LOS ANGELES More than five years after coming out from under the umbrella of Wilshire Associates Inc., equity manager Los Angeles Capital Management and Equity Research Inc. has prospered.
Assets have grown 624% since the management buyout on March 31, 2002, when the firm started with $760 million; it had $5.5 billion under management as of Sept. 30. Officials say new products in the pipeline and an emphasis on growing its overseas client base will keep LACMs assets swelling.
In the first quarter of 2008, executives plan to launch a global market-neutral strategy that will invest in securities in U.S., Europe and Japan, said Thomas Stevens, chairman and principal of Los Angeles Capital.
A year ago, the quantitative firm launched a long-short equity strategy that could be ratcheted up to 140% long and 40% short, or scaled back to 115/15, said Hal Reynolds, chief investment officer. The firm previously launched a domestic market-neutral strategy in August 2005.
The long-short equity strategy outperformed its S&P 500 benchmark by 1.36 percentage points for the nine months ended Sept. 30 with 10.49%; returns took a dip in the third quarter when the subprime crisis hit, according to data by eVestment Alliance, Marietta, Ga. The market-neutral strategy returned 15.04% for the year ended Oct. 31, topping the returns for Treasury bills, the benchmark, by 9.92 percentage points, according to data by LACM.
Los Angeles Capital broke away from Wilshires asset management unit in 2002 when the four founding partners purchased the firm; Mr. Stevens declined to give terms of the deal. At the time, Wilshire, mostly known for its consulting operation, was having trouble generating the economies of scale needed to grow its asset management business. Instead, Wilshire officials chose to focus on their fund-of-funds and private market businesses.
Despite the strict Chinese wall at Wilshire between consulting and asset management, the firm found it difficult to get a foot in the door with outside consultants who may have associated the asset manager with the competition, said Mr. Stevens. When the principals bought out the business, it was a huge turning point for us, he said.
Whether its a conscious or subconscious decision, I think there is some concern. It could be viewed as endorsement of another firm, said Thomas Shanklin, senior consultant at Wurts & Associates, Seattle. Mr. Shanklin does not follow Los Angeles Capital.
Since March 2002, the firm has averaged about $500 million a year in new business, with the rest of the growth coming from market appreciation, said Mr. Reynolds.
Going forward, the firm plans to continue to offer products that go beyond traditional long-only in the international markets. The firm plans to run the global market-neutral strategy with three different alpha engines that generate returns from the U.S., Europe and Japan, Mr. Reynolds said. Los Angeles Capital officials hope to bring in 5%-7% in returns above the London Interbank Offered Rate. Because the alpha engines are run separately, the firm can use the strategy for a Japan-only portfolio, for example, if a client requests it. It is also easier to run a risk controlled portfolio since investors in local markets typically determine the price of risk, he said.
Having separate return drivers is common for this type of strategy, though the typical market-neutral strategy brings in returns of 2% to 4%, said Jim McKee, senior vice president of hedge fund research at consulting firm Callan Associates Inc., San Francisco.
Mr. McKee said investors should ask where the manager is obtaining the extra returns. For example, the manager could be taking on leverage, or playing in European or Japanese small-cap stocks, which raises questions on capacity or whether the manager is making sector bets, he said.
The portfolio will not be levered, said Mr. Reynolds, but it will carry a higher tracking error than other market-neutral strategy with lower returns. About two-thirds of the global market-neutral portfolio will be invested in large-cap stocks and the remainder in small-cap equities. Were not simply looking for anomalies, like earnings surprises or low (price-to-earnings ratios), were looking for opportunities where risk is being repriced in the markets, he added.
The strategy is being launched in response to demand from its European clients, said Mr. Stevens. Theres a high level of receptivity to quant approaches in Europe, said Mr. Stevens, where clients have bemoaned the lack of suitable quantitative products.
Some 10% of the firms assets come from European institutional clients, mainly in the Netherlands and Sweden, and officials have been adding staff to keep the growth coming. In November, the firm hired Charles Morris, managing director in charge of business development in Europe as well as the East Coast and Southeast regions of the U.S.
Officials at the firm plan to hire one more person to oversee West Coast and Midwest relationships.