Legions of post-bubble investors have come to appreciate the risks of putting too many eggs in the U.S. stock market, but for Martin D. Sass, that epiphany came in 1972. Launching his eponymous firm just as the market was on the cusp of an 18-month swan dive, Mr. Sass concluded he had to diversify or perish. His first move was to recruit a partner, Hugh Lamle, with the expertise to move what is now M.D. Sass Group beyond its Graham and Dodd-grounded equity focus. Over the following decades, the firm has incubated a succession of offerings, tapping industry veterans to lead its charges into alternative strategies focused on real estate, hedge funds and private equity funds. At 64, Mr. Sass shows no signs of slowing down. His firm just brought in Sydney-based Macquarie Group as a partner for its 3-year-old Financial Strategies Private Equity fund, and will soon announce the launch of another hedge fund strategy as well as a mutual fund. Organizationally, the New York-based firm is ratcheting up its domestic sales team and bringing in its first chief operating officer. Mr. Sass says he's having too much fun to even think about an eventual exit strategy from his firm.
It's fair to say you've been around the block a few times. (M.D. Sass) started in March 1972, to show you what a great market timer I was. It was right at the top. The Dow was 1000. It went right to 577 in the next 18 months. I started out banging my head against the wall every day as an equity-only manager. I'd buy something I thought was a great value at eight times earnings and watch it go to five times.
Hardly a recipe for a good night's sleep. One of the realizations I came to was the importance of diversification among alternative strategies. My first step was finding Hugh Lamle in 1974. We shared a common vision, a desire to build the best money management company we could — a multilegged stool, such that if you knocked one leg out it still stood strong. The first diversification was a no-brainer into fixed income, but looking for niche areas. In 1977 we started one of the earliest strategies in mortgage-backed security fixed-income management. And then we also did covered call option writing, even before the advent of the Chicago Board Options Exchange.
Your organizational chart looks more Byzantine today. Since then, we've incubated 18 different investment strategies of which 15 were highly successful. We'd seed them with our own capital.
Your product launches seem to come in bursts. In the late '80s, we saw opportunities in distressed investing. We saw an opportunity to acquire a substantial $100 million portfolio of luxury garden apartments at prices ranging from $17,000 to $20,000 per unit. We put a group together. I knew of two people who were running Mellon Bank's real estate division. They shared our vision, and we formed a company, Real Estate Capital Partners, which grew from zero to $4.5 billion in assets under management. We recently sold that company to a client, a very substantial European investor. Everybody walked away very happy, and we've since started another real estate company called Ascent Real Estate Advisors. Another example: back in the '80s, we had this surge of leveraged buyouts at ever-increasing valuations with ever increasing leverage. We felt that would result in a surge in corporate bond defaults, so in the late '80s, we started a hedge fund which still exists that invests in distressed securities, and subsequently we started a private equity fund to take control investments in distressed companies.
And again you had to bring in the talent? We started out one at a time, built a team of investment professionals there.
Does having so many niche teams inhibit a company culture? There's very much a company culture — a very close-knit family kind of culture. One of my jobs is breaking down silos and bureaucracies. What we're finding is that even as we get more and more diverse and larger, there's more and more sharing of market intelligence. People are focused on their areas … but they also want to work together in this environment.
What's next? There are newer vehicles that we're examining, (including) collateralized debt obligations. We're also introducing a mutual fund that will be distributed by brokerage firms.
It looks as if you've been bulking up your own distribution as well. Distribution has been, frankly, one of the weaknesses of the organization, which we're remedying. We used to be a one-person marketing team. Now it's five.
Why now, after 34 years? It's partly related to the launch three years ago of the Financial Strategies Private Equity fund, which has helped set up four money management firms, with plans for another 10 over the coming three years. They need distribution, which was another reason for the Macquarie strategic alliance. They're very strong in the Asia Pacific region, and offer strong global distribution.
But in the U.S.? We've decided to have our own direct marketing force. We hired Bruce George from Fortis to focus on consultants; Frank P. Pfeffer for large pension funds; Chris Pasada for high-net-worth investors and the fund-of-hedge-funds market; and Richard O'Hara for Taft Hartley.
Your assets under management have been on a roller coaster ride at times, with at least one year where they fell by over $10 billion. We sold Chase M.D. Sass Partners, a firm with $20 billion in short-term fixed-income instruments, and have sold other units with billions of dollars in assets.
Do you have an exit strategy? We've had offers for the whole company, but we're not interested at all. I love what I'm doing. I've never been more excited. We've got the best team we've ever had — a portfolio of companies here that's very exciting. I still manage money every single day.
Do you give equity to the industry veterans you bring in? Yes, all the senior investment professionals here are incented in that fashion, either with a share in the profits in a division or an equity interest. The motivation that provides just can't be matched by base salaries and bonuses.
You've announced a number of hires recently. We're expanding more than we ever did. A very senior person is coming in as chief operating officer of M.D. Sass right after Labor Day. We're expanding and increasing the depth of the bench so we can be ahead of future growth, and handle it in an orderly fashion.
Where do you see growth? It's across the board. Most of the strategies that we have are in pretty substantial growth curves, and the marketing is starting to gain momentum and traction. We were not very aggressive marketers prior to this, but with all these products and strategies and hungry young entrepreneurs that have joined the team, we did need this team of five marketers to help grow it.
Consultants say you're a maverick. To me, at the end of the day, it's how you perform for your clients. Do you do it with integrity? Do you have relationships that are good and strong and positive? I have clients that have been with us for 34 years. We have a 10-year club at M.D. Sass, where once a year employees who are here for 10 years or more have a dinner. It has 20 members. People don't stay that long if you're not doing something right.