NEW YORK - MacKay-Shields Financial Inc., a firm that has built a reputation as a fixed-income shop, quietly has been broadening its product lines through the management of mutual funds and separate accounts.
While only four years ago the firm's equity assets were 17% of total assets, today they are catching up to fixed income. The firm runs $5 billion in equity, $6.5 billion in bonds and $500 million in international equity. (Most of the international assets are seed money from its parent, New York Life Insurance Co.)
The growth in newer product lines is robust. Many of the firm's 24 new accounts gleaned in the third quarter are for stocks or international or, in some cases, multiple products.
The latter is a step toward fulfilling the goal of Ravi Akhoury, chairman and chief executive officer. When he became chief executive more than three years ago, when the firm had assets of $8 billion.
"We were mostly fixed income. In the prior 10 years it was good to be a boutique: that's changing. I want to get us positioned to be a multiproduct firm," said Mr. Akhoury.
The equity growth has resulted from the firm's strong performance. Its value equity strategy has returned a compound-annualized 20.45% from its inception in January 1988 to June 30. The Standard & Poor's 500 index returned 15.57% in the same period. The S&P Value Index was 15.44%.
Growth equities have returned 17.89% since Jan. 1, 1986, vs. the S&P's 14.63% over the 81/2 years ended June 30. The S&P Growth Index returned 14.31%.
Offering multiple products "allows for cross-selling to existing clients in an industry that's very competitive with very severe price competition," Mr. Akhoury said.
The desire to diversify products also stems from his belief that alternative asset classes will grow in importance.
"We've just gone through a decade of incredible returns from relatively low risk financial assets. The net result: they are fairly valued. None is cheap. We explain to clients that going forward it's not reasonable to expect 20% returns from stocks," he said.
Along with offering multiple products, the firm is serving multiple clienteles.
Its MainStay funds - for which it manages more than $4 billion on behalf of New York Life - are geared tooward retail investors; its core business is for pension funds and other tax-exempt clients. It also manages $1 billion for the New York Life Institutional Funds, which are geared to 401(k) plans.
"We don't have a bundled 401(k) product, but New York Life does. Most of our 401(k) business is through New York Life. It's a good fit for us," he said, noting that New York Life's AAA credit rating makes it an attractive provider of guaranteed investment contracts.
In the first quarter of 1995, the firm's international equity product will have a five-year track record. Since February 1990 through June 30, the strategy logged a compound-annual return of 6.61% vs. the Morgan Stanley Capital International Europe Australasia Far East Index's 2.79%.
On Sept. 12, MacKay-Shields was assigned by its parent to manage MainStay's international equity and fixed-income mutual funds.
One client, the Harvest States Cooperatives in St. Paul, Minn., recently hired the firm to run international equities. The firm already ran fixed income, value equity and growth equity for Harvest States. A new client, J. Walter Thompson Inc., New York, gave the firm the flexibility to move between value and growth stock styles in an equity fund and in a balanced fund.
"I don't negotiate fees. I set them below median (of other managers in the SEI universe) But if a client gives me more accounts, I'll be happy to lower the fee by virtue of economies of scale. That's going on a lot in this business," Mr. Akhoury said.
In addition, a number of fixed-income clients, such as the Memphis City Retirement System and Walter Industries Inc., Tampa, have given the firm discretion to invest in international bonds.
The firm's international effort is under the leadership of Michael Pearlstein, who was hired away from Brinson Partners, Chicago, five years ago.
"This year, I'm starting to push for that product quite seriously," Mr. Akhoury said.
Another area MacKay-Shields has its eye on is alternative asset classes.
If returns from publicly traded stocks and investment-grade bonds weaken in coming years, as Mr. Akhoury expects, "the implications are far reaching. Most institutions - pension funds and insurance companies - have very high expectations with high return/actuarial assumptions."
The choice is either to lower those assumptions or to increase the overall risk of the portfolio. "Over the next two to three years, people will do both."
Vehicles such as commodity funds, hedge funds and private equity might merit a look from pension funds. "You've got to think of taking owner-type risks and not investor-type risks. It requires capital," as in private equity investments, he said.
Private equity would be his first choice as an alternative investment offering because it doesn't have the negative publicity of hedge funds and commodities funds.
Because of the capital required, "very few money managers are in a position to compete in that business," Mr. Akhoury said. He hopes MacKay-Shields' connection to capital-rich New York Life would give the firm an edge.
But he stressed a move into the field is merely a possibility, not a sure thing.
"We're certainly in a position to investigate it and see if it's feasible. The ingredients are in place if we ever decide to do something."
The firm might build the expertise from within or think about acquiring it, perhaps through a joint venture.
Another alternative asset class the firm might consider offering to separate account clients is high-yield bonds. Since 1986, the firm has managed a high-yield mutual fund for MainStay. The fund was the top performer in the high-yield mutual fund universe of Lipper Analytical Services Inc., Summit, N.J., for the year ended Aug. 31. Audited Sept. 30 figures were not yet available. From Jan. 1, 1990, through June 30, 1994, it has returned a compound-annual 15.43% vs. the Salomon Brothers High Yield Long Term index's 13.53%.
"When high yield was in vogue I did not have enough of a record. Right now I'm talking to two existing clients and one prospect for high yield, and I plan to sit down with SEI. It's along the lines of the higher risk I was talking about," Mr. Akhoury said.
"Today for the first time high-yield securities are truly what (former Drexel junk bond king) Mike Milken wanted them to be -higher risk but higher yield. The premium is justifiable, very fair," Mr. Akhoury said.
Now that the junk-bond market has come back from the doldrums, "we've come back on real solid ground. If it can come back after that debacle no one can question the viability of that market," he said.
Of course, that assessment comes from a person whose first love is fixed income. He directly oversees the firm's fixed-income investments but the individual products are managed by teams.
And, just as the pension fund management business is becoming intensely price competitive, so is the mutual fund business.
"Mutual funds are getting to be more and more like a commodity. But it's a good business because the volume growth (in assets) is enormous. If you look at what percentage of individuals' net worth is in financial assets, it's still very small compared to the 1960s. There's so much money still ready to go into funds," Mr. Akhoury said.
By next year, MainStay likely will introduce a class of load shares.
While the MainStay funds traditionally have been sold to New York Life customers, "since the beginning of this year, because our performance numbers were outstanding, particularly in high yield and convertible funds, we started getting calls from brokers wanting to sell our funds."