Hechmer Leads Money Managers in Startups After Industry Shakeup

Date: Wednesday, April 14, 2010
Author: Bloomberg

Paul Hechmer had just interviewed for a job with a large asset manager when he got unsolicited advice from an investment consultant: Start your own firm.

Hechmer, who had quit Nuveen Investments Inc. on June 15, listened and last month opened Los Angeles-based Del Rey Global Investors LLC. He’s one of at least half a dozen managers who are beginning to go after investors this year, including David Marcus, formerly with Franklin Resources Inc., and ex-TCW Group Inc. investment chief Jeffrey Gundlach, who started his first mutual funds on April 6.

“So much in this business is about credibility and a manager being able to act in the best interest of the clients,” says Hechmer, who left Nuveen in a disagreement over the firm’s decision to open new funds. “I felt I could do that better on my own.”

The managers are counting on their performance records to win clients from larger rivals after the financial crisis forced nearly 100 firms to close down in 2008 and 2009. Hechmer guided the Tradewinds International Value fund to an annual 6.7 percent return in the five years before leaving Nuveen, twice the pace of its benchmark. Gundlach’s TCW Total Return beat Bill Gross’s Pimco Total Return, the world’s largest bond fund, in the five years through Dec. 4, the day TCW fired him.

“There was a two-year lull in startups, but recently we’ve seen more startups that look exciting,” said Steven Roge, a portfolio manager at R.W. Roge & Co. in Bohemia, New York, an investment firm that manages about $200 million. “There’s been a lot of turnover and shakeup at bigger firms so there’s more activity.”

Seven-Year Low

In the three months ended March 31, 15 companies have started their first mutual funds, triple the rate in the first three months of 2009, according to Chicago-based research firm Morningstar Inc. Formation of new fund firms dropped to a seven- year low of 20 last year from 43 in 2008, according to the Investment Company Institute in Washington, which tracks yearly numbers.

Other asset managers that have opened this year include Ascent Investment Partners in St. Louis, and Balentine LLC, an Atlanta-based firm. Lewis Sanders, the former chief executive officer of AllianceBernstein Holdings LP, and former Janus CEO Gary Black started their own companies last year.

The startups are emboldened by rising investor confidence after the Standard & Poor’s 500 Index advanced 77 percent from a 12-year low reached on March 9, 2009. Investment companies are starting to recover from the global financial crisis that forced them to slash more than 7,500 jobs and replace top executives.

Hechmer’s Departure

Hechmer, known for picking global stocks that he deems cheap based on financial yardsticks, said his firm will offer four funds that will invest in stocks around the world.

Del Rey Global got an undisclosed amount of financial backing from Seattle-based private-equity firm Northern Lights, which raised $80 million for a fund in 2006 to invest in asset- management companies. The firm, which has invested in nine other investment-management companies, is seeing an increase in new firms looking for money, Andrew Turner, Northern Lights’ co- founder and chairman, said in an interview.

“People thought that large firms were a very safe place to be, and clearly that’s not what we saw in the last few years,” Turner said. “One of the good things that new firms have is that they are not wedded to old business models, and in this very fast-changing environment, they’ll find it easier to adapt.”

Gundlach, Marks

Gundlach, too, received financial backing for his new firm after his acrimonious split with his former employer, TCW Group Inc. Oaktree Capital Management LP, the Los Angeles-based firm started by former TCW Group Inc. executives including Howard Marks, took a 22 percent stake in DoubleLine Capital LP. More than 40 TCW employees followed Gundlach to his new firm.

Gundlach, who led the TCW Total Return Bond Fund to top returns over the past decade, omits any mention of his track record in documents filed with the U.S. Securities and Exchange Commission. Under Gundlach and Philip Barach, TCW Total Return returned 7.5 percent in the five years ended Dec. 4, compared with 7 percent by Bill Gross’s Pimco Total Return, according to data compiled by Bloomberg.

“Financial backers like incubating startup asset managers because of the high returns from such investments,” Benjamin Phillips, a Boston-based partner at consulting firm Casey Quirk & Associates LLC, said in an interview. “Right now, there’s a supply of talent and there’s a supply of capital.”

Even with a track record and a sponsor to help fund the firm, new asset managers are at a disadvantage to established companies because they don’t have the distribution channels, investor Roge said.

Failures

New firms have to get on sales lists of intermediaries such as Bank of America Corp.’s Merrill Lynch & Co. and Raymond James Financial Inc. They also have to compete with asset-management firms such as Boston-based Fidelity Investments and Los Angeles- based Capital Group Cos. to get recommended by financial advisers.

“The industry is full of failed startups,” said Charles Burkhart, founder of Rosemont Investment Partners LLC, a West Conshohocken, Pennsylvania-based private-equity firm that invests only in asset managers. “There are a lot of business checkmarks” that companies need to accomplish to be successful, Burkhart said.

Roge, who last year invested in money manager Charles de Vaulx’s new firm International Value Advisers LLC, said he’s considering putting money with Evermore, the startup Marcus founded last year with another former Franklin executive, Eric LeGoff.

Evermore

Evermore Global Value Fund and Evermore European Value Fund can short stocks to boost returns, said Marcus, who began his investment career with Michael Price’s Mutual Series Funds, owned by San Mateo, California-based Franklin. He left Franklin in 2000 to manage a hedge fund which invested in global stocks, especially those in Europe. That fund, MarCap Global LP, rose 65 percent in 2009, at almost twice the pace of the MSCI All- Country World Index. Marcus is winding down the hedge fund after the seed investor left.

Marcus said he teamed up with former Mutual Series colleague LeGoff to open Evermore because he saw an opportunity to gain clients who want the flexibility to invest in a hedge- fund-like product without the high fees. The Evermore Funds charge annual management fees of 0.99 percent. Hedge funds usually charge investors a 2 percent management fee and take 20 percent of profits.

“The crisis woke investors up and they want more for less,” Marcus said. “Firms like ours have the flexibility to offer that to investors,” he said.

Black, Sanders

Black, who led Janus for five years, left the Denver-based firm in July after failing to reverse a decline in assets that began with the collapse of the technology bubble. He started Black Capital Management in October, which will offer long-only and absolute-return strategies to institutional and individual investors.

Former AllianceBernstein CEO Sanders opened Sanders Capital LLC last year after retiring from the U.S. fund unit of French insurer Axa SA. His firm has won a mandate from Vanguard Group Inc. to manage 8.5 percent of the assets in the Vanguard Windsor II Fund.

The new managers can take some comfort from the early success of de Vaulx, the former manager at New York-based First Eagle Funds and a protégé of value stock-picker Jean-Marie Eveillard, said investor Roge. The fund, which was started in October 2008, has attracted $4 billion in assets, Bloomberg data show.