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10 years later: Investing

For lucky few, timing was everything in 2008

Ashbel C. Williams Jr., who started again at Florida during the crisis, said he never lost faith in the markets.

Fund dodges a bullet; managers prevail; true believer is vindicated

The global financial crisis was a searing test of nerves for most investors and money managers, but a minority skated through relatively unscathed, helped by fortuitous timing, safe haven charms or geography.

For Hewlett-Packard Co., which froze its roughly $4 billion U.S. defined benefit plan effective Dec. 31, 2007, a well-timed liability-driven investment program left the Palo Alto, Calif.-based firm's investment team largely watching the market carnage from the sidelines.

Kenneth Frier, who became chief investment officer of Hewlett-Packard's retirement assets in 2007, said he and then director of investments Gretchen Tai worked out a plan to hedge the corporate defined benefit plan's liabilities, and executed it with what turned out to be fortuitous timing.

Mr. Frier said the investment team sold "most of our equities at the peak of the market in late 2007," and then hedged 100% of the plan's interest rate liabilities with 10-year swaps and long-term STRIPS.

With those long-dated interest rate swaps and STRIPS yielding 5.5% at the time, they became "extraordinarily valuable" when the wheels began falling off the financial bus in 2008, Mr. Frier said.

That hedging left Hewlett-Packard's defined benefit plan "pretty well protected" as the crisis picked up steam in 2008, said Ms. Tai, who together with Mr. Frier joined SECOR Asset Management last year as principals and portfolio managers in the New York-based firm's Palo Alto office.

Even so, the two pension executives would get a second chance to experience the GFC's fury when Hewlett-Packard acquired Texas-based Electronic Data Systems Corp., and its underfunded $4.9 billion defined benefit plan, three weeks before the bankruptcy of Lehman Brothers Holdings Inc.

With credit spreads at unprecedented wide levels, "we added significantly to positions in long-term credit in early 2009," said Mr. Frier.

For Deborah Cunningham, chief investment officer for global money markets at Pittsburgh-based Federated Investors (FII) Inc. (FII), being able to offer investors a safe haven in a storm made the GFC a pretty good — if not entirely smooth — time for the company.

With wonky investments popping up here and there in money market funds as 2008 progressed, Ms. Cunningham said the biggest challenge for Federated's team that spring and summer was "answering questions from shareholders about what we did own."

Having managed to avoid the land mines that affected some competitors, "thankfully our answers were good," and Federated managed to avoid outflows in the lead-up to the Lehman bankruptcy, she said.

Then, the day after Lehman failed, the Reserve Primary Fund, a money market fund with roughly $65 billion in assets under management at the time, "broke the buck" — announcing that the value of its money market units had fallen to 97 cents and imposing gates on withdrawals, she said.

That's when investors started to panic, withdrawing money from prime money market funds invested in corporate paper while seeking the safety of money market funds investing solely in government paper, said Ms. Cunningham.

"Our prime funds shrank probably by 25% ... but that plus a whole lot more went into our government money market funds," she said. People were "redeeming from quant firms, redeeming from credit firms and prime money market funds" and rushing into government money market funds, Ms. Cunningham said.

"Our AUM ballooned," she said.

Federated's assets under management jumped to a record $409.2 billion as equity markets were bottoming during the March 2009 quarter, from $259.7 billion in June 2007, itself a record for the firm at that time, as the crisis was picking up steam.

Federated's AUM stood at $379.7 billion as of June 30, 2018.

Not as bad as last time

For Hugh Young, Singapore-based head, Asia-Pacific, Aberdeen Standard Investments, the GFC was noteworthy but not off the charts for a region that had been hit far harder 10 years before.

The Asian financial crisis of 1997 and 1998 "was far more shocking" for local market participants, Mr. Young said. "Business just stopped in Asia," he recalled.

"I'm not saying (the global financial crisis) wasn't a storm," said Mr. Young, a 26-year Aberdeen veteran. "But as far as the day-to-day job went, wearing an Asian hat, you felt far more like a spectator than a participant."

Finally, there was a cohort of true market believers who insisted their faith wasn't tested by the exaggerated volatility and uncertainties of 2008 and early 2009.

Ashbel C. Williams Jr., who within weeks of the Lehman bankruptcy returned to the role of executive director of the Florida State Board of Administration, Tallahassee, after a 12-year absence, the last nine with New York-based event-driven/distressed hedge fund firm Fir Tree Partners, said he wasn't "the least bit scared" of the financial fireworks exploding around him.

Mr. Williams said he remembered telling people who assumed he'd be terrified to take on the top spot at Florida as markets were imploding, "it's burned to the foundation, it's all up from here."

"The fire's going to be put out, we're going to rebuild it and we'll have a beautiful new house," he said.

Mr. Williams said the first thing he did was to move ahead with a rebalancing to the portfolio's investment policy targets at the end of 2008. The acting head of the fund, following the December 2007 resignation of Executive Director Coleman Stipanovich, had decided to leave that decision to whomever was picked to replace Mr. Stipanovich. That turned out to be fortuitous. "The portfolio would have been punished by rebalancing earlier," he said.

As of June 30, 2018, the Florida SBA oversaw $204.4 billion in assets, with the $162.3 billion Florida Retirement System accounting for the biggest piece of the total.

David G. Booth, founder and executive chairman of Dimensional Fund Advisors LP in Austin, Texas, meanwhile, said his worst memory of the GFC was "being on the phone with a client who was shaken beyond belief."

"Nothing you could say to them" would make them believe markets worked, he recalled.

Aaron Cunningham, director of research and analytics, and reporter Rob Kozlowski contributed to this report.