Telecom tumble hits Bradford & Marzec

LOS ANGELES — Fixed-income manager Bradford & Marzec Inc. lost 38% of its assets under management in just over a year, largely because of telecom bond blowups.

Although the firm sold off troubled investment-grade bonds like WorldCom Inc. and Qwest Communications International Inc. last year well before the companies declared bankruptcy, they still damaged performance of core and core-plus portfolios, said Zelda Marzec, president and co-chief investment officer.

While performance improved after the third quarter because of new risk controls, a number of institutional clients lost patience and terminated the firm.

Worldwide assets under management at Los Angeles-based dropped to $4.922 billion at year-end 2002 from $7.951 billion a year earlier. Worldwide institutional assets fell to $4.871 billion from $7.393 billion as of year-end 2001.

Consultants report that the firm experienced $1.1 billion in client terminations in the fourth quarter alone. Among recent terminations: the $350 million Merced County (Calif.) Employees' Retirement System, for a $67 million core-plus portfolio; the $2.1 billion Colorado Fire & Police Pension Association, Greenwood Village, $170 million core-plus; and the $13 billion Nevada Public Employees' Retirement System, Carson City, $580 million in core bonds.

David Hogan, director of marketing, said some losses were due to clients rebalancing from bonds to equities, rather than performance.

Long-term performance of the core-plus strategy, used by most of 's clients, is good. For the 10 years ended May 31, the strategy returned an annualized 8%, outperforming the Lehman Brothers Aggregate Bond index's return by 57 basis points.

Over five years, however, the core-plus strategy underperformed the index by 14 basis points; for three years, it underperformed by 64 basis points; and for one year, by 23 basis points, with an 11.35% return.

As for a peer comparison, the most recently available data (for periods ended Dec. 31) showed 's core-plus bond strategy ranked between the 45th percentile (for 10 years) and 67th (for the year ended Dec. 31), according to eVestment Alliance, Marietta, Ga.

Ms. Marzec was candid about short- to midterm performance. "In 2002, the investment-grade industry, especially telecoms, was one that got whacked. You can see from our performance how much telecoms really hurt our portfolios."

Although the investment teams and processes are the same as they were in May 2002, "we intensified our disciplines with regard to credit in general," Ms. Marzec said. Among the processes tweaked:

-- Applying yield book to portfolio analysis for the first time;

-- Analyzing daily the underlying equity for each credit owned, which enables portfolio managers to react to good or bad company news a day or two before the rest of the bond market; and

-- Making the sell discipline more rigid for high-yield and corporate bonds.

Performance is improving as a result of these changes, Ms. Marzec said. As of May 31, the core-plus strategy's year-to-date return was 5.12%, or 99 basis points over the index.

The firm also has picked up some new clients, although Mr. Hogan would not divulge net new growth or client names.

Consultants are watching the firm closely, among them, Jeffrey McLean, president of Wurts Associates Inc., Seattle.

Bradford & Marzec manages a core-plus portfolio of undisclosed size for the $1.7 billion Fresno County (Calif.) Employees' Retirement Systems, a client of Mr. McLean's. He said has turned in better performance than the county fund's other two bond managers, Loomis Sayles & Co. LP, Boston, and Boston Partners Asset Management LP, Boston.

Meanwhile, some consultants are uncomfortable with the firm's ownership structure, compensation and independence.

Co-CIO Edward T. Bradford and Ms. Marzec own 100% of the firm, which they founded in 1984. While no specific succession plans have been made, Ms. Marzec said certain staff is being trained to assume leadership, although neither she nor Mr. Bradford intends to leave.

And while the firm has no plans to sell — "it's not on our minds now" — Ms. Marzec did not rule it out.

Consultants said the firm's phantom equity plan only rewards seven senior staffers with 15% of profits if the firm is sold. Otherwise, there is no financial incentive. Ms. Marzec confirmed a phantom equity plan is in place, but would not give details. She said the firm will be enhancing — and possibly changing — equity ownership and compensation schemes later this year, but said it was too early to provide details.

Timothy Barrett, executive director and chief investment officer of the $3.2 billion San Bernardino County (Calif.) Employees' Retirement System, said Bradford & Marzec's current phantom equity ownership scheme "doesn't hold water with our trustees. They've lost some staff — not recently — and Ted and Z (Ms. Marzec) own all of the firm. Our trustees are concerned, but we understand that they have engaged an outside consultant and are working on coming up with a new compensation plan, and that reassures us."

Mr. Barrett said trustees were concerned about performance of the county's $500 million core-plus portfolio with . But he added: "We have had them since 1985 and have been through rough patches with them before. Everything is in place to improve performance."