Brandes' performance, outflows give pause

SAN DIEGO — Brandes Investment Partners LP was hit hard by weak equity markets and retail outflows, and institutional clients have noticed.

The San Diego-based value equity and fixed income manager’s assets dropped 23% in the first six months of the year to $86.4 billion, according to data provided by the firm.

Of the $25.3 billion decline, about $13 billion was due to market fluctuations, about $6.7 billion to client outflows — mostly retail — and about $5.6 billion to underperformance, said Edward Blodgett, director of the private client group at Brandes.

Assets are down 26.2% from year-end 2006.

Though most client defections have been on the retail side, some institutional investors have terminated the firm in recent months or are keeping an eye on performance.

• The $17.2 billion Indiana Public Employees’ Retirement Fund, Indianapolis, terminated Brandes in November from a $413 million active domestic midcap value portfolio. Officials at the system wanted to use a relative value manager to better meet risk and diversification objectives, said Jeffrey Hutson, spokesman. In March, the fund replaced Brandes with Artisan Partners LP, Milwaukee. Brandes still manages $493 million in active global value equity for Indiana PERF.

• The $16 billion San Francisco City and County Employees’ Retirement System dropped the firm in December from a $71 million international small-cap value equity strategy for performance reasons.

• The $38.4 billion Teachers’ Retirement System of the State of Illinois, Springfield, has the firm on watch, also for performance, said spokeswoman Eva Goltermann. Brandes continues to manage a $1.2 billion international equity portfolio for the pension fund.

Mr. Blodgett said performance has been hurt by the manager’s decision to overweight financials at the start of the year and because of little to no exposure to energy and raw materials.

“Our heaviest single exposure was to financials during the first half of the year,” said Mr. Blodgett, adding that a year ago, the firm was underweight financials.

Brandes’ largest strategy, the $40.1 billion international equity portfolio, returned -14.35% for the year ended June 30 underperforming the Morgan Stanley Capital International Europe Australasia Far East index by 420 basis points, according to data by eVestment Alliance, Marietta, Ga. For the six months ended June 30, returns were -13.16%, underperforming the benchmark by 258 basis points.

Annualized three-year returns were 11.86%, underperforming the index by 148 basis points, while annualized five-year returns of 17.95% outperformed the index by 79 basis points.

Its $530 million international midcap equity portfolio returned -24.95% for the year ended June 30 and -15.35% for the first half of 2008 vs. -10.61% and -10.96% for the MSCI EAFE net dividends, the portfolio’s benchmark, for year and six months, respectively, according to eVestment.

The portfolio returned an annualized 3.18% for three years and 14.67% annualized for five years, while the MSCI EAFE net dividends returned vs. 12.84% and 16.67% for the respective periods.

Although the financial sector was battered in the markets, officials at Brandes still see opportunities. “We are seeing more bargains in financials,” said Mr. Blodgett. He declined to name specific securities.

Financials was the best performing sector in the Russell 3000 index in July, returning 6.4% for the month, but even with the pickup in July, the sector returned a -21.3% for the year to date though July. The energy sector performed the worst for the month of July with returns of -18.1% but year to date had positive returns of 2.2%.

The shift in the markets — July’s rebound in financials and dip in energy — will work to Brandes’ advantage if it continues, said Mr. Blodgett.

Officials at the $10 billion West Virginia Investment Management Board, Charleston, are sticking with the firm despite the relative underperformance of the fundamental, bottom-up manager.

“They’re not benchmark huggers,” said H. Craig Slaughter, executive director. “Yes, they’ve underperformed, but we’re not surprised. The markets haven’t favored Brandes’ approach,” he said.

Brandes manages $430 million in its Emerging Markets Equity portfolio for West Virginia. For the year ended June 30, the portfolio returned -14.47% vs. 4.89% for the MSCI Emerging Markets index. The portfolio was up 17.25% and up 25.35% annualized for the three- and five-year periods ending June 30 vs. 27.52% and 30.15%, respectively, for the benchmark, according to data provided by the firm.

Contact Raquel Pichardo at [email protected]