Guggenheim grows beyond its insurance roots

Updated

Guggenheim Investments, known for managing insurance company assets, is luring a more diverse group of institutional clients with its solid investment performance while it raises capital to expand even further.

Guggenheim specializes in fixed income, but also manages some equities and alternatives. It attracted its first non-insurance client in 2007. Corporate and public pension plans, along with foundations and endowments, made up 30% of the firm's $148.3 billion in assets under management as of June 30, company officials say.

Its growth has been rapid; assets rose more than 75% in the last 5½ years.

The firm opened 14 years ago, part of a deal that merged the business of specialty financial company Liberty Hampshire Co. with the family office of the fabled Guggenheim family and Links Securities, a broker-dealer. Mark Walter, Liberty Hampshire's CEO and co-founder, is CEO of Guggenheim Partners, Guggenheim Investments' parent.

Neither Guggenheim Investments — based in Santa Monica, Calif., and New York — nor its parent discloses financial information. Still, the money manager has been successful enough to help Guggenheim Partners lead groups of investors buying controlling stakes in various life insurance companies, as well as to expand into investment banking in 2009.

The strength and stability of the investment management business is an important component of the value that has been created at Guggenheim Partners, President Todd Boehly said in a statement. “This value has helped support the overall growth of Guggenheim Partners, in both asset management and Guggenheim's other businesses.”

(A consortium led by Mr. Walter and that includes Mr. Boehly formed Guggenheim Baseball Management and purchased the Los Angeles Dodgers last year.)

Guggenheim Investments, meanwhile, got a capital injection July 22, receiving $700 million in new low-cost financing in the form of a seven-year term loan from a consortium of five banks. It will be used to refinance higher-cost debt and expand opportunistically, Mr. Boehly, who is based in New York, said in an interview. He wouldn't say how much debt the firm has.

Borrowing terms were LIBOR plus 325 basis points, with a LIBOR floor set at 100 basis points. Mr. Boehly said the loan was Guggenheim Investments' first foray into the capital markets.

He said the money will be used to refinance debt and expand, opportunistically. He wouldn't be specific. One possible use: acquiring another money management firm or other investment teams.

In a separate interview, Santa Monica-based Scott Minerd, global chief investment officer for both Guggenheim Investments and Guggenheim Partners, said, “We are always talking to people about acquisitions.”

In 2009, Guggenheim Partners purchased Claymore Group, an exchange-traded funds provider, following up in 2010 with the acquisition of Rydex SGI, a money manager with a large ETF concentration.

But the biggest potential deal never happened.

"We couldn't come to terms," said Mr. Minerd of the publicly disclosed, unsuccessful negotiations between Guggenheim Partners and Deutsche Bank in 2012 to purchase of part of Deutsche's asset management business.

A successful deal could have added more than $500 billion to Guggenheim's AUM, although talks were scaled down after months of negotiations to the sale of just one Deutsche asset unit — its $63 billion RREEF division, which focuses on real estate investments.

In another deal, an investor group organized by Guggenheim Partners and that includes unidentified Guggenheim shareholders, completed the $1.35 billion purchase of the annuity business of Canadian insurer Sun Life Financial Inc. on Aug. 2.

Guggenheim Investments will be managing several billion dollars of the general account assets of the company, said Mr. Minerd.

Acquisitions aside, Mr. Minerd — who is very visible as a market commentator — attributes most of Guggenheim Investments' AUM increase to organic growth fueled by the company's bottom-up, fundamental investment approach.

The process replaces securities in the company's portfolios as new issues with better risk/return ratios are found.

Mr. Minerd said portfolio managers cannot make decisions about which securities can be held in the portfolios. Instead, securities are picked by sector teams, which specialize in researching specific areas such as energy or aviation, while the portfolio manager focuses on optimizing the portfolio.

“It's different than other money managers,” Mr. Minerd said, “where you get assigned portfolio manager A vs. portfolio manager B, and your portfolio can look entirely different just based on what a portfolio manager wants to do. Basically, we have an approach that is designed to provide more constant performance across portfolios.”

Guggenheim Investments' fixed-income strategies also can include securities from the firm's middle-market direct lending securitization, aircraft leasing and infrastructure teams. These securities together can make up 10% to 15% of portfolios, including core fixed-income ones, Mr. Minerd said.

It's hard to argue with the performance of a composite of Guggenheim's largest strategy — core institutional fixed income, with $77.7 billion. It handily outperformed the Barclays U.S. Aggregate Bond index and almost every other core fixed-income strategy during the 10 years ended June 30, according to data from eVestment LLC, Marietta, Ga.

For the 10 years ended June 30, the composite returned an annualized 6.56%, vs. 4.52% for the Barclays' index and 4.98% for the median core fixed-income manager, eVestment data show.

Its five-year numbers are even better: Guggenheim's composite returned 8.91% vs. 5.19% for the benchmark and 6.07% for the median manager, according to eVestment.

Officials at Intel Corp., Santa Clara, Calif., Guggenheim Investments' first institutional client, are more than pleased with the performance of their $500 million fixed-income portfolio. The firm was hired in September 2007, one of three chosen to run a broad-based, opportunistic fixed-income portfolio for Intel's $11 billion master trust, said Stuart Odell, assistant treasurer, retirement investments at Intel.

Mr. Odell said the Guggenheim portfolio returned 9.2 % annualized for the period between Sept. 30, 2007, and July 30, 2013, outperforming the second manager hired, Pacific Investment Management Co., and a third manager he wouldn't identify because the firm was terminated earlier this year.

Mr. Odell said Guggenheim and the other managers were competing against a custom benchmark of LIBOR plus 300 basis points.

He said Guggenheim Investments differentiates itself because of its unique expertise in structured investments such as aircraft leasing.

"They understand complex structured investments," Mr. Odell said.

Mr. Odell said Intel officials also like that Guggenheim isn't huge. “They're small, they're not PIMCO, they don't move the markets and have to make the big bets,” he said.

Mr. Minerd said AUM at Guggenheim Investments has grown 20% a year on average since the firm's founding, and even if it slows to 15% a year, assets will double in five years. The CIO is not worried about growing too big. He insists Guggenheim's investment approach is scalable and will work as the firm becomes bigger.

Mr. Boehly said Guggenheim's status as a private company is an advantage because the company can be thoughtful about its growth and not have to adhere to Wall Street's desire for continued earnings growth each quarter.

Not all of Guggenheim's investment strategies have been successful. Since March 23, 2012, the company has liquidated 21 ETFs, according to data from Morningstar Inc., Chicago.

The large number of ETF closures raises questions as to whether there was adequate due diligence before opening the strategies in the first place, said Josh Charney, alternatives investment strategist at Morningstar Inc., Chicago.

Mr. Charney said while Guggenheim's corporate culture nurtures innovation, it can be a double-edged sword, because those strategies that are too niche are at risk of being cut because of a lack of investor interest.

Mr. Minerd said of the 21 ETF's that Guggenheim closed, 16 were legacy Claymore or Rydex ETF's. A significant number of these were closed because of redundancy between the Claymore and Rydex ETF product lines, he said.

Guggenheim has gotten some negative attention from news that the Securities and Exchange Commission was investigating whether Michael Milken advised on investment transactions at the firm. Mr. Milken, the infamous junk bond king who served time in prison for securities fraud, is allowed to manage his own money but is barred for life from acting as an investment adviser or broker.

Mr. Minerd said Mr. Milken is a valued client, but he could not discuss the matter further. In a statement in March, Guggenheim Partners officials said Mr. Milken, “does not have an ownership or managerial role in the firm in any way, shape or form.”