Joan Payden has come a long way since her early days as a draftsman of oil refineries. Laid off from her first job in an economic recession more than two decades ago, the math and physics major found the money management field, where she has spent the majority of her working life. In 1978, Ms. Payden became the first woman partner at Scudder, Stephens & Clark, now part of Deutsche Bank. In 1983, she started Payden & Rygel, using money from her profit-sharing plan. Recently, the firm partnered with Metzler, a private bank in Germany to form Metzler/Payden, which now manages about $3 billion in fixed-income investments in Germany and other parts of Europe. She talked to reporter Arleen Jacobius about her take on the money management industry.
Q How is the investing world changing?
A People will be more realistic and look at absolute returns and not relative returns. ... In a bond index, if a name is big it is because of a negative. They're big because they have a lot of debt. People got into bond funds because they are treating it as stock performance. In stocks, you're betting on names. Now people are more attuned to absolute returns. What can I live with? Zero? -5?
Q How do you expect to grow your business?
A Four years ago we established a joint venture with Metzler Bank of Frankfurt, and we now manage $2.5 million in Europe for pension funds and endowments.
With our joint venture with Metzler, there is a sales organization where we manage for a lot of pension funds ... in Germany. Four years ago we established a joint venture with Metzler Bank of Frankfurt, and we now manage $2.5 million in Europe for pension funds and endowments. That entity as of Jan. 1 has five European funds, including small-cap, large-cap and emerging markets. Those markets are very different, very depressed. We're prepared. We think that the real value area is European equities. It may take some time.
Q Why take the company global?
A In 1988, I thought our bond portfolio was affected by the Bundesbank, the Bank of Japan ... and U.S. monetary policy. It was a time when the bond markets were just trying to grow. We started to have a global fixed-income strategy. At that time, everyone was saying ... international (meaning) ex-U.S. We said, "Wait a minute; it's global."
Now Poland, Russia, Eastern Europe, some countries in the Pacific Basin, a lot have bond markets. We are investing in Eastern Europe and done well and think it's a big diversifier. The same is true in the emerging markets. Years ago (when) one went bad, they all went bad. Now, investors are realizing if something happens in one sector, it is not going to happen to all sectors. When it happened in Brazil, everything did not go. We're seeing people looking at the entities, not at the class.
Q Do you expect to merge, eventually, with a larger institution?
A We are fiercely independent ... our corporate structure allows for that. We have 10 owners. All senior members of the firm are shareholders and the others are very much aligned to this independence. I don't have a family and I want to pass it along. Most people sell because they need a certain mass. We've worked very hard to attain a certain mass.
Q How did you start in the profession?
A I trained in math and physics. I started as a chemical engineer. There were four women among the 600 young engineers working at my first job. One day before Christmas I was called in to the boss' office and he said that 300 people would be laid off, and I said, "Gee, that's too bad," and then I heard that meant me. That was in New York. Then I found a job in investment management. I did not know the difference between stocks and bonds then, but I learned quickly.
Q Why specialize in bonds?
A When we started Payden & Rygel, we managed stocks, but my first love was bonds. Bonds pull in so many different things. They pull in not only the entity that issues the bonds, but the economics of the region. It's more fascinating and in a strange way, people who manage bonds can manage stocks well too. ... Able stock managers look bottom-up, where bonds are more of a top-down approach. One thing we did in this firm is we take the top-down approach.
In our research we put stock and bond people together. We found they would ask more questions about the entity and it helps both sides. We have 130 people in the firm. Forty people are involved in some aspect of research.
We started with four people including an administrator. There are 10 of us principals now. Everybody has been together on average 10 years. One of our strengths has been that some people have come and gone but the core has stayed. The newest members joined eight or nine years ago. We don't compensate people on investment performance but on personal performance.
Q Are expectations too high?
A Today, people don't put an emphasis on the fact that money management is an inexact science. Quantitative prevailed and people did not look enough to the qualitative. It's easier to look at quantitative. But is looking at stocks and bonds from an historical point of view still relevant? You have to look further into risk management. Again I go back to the inexact science. It's not just at the company you're looking at, it's the liquidity of the marketplace.
A good example is the international markets. It's hard enough for two U.S. cultures to get together in a merger. So many entities are merging cultures from different countries. There's this qualitative element that people have to look at. People have been very greedy. They're beginning to believe their own stories. Humility is not a great virtue in our business.
Expectations have been set on the last one or two years instead of from an historic perspective. We're experiencing a reversion to the mean. Everybody's asking, "How did this happen?" We were all sucked in. It was the biggest bubble.
Q Where do you see the greatest investment values?
A There's a lot of risk in the investment-grade companies. People say that risk question is more complicated, more highly leveraged. The greatest value is in small companies that are high yield, not junk. Small companies, because they are small, have to pay 10% to 12% more, but there's real value. High yield is not junk.
Q Have you come across a good ol' boy network?
A In my working life I'm sure there were many times when gender issues came in. I've been oblivious to them. I love being a woman. It's never been a problem. Sometimes they thought Joan Payden was John Payden and they were surprised when they saw me, but they got over it.
Joan Payden, president and chief executive officer, Payden & Rygel, Los Angeles
Assets under management: $50 billion
Performance (as of Dec. 31): Return (benchmark)
1 year 11.53% (10.27%)
3 year 10.46% (10.09%)
1 year 9.93% (9.32%)
3 year 9.60% (9.56%)
1 year -24.62% (-30.26%)
3 year -7.70% (-21.06%)
Benchmarks (respectively): lehman aggregate; merrill lynch gnma masters; russell 2000 growth