Some well-known equity boutiques have begun offering bond strategies this year, diversifying their portfolios after the market collapse focused attention on the ability of money management companies to cope with severe downturns.
Some well-known equity boutiques have begun offering bond strategies this year, diversifying their portfolios after the market collapse focused attention on the ability of money management companies to cope with severe downturns.
In the past several months, Hotchkis and Wiley Capital Management LLC, a Los Angeles value-equity boutique, launched a high- yield bond strategy for retail and institutional investors that is managed by Ray Kennedy, who spearheaded Newport Beach, Calif.-based Pacific Investment Management Co. LLC's rise as a high-yield powerhouse.
In February, Driehaus Capital Management LLC, a Chicago-based growth-equity shop, brought in an absolute-return credit team, led by portfolio managers Mirsada Durakovic and Kenneth Charles Nelson from Lotsoff Capital Management, also of Chicago. The team launched a credit hedge fund strategy in March and an institutionally priced mutual fund approach June 1.
Also on June 1, Third Avenue Management LLC, a New York value-equity firm, announced the hiring of two high-yield bond veterans — Jeffrey Gary from BlackRock Inc. of New York and Thomas Lapointe from Columbia Management of Boston — with plans to bring out retail and institutional high-yield/credit strategies by late summer.
Robert Dochterman, a managing director and chief marketing officer with Hotchkis, and Robert H. Gordon, president and chief executive of Driehaus, said separately that diversifying their businesses — a long-held goal for both firms — had become a more urgent priority following the market fireworks of the past 18 months.
Third Avenue spokeswoman Bridget Smith said that the move is a less dramatic departure for her firm.
Amid the plunge of more than 35% in broad equity market indexes last year, Hotchkis saw assets under management fall 61% to $10.8 billion, while Driehaus and Third Avenue sustained respective drops of 51%, to $2.5 billion, and 54%, to $12.5 billion. Market watchers cited those firms as among the strongest survivors of the storm.
Some industry veterans expect more boutiques to broaden their scope this year, as institutional investors and investment consultants add due diligence about the overall health of a money manager's business to their focus on the strategies that manager offers.
Because of the market's horrors, more consultants and plan sponsors are asking money managers about their staying power. “What would happen to your firm if assets are down another 20%?” Glenn Davis, a partner with Louisville, Ky.-based money manager consultant Eager Davis & Holmes LLC, said he now asks.
The past year has highlighted “the business risks of having a narrow product line,” with value equity managers in particular exposed to the “double whammy” of their style being especially out of favor, said Terry A. Dennison, a Los Angeles-based worldwide partner and U.S. director of consulting with Mercer LLC of New York.
Private-equity investors, investment bankers and liftout specialists expect the trend of equity boutiques offering a broader array of strategies to pick up over the coming year.
The downside volatility last year “was a wake-up call for many one-dimensional managers,” said Roy Duke, president of Palm Beach Gardens, Fla.-based executive search and liftout firm Duke Advisors LLC.
In practice, established equity boutiques look to diversify by adding fixed income or a broader range of equity strategies, said Jeffrey D. Lovell, managing director of private-equity firm Lovell Minnick Partners LLC in El Segundo, Calif.
Lovell Minnick is “in active discussions with several firms that are pursuing such strategies,” he said. Mr. Lovell declined to identify them.
Executives at boutique firms have begun thinking more about how they should be managing the business, rather than simply managing specific strategies, said Jon Stern, a managing director with investment banking firm Berkshire Capital Securities LLC in New York. In addition, unusually attractive prospects now for many fixed-income segments are adding an opportunistic element, he said.
One charm of narrowly focused boutiques was that their interests were closely aligned with clients'.
A diversification strategy broad enough to insulate a manager from the pain that clients suffer would bring that alignment into question, Mr. Dennison said. But while clients previously might have wished their managers to have “maximum personal risk” in their business, increasingly, clients might be willing to seek a “happy medium” between that alignment and the stability of the management organization, he said.
Mr. Gordon said that consultants and clients have become more focused on satisfying themselves that the money management firms they hire are financially strong and are concerned only that efforts to diversify don't threaten a firm's culture or focus. The credit team that Driehaus brought in has won favorable reviews from clients, he said.
Douglas Appell is a reporter for sister publication Pensions & Investments.
