Smith Breeden Associates lost more than 75% of its assets under management since the global financial crisis, but executives there say flows into higher-margin strategies have sustained the company and left it poised to rebound.
Some investment consultants, however, say it's too soon to begin recommending the money manager again.
Smith Breeden's AUM plunged to $6.4 billion as of Dec. 31, with net outflows of roughly $5 billion a year in both 2009 and 2010, according to Marietta, Ga.-based eVestment Alliance. The firm's assets had reached a record high of $33 billion as markets began unraveling in late 2007.
In interviews, Smith Breeden executives said a changing business mix — with more money flowing into higher-margin opportunistic credit strategies, both long-only and long-short — has helped the firm weather a historic period of uncertainty and volatility for the mortgage sector, where the bulk of its assets were invested.
While overall AUM has fallen, flows into the firm's newer alternative, absolute-return strategies have lifted those strategies' assets from “very little” at the start of 2009 to close to $2 billion today, helping make 2010 “one of our more profitable years,” said Stephen A. Eason, executive vice president and director of marketing and client service.
Chairman and CEO Michael J. Giarla said much of the heavy outflows Smith Breeden saw in recent years reflected decisions by big, non-U.S. clients — such as central banks and sovereign wealth funds — to allocate away from the U.S. mortgage sector. Mr. Giarla became CEO on March 23 after the firm announced that longtime CEO Eugene Flood Jr. was joining TIAA-CREF.
That reallocation — amid concern that U.S. support for government-sponsored mortgage entities such as the Federal National Mortgage Association was less than rock solid — resulted in Smith Breeden losing a number of hefty, but lower-margin, index-like mandates, Mr. Giarla said.
For example, in the first quarter of 2010, a Japanese bank client decided to move a $4.8 billion mortgage-focused portfolio in-house - accounting for the vast majority of Smith Breeden's net outflows for the year, according to information the firm provided to eVestmentAlliance. Mr. Eason declined to name the client.
Messrs. Giarla and Eason said as the dust continues to settle from the post-financial crisis confusion, the picture emerging of the new U.S. mortgage market — while not completely clear — looks set to favor Smith Breeden.
More and more U.S. mortgages are likely to fall outside the umbrella of government-sponsored entities, and that will play to the strengths of a firm such as Smith Breeden, with a 30-year track record in mortgage-related research, said Mr. Eason.
Some clients will reallocate money to beta-type strategies, and a growing number will look to complement those allocations with mandates to absolute-return strategies, and Smith Breeden can compete at both ends of the spectrum, said Messrs. Giarla and Eason.