Del Rey founder finding rough road after fast start

Paul Hechmer was a star international equity portfolio manager at Tradewinds Global Investors. But that star has burned out since he launched his own shop — del Rey Global Investors LLC.

Assets under management at the 5-year-old global and international equity firm soon will drop to about $12 million, after hitting a high of $2.4 billion at the end of June 2012.

Del Rey, Los Angeles, had $321 million as of Dec. 31, according to eVestment LLC, Marietta, Ga. That includes about $300 million from Merrill Lynch, which is in the process of terminating del Rey from a wrap fee program, sources say.

It's quite a reversal for Mr. Hechmer, who had managed as much as $25 billion at Los-Angeles based Tradewinds.

When Mr. Hechmer formed del Rey, private equity firm Northern Lights Capital Group took a 25% equity stake for $3 million. Northern Lights also marketed the firm's investment strategies, helping to raise $1.8 billion of the firm's assets under management.

When the marketing agreement expired in early 2013, Northern Lights officials did not renew it, saying del Rey was not profitable and the firm's poorly performing strategies could not be sold to new clients, said one former del Rey official who asked not to be identified.

Mr. Hechmer said del Rey had developed its own two-person marketing and distribution staff and didn't need Northern Lights' help.

Today, no one markets del Rey. Mr. Hechmer confirmed the two marketers left because there wasn't enough potential new business.

Subadvisory relationships with Russell Investments, ING U.S. (now Voya Financial), SEI Investments, Renaissance Investments and CIBC Asset Management were terminated beginning in 2013; they made up as much as 75% of the firm's $2.4 billion in assets.

Most recently, the $18 billion Los Angeles Fire & Police Pension System on Jan. 7 terminated del Rey, which had managed $38 million, according to the minutes of the board's Jan. 15 meeting.

“Staff and (R.V. Kuhns & Associates, the pension fund's investment consultant) have been concerned about del Rey's performance for over a year,” said a memo from Paul Palmer, an investment officer with the plan. “As of Dec. 31, 2014, del Rey's performance since inception (in October 2012) trails its benchmark by 382 basis points. Recent personnel turnover at the firm and client departures have elevated staff's and RVK's concern over the direction of the firm.”

Tom Lopez, the pension fund's chief investment officer, said in a brief interview that investment staff also was concerned about the overall stability of the firm.

Data from eVestment show the international strategy, the firm's largest, returned -5.21% for the year ended Dec. 31, vs. -4.9% for the MSCI EAFE index, the manager's benchmark.

For three years, the strategy returned a compound-annualized 6.32%, vs. 11.06% for the benchmark. For five years, del Rey returned an annualized 3.11%; the benchmark is 5.33%.

Mr. Hechmer conceded times have been tough. “Generally speaking, we tell our clients that we outperform when the markets are down,” he said. Mr. Hechmer said the bear market that his strategies do well in has not started yet.

“We can pick up a lot of lost ground very quickly if the bull market reverses,” he said.

Not only are clients fleeing, so are employees. Today, the firm has a staff of seven employees, down from 15 several years ago. Gerald Wheeler, chief operating officer and chief compliance officer who is also a part owner of the firm, quit last month. Mr. Hechmer was and continues to be the sole portfolio manager.

Mr. Hechmer prides himself on being a contrarian investor. For example, he said international stock-picking strategies have, on average, a 25% weighting in financials, whereas he has only half that amount. He said he has a 24% weighting to Japan, whereas other managers have an average of 14%.

Some of his picks have backfired, such as investments in gold-mining stocks. Mr. Hechmer still holds a 5% to 6% weighting in the group, saying when the markets go down, those stocks tend to go up. He said investment in another stock, Toronto-based Sino Forest Corp., was a mistake because allegations of fraud over the company's Chinese timber holdings, made after del Rey had invested, eventually led the company to file for bankruptcy protection. The Ontario Securities Commission is conducting hearings on the fraud allegations.

Mr. Hechmer acknowledges his firm has hit some bumps, but still holds out hope he can turn it around.

He said Northern Lights might be willing to give del Rey a cash infusion. The Northern Lights senior official said such funding would be unlikely, but he would not rule it out. He said more funding would have to be earned. The official said Mr. Hechmer has to show he had attracted additional fee-paying clients who are going to give the firm substantial amounts of new capital.

Mr. Hechmer said he is intent on continuing to manage money, although he admits it might eventually have to be for another firm or for himself. “My passion is to invest,” he said. n