Magazine Issues » July-August 2014

INTERVIEW: Zinser promises a twist in the ECM tale

Stephen ZinserStephen Zinser, CEO of London's ECM, found traction in the US after selling the firm to Wells Fargo. Now he has to sell Europe to the Americans, finds Nick Fitzpatrick.

Stephen Zinser promises to launch an innovative investment management product that targets infrastructure. It will fund infrastructure projects across Europe and the investments will be placed as loans. But Zinser, the chief executive and co-chief investment officer of ECM Asset Management, a credit fixed income specialist, will not divulge what will apparently make the product so unique.

“It will have a twist,” he says, and that’s nearly all he says, except that the product will address institutional disappointment in the sector.

“Our sense is that many institutional investors have been disappointed in the outcome to date from the time invested in implmenting infrastructure allocations,” he adds. 

“There has been a lot of noise in the sector but not that many quality assets on the books. Our infrastructure product lookes to address this situation.”

The pure fact that the product makes investments through loans could itself have been the twist a few years ago when loans were an unusual asset class for mainstream investors. Now though, loan strategies are gaining visibility. 

Not only are they permitted in Ucits funds, but fixed income fund managers have been touting loans as an asset class suitable for a world with rising interest rates, like the more familiar absolute return bond strategies.

From ECM’s perspective, although infra may be new, the London-based manager already runs loan funds. It launched the ECM Loan Fund in November 2008 and the Senior Secured Fund, which employs loans and bonds, in November 2012. 

Zinser says loans are not unusual to European-based investors anymore and that there is also now interest among US investors that want to invest in loans in Europe because the market has better relative value and a more stable backdrop.

Zinser is a former European credit issues specialist at Merrill Lynch and he co-founded ECM – or European Credit Management – in 1999 with Ross Pamphilon, who is co-CIO. Their aim was to take advantage of credit market growth since the introduction of the euro. The firm now has $8.2 billion (€6 billion) of assets under management.

Since then the euro has had a terrible time, of course. Some “hard lessons” have been learnt, he says, but ECM now hopes to increase its assets under management partly with the help of American investors as they look at Europe anew.

Wells Fargo, a US institution, bought a 100% stake in ECM in 2012, and since then ECM has had more exposure to a US customer base. Zinser says this is one advantage of the acquisition. “We don’t have to hire [sales] people,” he says.

ECM has access to Wells Fargo’s distribution, which includes 50 sales people in the US and internationally, and a Luxembourg fund platform.

Yet ECM has found out that a Luxembourg platform can present challenges with the US – a country where Ucits funds, with their very specific European regulations, are not important.

The problem ECM or any manager in its position faces is to do with the Global Investment Performance Standards (GIPS). Though not mandatory, it is generally necessary to be GIPS-compliant in the US; this is not the case in Europe. 

“Whereas in Europe people want to see a fund with a three-year track record, in the US, people often do business in segregated accounts and so strategies are aggregated into one overall GIPS number that captures the entire track record across a range.” ECM has acquired the GIPS for US purposes, says Zinser, and the firm is finding US traction.

This is partly because US investors are looking more favourably at Europe, Zinser, who is also America, says.

“A few years ago, US investors saw Europe as a giant distressed opportunity, but they realise it’s different today. 

“There are oportuntiies in both loans and bonds in Europe. European high yield is viewed positively in Europe and Japan but that view is not shared in the US which, in my view, sees European high yield as toppy. All three regions are positive on the loan market.”

Even though Zinser says the flows are still small, ECM is tapping deeper into pension funds, endowments and insurers. 

This should help to achieve a major objective, which is to increase funds under management at the expense of fixed maturity notes that are historically a key part of ECM’s business. Ratings agency Fitch said in a March report into ECM that notes still formed 60% of assets under management. Fitch described the need to reduce reliance on these as a strategic priority for the firm.

Zinser says: “The model had to be restructured away from notes. Notes may come into fashion again one day and they are a very good structure, but the growth now is in funds. Managing that change has a been a key part of my job.”

Investment performance has been “good across the board” in the past six years, Zinser says.

Nevertheless, the hard lessons he talks of through the financial crisis period led to a change in the investment process when the firm realised a need to strengthen its top-down analysis to complement its fundamental credit analysis, which Zinser says is strong. 

“We felt we had to beef up the top-down process. Each credit asset class behaves differently depending on where we are in the economic and credit cycle and getting the mix right in asset allocation needed an enhanced top-down process.”

He says ECM was ahead of the eurozone crisis, having only a small exposure to the problematic periphery, but the firm bought back into these countries a little late. However, Zinser says also that ECM bought back into fixed income in a more timely manner after the May 2013 Federal Reserve announcement that it would start to taper its stimulus measures.

“We did the ‘taper tantrum’ well. We may not have necessarily predicted the magnitude of the volatility but we bought back in quickly afterwards,” he adds. Performance has been “solid” owing to a modest overweight in certain asset classes. 

ECM’s Absolute Return Credit Fund, which invests in investment grade credits, made a small loss of 0.05% in June after the taper announcement but the year saw a net return of 3.27%. The fund’s five-month return to May 30, 2014, was 1.55%.

With absolute returns and loans strategies, not to mention total return strategies and now infrastructure, ECM is about as complete in terms of product as a credit specialist could be.

Now we just have to wait and see where the promised infrastructure twist takes the business.

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