Rogge shifts business focus to Europe, Asia from U.S.

LONDON — Fixed-income manager Rogge Global Partners PLC is turning to Europe and Asia for business growth.

At year-end 2000, 80% to 90% of the firm's roughly $7.5 billion of assets under management were from U.S. investors; now, only 45% of the $14 billion under management is from U.S. clients, said John Graham, one of four portfolio managers at the firm. About half of the total assets under management are from European and Asian clients, roughly divided equally between the two.

Rogge's growth was spurred by increased demand for higher-alpha fixed-income strategies, some of which are used in a portable-alpha context.

"We realized early on that the game was going to change," said Olaf Rogge, the founder of the company, which was founded in 1984 and among the first to offer active global fixed-income asset management to institutional investors. "Clients suddenly are looking at liability, or told to look at liability, and as a result, they no longer want index huggers, or index-plus managers. What they want is a total return manager."

About three-quarters of all new portfolios in the past year have involved either a high-alpha or portable-alpha strategy, Mr. Graham said. So far this year, 50% of the $4.5 billion in inflows has involved such strategies. All but one of the mandates have involved new clients, who generally transfer assets from either equities or more traditional bond strategies such as domestic fixed income.

"We've been able to greatly diversify our client base, and that can only be a good thing," he said. "The result is that we are able to tap into a more extensive range with which to develop our skills as portfolio managers."

Meanwhile, Rogge still runs traditional global bond portfolios. The manager runs a $1.28 billion portfolio for the $193.3 billion California Public Employees' Retirement System, Sacramento. In the five-year period ended Aug. 31, Rogge chalked up a compound annualized return of 9.31%, beating the Lehman International Fixed Income index by 24 basis points. In the 12-month period ended Aug. 31, Rogge has returned 8.25%, outperforming the benchmark's 7.11% return.

In the year ended Sept. 30, Rogge's unhedged global fixed-income portfolio returned 4.11%, beating the Citigroup World Government Bond index by 108 basis points. Over the five-year period, the portfolio returned an annualized 9.22%, beating the same benchmark by 98 basis points, according to data from Atlanta-based eVestment Alliance.

"Making money over the last few years hasn't been a free lunch," said Paul Cavalier, principal at London-based Mercer Investment Consulting Inc., "with a low yielding environment, which it has been for a number of years, volatility is low and the spread of certain asset classes are low as well. So if you have a way of consistently adding alpha, then why not?"

Clients are keeping the same mandate but having less constrained guidelines, therefore widening the different sources of alpha that can be used by a portfolio manager, said Mr. Cavalier. Another option is to change the typical benchmark, or the beta, to a more liability-driven solution focusing on a pure matching policy and trying to add alpha elsewhere

Typically, clients are looking for 100 to 150 basis points in return above the benchmark, but some have "been down for as much as 200 to 250 basis points" above benchmark, Mr. Cavalier said. "And there are managers who have delivered," he added.

The alpha part of the equation is gained by extra risk, for example, going into emerging growth debt and credit markets. At Rogge, alpha is extracted mainly from three streams of strategic asset allocations — investment grade credit, emerging markets and developed markets, Mr. Graham said. Within those parameters, Rogge's portfolio managers also consider risks associated with yield curve, duration and interest rates. The idea is to combine the flexibility inherent in derivatives with the creativity of a cross-border investment environment.

Sweden's AP Fonden 2, Goteborg, was one of the latest investors to hire Rogge, tapping it for a $500 million active global government bond portfolio last month. The amount totals about 6% of the state pension fund's 60 billion Swedish kroner ($7.5 billion) fixed-income portfolio and was previously managed in-house as part of a passive vehicle, said Chief Investment Officer Petter Odhnoff. In the coming year, he's planning to invest even more money in similar mandates with other managers.

"We considered everything from the investment style to performance strength to risk management issues," Mr. Odhnoff said. "We wanted more liquidity within the global government space, credit risks like corporate bonds and so forth, but we don't have the capacity to do it internally."

Rogge's business strategy made a sharp turn with the fall of the Berlin Wall in 1989. The group began delving into emerging markets, since the collapse of communism meant that many emerging economies "can't hide from its (debt obligations) politically by turning to communism," Mr. Rogge said, making those countries more attractive to investors.

"Now we all live by the same rules," he added.

Another sea change was the advent of the euro. The firm began cultivating expertise in that sector, winning its first mandate in 1999, the same year the euro was introduced into the money markets.

In Japan, Rogge entered into a 50/50 joint venture with Tokio Fire & Marine Asset Management Company in 2003, a setup that has since added $3 billion to the firm's total assets under management, Mr. Rogge said. Most of the firm's clients in Asia are Japanese institutional investors who are attracted to the global fixed-income due to a much lower yield among Japanese bonds. The Japanese government's 10-year bond has been yielding about 1.5% compared to a yield of 4.6% for a 10-year U.S. Treasury bond as of November. Asia and Australia have also proven to be fertile ground for Rogge's business as more investors "move from the equity market into the bond market," Mr. Graham said.

While business grew at a healthy pace in Europe and Asia, it remained anemic in the United States. Global fixed-income mandates declined in 1999-2000 when a number of dollar-based portfolios experienced steep losses against the euro. Clients became "disenchanted," and in the past several years, the number of new global fixed-income mandates by U.S. clients has remained anemic, Mr. Graham and asset managers at other companies said.

But that might be changing. In an analysis released in October by Stamford, Conn.-based InterSec Research Corp., a unit of State Street Corp., new active global fixed-income mandates from U.S. clients totaled $6 billion for the first half of 2005. This compares with $1.7 billion for the same period the previous year, and only $1.6 billion in for the first six months of 2003.