Mr. Lippman began his career as a corporate lawyer, but while representing Paine Webber in a real estate transaction in the early 1980s, finance caught his eye. He left the Wall Street law firm to join Paine Webber in a corporate finance capacity, before jumping to the mortgage trading floor.
I was fascinated (by the) pace, he said. I left the practice of law 25 years ago and never looked back.
Mr. Lippman joined MetWest in 2001 as a generalist portfolio manager. He became CEO at MetWest in June this year, replacing founder Scott Dubchansky. Mr. Lippman is also a member of the firm's credit committee and the structured products committee, which helps determine investment strategies.
Mr. Lippman plans to grow the firm by building off of its existing foundation.
We've always been genuine in terms of what we do well. We don't reinvent ourselves in order to become something new. We tend to move in areas we have a core competence in, he said.
What's first on your to-do list? Looking forward, there are things we would like to accomplish. For instance, we'd like to add non-dollar (strategies) to the arsenal of things that we do. We'd also like to expand our distribution, which is predominantly domestic, to an overseas base as well.
We've considered a number of things ... such as lift outs, buying other firms. We've looked at firms that basically have a strong basis in non-dollar, as well as affiliations with other organizations, predominantly outside the United States.
Why not do this internally? We looked at that and we haven't ruled it out. It's a pretty large task and to basically start piecing it together, it's cumbersome. I'm not sure that we'd get the impact that we're looking for on a cost-benefit basis.
Who would make an attractive partner? I don't think that we're leaning one way or another. Most of the things that we consider are on a cost-benefit analysis, and obviously, we'd like to be involved in areas that we're not now. That would be the benefit.
What's your breakdown between U.S. and non-U.S. clients and how do you see that changing? We're almost entirely in excess of 90% U.S. based. Recently, we've been fortunate enough to pick up some clients outside the United States. I would expect that, on a go-forward basis, constituencies outside the United States will be a larger part of our business.
Do you see yourself eventually becoming part of the oligopoly of fixed-income managers: PIMCO, WAMCO or BlackRock? We like to be considered among their ranks only in that we feel in many ways we are just as talented as they are. They are so much bigger than we are that our relatively modest size ... provides opportunities and the ability to run money in an entirely different fashion than those three do.
Our approach is mostly bottom-up, and if you're managing $27 (billion) or even a larger size, say $50 billion, it provides the ability really for that bottom-up analysis to make a difference when buying bonds.
What are some of the biggest obstacles bond managers are facing? The volatility in the bond market, particularly in the higher-rated mortgage area, is unprecedented. I've been in this business for 25 years, and I can say I've never seen anything quite like it in the highest-rated mortgage-backed bonds. I think that this volatility creates opportunity as well as potential peril.
So where do you see the most opportunities? We think there are a lot of dislocations in the highest areas of rated bonds. We also think in the credit markets, in banks and finance, there have been tremendous dislocations.
For a long time, there was an attitude that was prevalent that all AAAs were created equal. I think there's a recognition (now) that the fundamental credit matters.
At first, when you see a market dislocation, the wheat and the chaff tend to get moved out together. But over the course of the remediation of the market, the good assets tend to remediate in price, the bad assets don't.
Recently, we've seen a lot about the Fed coming in and many repetitions of the old saw that some banks are too big to fail. We don't necessarily agree with that ... we do in regards to both Freddie Mac and Fannie Mae. They are government-sponsored entities, and the government has stepped in. But ... we think many of the nations' biggest banks will be just fine, and yet the levels of their debt suggest otherwise.
How has this affected the way you structure your portfolios? Going back two years, when there was a dearth of opportunity, the portfolios were weighted heavily toward Treasuries, just reflecting the fact that there was not much opportunity out there. The gravitation of the portfolio has migrated away from Treasuries ... Currently, we are modestly underweight Treasuries.
Returns for your Total Return fund have been great over the past three to five years but have suffered in the short term. What's driving the returns? A three- to five-year horizon is more viable in terms of looking at performance. Just because MetWest recognizes a market dislocation and invests in those assets where the value is less than what the intrinsics might suggest, doesn't mean the rest of the market beats a path to their door. One of the advantages we have (as an intermediate-size firm) is that we don't leave a very large footprint. If we recognize that an asset is undervalued, that doesn't necessarily mean that the rest of the world comes rushing in behind us and that price remediates immediately. We look at the relative underperformance as being somewhat opportunistic.
For the Low Duration and AlphaTrack portfolios, the short- and long-term numbers have been negative. For Low Duration, the benchmark itself has a higher percentage of Treasuries to the benchmark, so if you look at how well the Treasury market performs, in the near term during the last 12 to 14 months, that has a bigger dislocation if, in fact, you stray from the Treasury market.
With AlphaTrack ... it uses an overlay to achieve the performance of the S&P 500 and then it invests the money on a short-term basis as well. Consequently, there too, because of the short-term orientation, the dislocation is often magnified.
You've focused on asset-backed and mortgage-backed securities. If you look ahead 12 to 18 months, where do you see those markets going? I don't know that they'll ever return to what they once were. There's been a lot of abuse, and I think that the size of those markets probably became too big. But on the other hand, I think priced to where they are now, I would expect to see significant remediation in the markets over the next 12 to 18 months ... led by the fact that the assumptions embedded within many of these high-quality mortgages (are) not consistent with the outlook that is expressed in the credit market and the Treasuries market that we're due for a recession. I would say that the assumptions priced into the mortgage market at this point would point to an event that is equal to or worse than the Great Depression of 1929.
Contact Raquel Pichardo at [email protected]