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 Bradford & Marzec 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 Bradford & Marzec'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 Bradford & Marzec'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.