All about change: Face to face with Scott Minerd

Scott Minerd, chief investment officer of Guggenheim Partners LLC, is a man who has paid little attention to the box, let alone confined his thinking to it. These days he's at the helm in moving an investment firm that has been all about debt — from commercial mortgage-backed securities and mortgage origination to core fixed income — into equities.

Hailing from a small town in the mountains of western Pennsylvania, Mr. Minerd passed up an architecture scholarship at Temple University to study accounting at the Wharton School of the University of Pennsylvania. After graduation, he became a certified public accountant with Pricewaterhouse. Mr. Minerd jokes that he decided to pursue an MBA at the University of Chicago when he realized his Wharton classmates in investment management were making five times the money — and not working as hard —as he was in accounting.

He never completed his MBA because in 1983 he went to work in Merrill Lynch & Co. Inc.'s new fixed-income capital markets group started by Donald Regan, the former treasury secretary. He left Merrill Lynch five years later to head fixed-income credit trading in Europe for Morgan Stanley. In 1994, he joined Credit Suisse First Boston for a two-year stint heading up its North American fixed-income credit trading unit. He first met Mark Walter, Guggenheim's CEO, in a 1995 sales meeting when CSFB sought to represent Mr. Walter's employer, First Chicago NBD, in a debt issuance. Mr. Minerd won the business for Credit Suisse, which began a long relationship between the two men.

Mr. Minerd became CIO of Guggenheim Partners in 1999. As CIO, he is in charge of a broker-dealer business, a wealth management business and Guggenheim Partners Asset Management, the firm's institutional asset management subsidiary. His idea was to give investors the opportunity to pick the appropriate beta allocation regardless of vehicle based on the desired level of return and tolerance for risk using behavioral finance. Then Guggenheim would provide the investors with the vehicle that best suited them. If beta is the box, the vehicle — whether the strategy is offered as a private equity-style closed-end fund, a hedge fund or open-end fund — is for Mr. Minerd the wrapping paper.

Mr. Minerd's job at Guggenheim also included opening an office in the Los Angeles area, his home base. The self-described frustrated architect got a chance to show off his dormant talents in designing Guggenheim's space in a high-rise office building across the street from the ocean in Santa Monica, Calif. He added windows and opened up the floor space — but made sure all desks face away from the view.

Why did you join Guggenheim Partners? I'd known Mark Walter, (the CEO of Guggenheim Partners) for some time, and we had even talked about working together earlier in my career when I had retired from Credit Suisse. In 1998, when Guggenheim was forming, one day I made a proposal of what I wanted to do. It gave me the opportunity to help shape the company. One of my frustrations on Wall Street was seeing things that were wrong or inefficient or not in the best interests of clients. With Guggenheim, I saw the potential to build a world-class asset management firm. I recognized over time we could slowly extend to new products. We could build a foundation and opportunities would come when Guggenheim distinguished itself as world class.

Guggenheim Structured Real Estate II has written down the portfolio's equity to zero. What is the fund's current status? We bought (commercial mortgage-backed securities) and levered CMBS. The problem for a lot of funds was that by 2007 commercial real estate credit standards were goosey, but the real surprise for our fund was how the credit spreads widened. When we look at an asset class we look at Depression-era scenarios. When I was a kid I was fascinated with the Great Depression. Our Depression-era scenario studies had shown that if 100% of the properties defaulted and portfolios lost 50% of its value, we could still make the principal and interest payments on a timely basis for a large number of senior CMBS securities. So we felt confident most of it (CMBS) passed our Depression scenario. Who would believe that prices on bonds that were rated AAA would discount worse than the Great Depression?

My view was that the crisis of 1990 was focused in commercial real estate and residential real estate held up. This current crisis was in residential real estate due to over-leverage and over supply. In commercial real estate you did not have the same extreme levels of leverage and the large oversupply.

In 2004, there were no pro forma loans in CMBS (loans issued on the basis of perfunctory review of debtor's creditworthiness), but by 2007, more than 25% of all the loans (in CMBS) were pro forma.

Tell me about your alternative investment business. We don't talk about alternatives. We look at alternatives as packaging. Our view is that hedge fund and private equity are labels put on structures. ... We don't talk about alternatives; we talk about the underlying investments.

What does the asset allocation look like at Guggenheim Partners Asset Management? Here is the breakdown: Treasuries and agencies, 13%; ABS, 16%; RMBS, 18%; CMBS, 10%; corporates, 34%; other, 9%.

Guggenheim is big on Build America Bonds. Is there an institutional investment opportunity there? We are the largest buyer of the Qualified School Construction Bonds to date, having purchased about 80% of all issuance. We are adding munis because Build America Bonds and QSCBs are very cheap. I'm startled that pension funds have not embraced Build America Bonds, which are at 8% to 9%, with all the talk about liability-driven investing. We are working with a number of pension funds that are looking for a fund for Build America bonds. A lot of pension funds argue that they should invest in taxable municipal bonds in-house but the problem is that most pension funds do not have credit experience looking at munis. They don't want to outsource because a lot of funds (pension funds) don't outsource fixed income.

How is Guggenheim expanding its investment management business? With two acquisitions. We invested in (financial information services and asset management firm) Transparent Value (LLC), which analyzes the probability of a stock under- or overperforming based on a technique it calls required business performance — RBP. Dow Jones has a series of indices based on RBP. It's a different approach to analyzing equities and companies. It looks at how many iPods Apple would have to sell to fulfill their stock price. This fall we plan to launch retail and institutional products based on RBP.

The second acquisition is Claymore Securities Inc. We have a presence in equities but with this acquisition we will dramatically expand and (get) a presence in almost every major asset class. We're also expanding into international fixed income and international equities through the Claymore acquisition.