Ellen Safir was managing director of fixed income and currencies at the Howard Hughes Medical Institute for 16 years before launching her own fixed-income shop in 2002.
"I felt entrepreneurial," said Ms. Safir, founder of New Century Advisors LLC, Bethesda, Md. "There is fascinating stuff in fixed income from which you can build portfolios that provide equitylike returns."
Most money management entrepreneurs have been heading for hedge funds in recent years, but a small minority like Ms. Safir found that fixed income offers opportunities.
"The interest rate environment will improve and (provide) an opportunity for these firms to show their mettle," said David Silvera, managing director at private equity firm Rosemont Investment Partners, LLC, West Conshohocken, Pa.
There are no hard numbers tallying fixed-income shop launches in the past few years, but data from Progress Investment Management Co. LLC, a manager of emerging managers in San Francisco, offers a glimpse into recent activity. The firm has hired seven emerging fixed-income managers since January 2000, said Jose Balagot, deputy chief investment officer. Progress defines "emerging" firms as those that are independent and employee-owned, with less than $2 billion in assets under management.
Fixed income often is overlooked by entrepreneurs because it is considered a lower margin business than other asset classes.
"But it is still good money," said Brad Tillberg, senior research analyst at Russell Investment Group, Tacoma, Wash. For example, "the average fee for a high-yield mandate is between 40 and 70 basis points, which are more equitylike fees than traditional broad market fixed income," he said.
Most new fixed-income shops are the result of investment professionals migrating from bigger money managers to go out on their own.
Among the new fixed-income boutiques:
Hillswick Asset Management LLC
Based in: Stamford, Conn.
Total assets: $884 million
U.S. inst'l tax-exempt assets: $851.7 million
Year formed: 2004
Founder: Anders Ekernas, CEO and chief fixed-income investment officer
Hillswick was launched when Mr. Ekernas led a management buyout to acquire the fixed-income operation of SEB Asset Management America Inc., Stamford, Conn. Mr. Anders founded the predecessor company to SEB in 1987, which puts Hillswick among those firms that can classify themselves as emerging managers with long-term track records. Hillswick focuses on captive insurance. "We generated our performance with AAA-rated securities, taking minimal credit risk, and that works wells with the captive insurance industry, since a lot of times money entrusted to us is used as collateral," Mr. McDonnell said.
Midanek/Pak Advisors LLC
Based in: Walnut Creek, Calif.
Total assets: $60 million
U.S. inst'l tax-exempt assets: $55 million
Year formed: 2002
Founders: Jim Midanek, CIO; John Pak, CEO
Midanek/Pak invests in high-quality fixed-income securities, offering core, short- and ultrashort-duration and low-duration strategies, as well as an arbitrage hedge fund. The firm focuses on securities selection within mortgage and asset-backed markets. All portfolios are made up, at a minimum, of 50% government securities. The remainder comes from AAA asset-backed or whole-loan mortgage products, Mr. Midanek said.
Midanek/Pak was formed after Mr. Midanek sold Solon Asset Management to Turner Investment Partners Inc., Berwyn, Pa., in 1998 — nine years after he launched Solon. He stayed with Turner until he and Mr. Pak, formerly Turner's senior portfolio manager, launched their firm.
Samuel "Skip" Halpern, executive vice president at Independent Fiduciary Services Inc., Washington, described Mr. Midanek as capable, responsive and accessible. "That kind of access is an attraction of dealing with a small firm," Mr. Halpern said.
JKMilne Asset Management
Based in: Pittsburgh
Total assets: $215 million
U.S. inst'l tax-exempt assets: $215 million
Year formed: 2004
Founder: John Milne, CEO
John Milne was president and CEO of Mellon Bond Associates LLP until he left in July 2003. His new shop focuses on core fixed income, investment-grade securities and absolute value and portable alpha strategies. Assets under management were about $20 million just 10 months ago. Mr. Milne said his firm's strategies are "more of a blend of macro top down and bottom up, in contrast to the majority of fixed-income firms that have become bottom-up oriented and (whose) process has become equitylike."
The ability to provide customized portfolios is a key advantage for the firm, said Terry Bilkey, a principal at Bilkey Katz Investment Consultants, Pittsburgh.
Among JKMilne's clients: Dominion Resources Inc., Richmond, Va., which hired the firm about four months ago for an enhanced index mandate. Don Borneman, assistant treasurer, asset management, said JKMilne was the "right fit at the time."
New Century Advisors LLC
Based in: Bethesda, Md.
Total assets: $240 million
U.S. inst'l tax-exempt assets: $230 million
Year formed: 2002
Founder: Ellen Safir
New Century concentrates on real return and absolute-return strategies, offering short-duration core-plus and modular core-plus strategies, among others. One aspect of the firm's approach is the way it parses out fixed-income risks. While duration typically accounts for 80% of return, New Century puts duration on a "level playing field" with term structure, volatility, inflation and credit for to achieve a diversified portfolio, Ms. Safir said. The firm recently struck marketing relationship with Merrill Lynch & Co., New York, whereby Merrill is helping to sell New Century's newly launched inflation-linked collateralized debt obligation strategy. Also in the works is a hedge fund that will focus on global inflation-linked bonds, Ms. Safir said.
Prima Capital Advisors LLC
Based in: Scarsdale, N.Y.
Total assets: $1.5 billion
U.S. inst'l tax-exempt assets: $1.5 billion
Year formed: 2003
Founders: Gregory White, CIO; Steven Copulsky, managing director.
Prima's roots date back more than a decade, to when Mr. White began Schroder Mortgage Associates, affiliated with Schroder Investment Management in the United Kingdom. That business was sold to Conning Asset Management in 1998, but Mr. White subsequently bought back the fixed-income assets and reformed the company as Prima Capital Advisors.
Prima invests in commercial mortgage, mortgage-backed securities and whole loans — an investment niche in which few money managers specialize, Mr. White said. The firm's investment-grade commercial mortgage portfolio tends to be the most popular with clients. Prima's goal is not to double or triple in size, Mr. White said. "We have a modest number of clients, and we find that we're able to give them personal service, and that's important to us."
Samson Capital Advisors LLC
Based in: New York
Total assets: $2.5 billion
U.S. inst'l tax-exempt assets: $170 million
Year formed: 2004
Founder: Roy Zuckerburg, chairman and founding principal
Many of Samson's 11 founders came from OFFIT Investment Group, acquired by Evergreen Investments in 2003. Samson pinpoints capital preservation with high-quality, tax-efficient returns. It offers liquidity and enhanced liquidity strategies, as well as short-term, short-intermediate and core-intermediate strategies.
Samson's team has a "good understanding" of an individual client's risk tolerance and can customize portfolios to accommodate special circumstances, said a consultant who requested anonymity. About 90% of clients are high net worth, although Scott D. Einhorn, a founding principal, said the firm is starting to get more "traction" in the institutional arena.