak of 8,000 to 5,700. There were some other personnel cuts in the financial industry. But most of these people were quickly absorbed in banking, other financial firms, or elsewhere.
In the first half of this year, the addition of a number of new office buildings had pushed up vacancy rates a percentage point or two, to 5.2 to 9.2 percent, depending on the real estate firm involved. But business in Boston was still absorbing office space at a near-record annual rate of some 2 million square feet.
Growth in the financial industry has helped the city's population of just over 600,000 to begin growing again after years of decline in the 1960s and the '70s. (The metropolitan area, including dozens of separate municipalities, contains some 3 million people.) As elsewhere in the nation, the number of jobs in manufacturing has declined in Boston proper - from 53,507 in 1976 to 37,295 in 1987. But this drop has been more than offset by an increase in the number of financial jobs (banks, insurance, securities, money management, etc.), from 65,129 in 1976 to 94,036 in 1987.
Overall, the city has added 110,000 new jobs to a base of 510,000 since 1976.
``Boston is preeminent in the nation in services activities,'' says Ganz.
About 57 percent of Boston jobs are in service activities, compared with 56 percent in San Francisco and 53 percent in New York. Boston also benefits from the relatively high proportion of foreign-owned businesses in New England. About 450 foreign manufacturers have been attracted to Massachusetts by the region's famous universities, high-technology companies, and economic renaissance.
These days, investors from Japan, Canada, Britain, and elsewhere in the United States are taking a fresh look at what was known before the Civil War as the ``Hub of the Universe.'' They are using the city's knowledgeable money managers, and they are buying its real estate. The Japanese, for example, have invested an estimated $1 billion in Massachusetts, and now own half the Ritz-Carlton Hotel, other real estate, and numerous manufacturing operations.
The nation's first open-end investment company, or mutual fund, Massachusetts Investors Trust, was introduced in Boston in 1924 by Massachusetts Financial Services. Since then, assets under its management have grown from $392,000 to more than $23 billion, the number of investors served has gone from 200 to more than 1.6 million, and the number of portfolios from one to 99.
By now about a dozen management companies look after at least $150 billion in mutual fund assets, out of the industry's total of $810 billion at midyear.
``There is so much money managed in Boston,'' notes Hugh Dunlap, president of Tucker Anthony Management Corporation, which manages $1.9 billion. ``On the mutual fund side and on the pension side, there is a lot of custodial work done here.''
Ronald Golz, executive vice-president of State Street Bank & Trust Company, maintains that New York City is no longer the head of the financial-services business, though it remains the major US money center. Financial services - such as custodial services and money management - have spread out along the Eastern corridor, he says.
State Street, for example, is the world's largest custodian, looking after nearly $600 billion in assets.
So one reason the Boston financial industry has been growing is that money attracts money.
In addition, Boston is considered an attractive city. Says Mr. Golz: ``There are a lot of good places to work, but not a lot of good places to live.'' It is fairly easy to get out of Boston to the countryside, Cape Cod, the lakes of New Hampshire, or the wilderness of Maine.
Moreover, many visitors like the city's European flavor. ``It is easier to do business in Boston for international firms than New York,'' maintains Golz, referring to the city's airport, 15 or 20 minutes from downtown, and to the relatively genteel character of its financial community. ``It is easy to get to. There is a natural attraction to Boston for Europe and the Pacific.''
Walter Connolly Jr., chairman of the Bank of New England, says, ``Almost every company that produces goods that is located in New England has either manufacturing facilities or sales operations abroad. There is greater natural trading back and forth. This makes for a large volume of financial transactions. Our foreign-exchange business is among the top 10 or 15 in the country.''
``We are in a position to be much more effective players in the world scene as we grow larger,'' Mr. Connolly adds.
That sort of thinking delights Andrew Bagley, executive director of the Massachusetts Office of International Trade and Investment, which is responsible for attracting foreign companies to the state. ``We are fortunate,'' he says. ``Massachusetts is pretty well known abroad.''
This growing international awareness is also reflected in the city's mutual-fund industry.
Massachusetts Financial Services, for example, has been managing the Massachusetts Financial International-Trust Bond Portfolio since 1981, investing in fixed-income securities of eight or so industrial nations, including the US. Last year it earned 20 percent on more than $700 million of funds invested in nondollar bonds. Since the US bond market performed worse than any other major bond market, this diversification paid off handsomely.
Other Boston organizations with skills in international money management include Batterymarch Financial Management, State Street Bank, the Putnam Companies, Scudder Stevens & Clark Inc., Grantham Mayo Van Otterloo & Co., and Oechsle International Trading.
Boston even has a small stock exchange, trading nearly 3 million shares daily on average. The exchange makes markets in close to 1,600 securities, of which nearly 1,400 are also listed on the New York, American, and other regional exchanges. About 100 stocks are exclusively listed here. It claims to be the country's fastest-growing equities exchange.
Last year the exchange unveiled the first-in-the-nation on-line, real-time system combining quote and trade information with the automated execution and reporting of trades. This ``Beacon'' system also provides an electronic specialist ``book,'' and is designed to handle, without delays, peak volume loads that result from market surges.