October 2008

PAYDEN & RYGEL: The World on your Doorstep

Payden & Rygel has been in Europe for ten years and has built a business on gaining global exposure through simple fund structures, finds Nick Fitzpatrick ... robincresswell.jpg It is 25 years since the launch of Payden & Rygel in Los Angeles and Joan Payden, CEO and president, is in London the week following the collapse of Lehman Brothers.

“What about investment managers in this crisis?” she asks. “And what about the clients? It’s all about the banks now, but I think in the next few weeks when the crisis abates a little you will see more comment on the management aspects of institutional funds.”

At least Payden will have a clean conscience. The firm rebutted a large investment bank that tried to sell collateral debt obligations (CDOs) to it two years ago. Payden says the sales pitch made everyone involved in the CDO – from issuer, to manager, to client – sound like a winner. Payden declined to buy. Whichever investment bank it was, it is almost certainly now either bust or sold.

A prudent approach
Payden was called conservative at the time for the firm’s distrust of such instruments, but the criticism seemed hollow in September 2008, and while turmoil ensued among the banks that month, Payden & Rygel continued to enjoy a birthday year.

Joan Payden reflects that there are relatively few independent asset managers around today since the banks, finding the business profitable, have bought up so many fund management names. Payden & Rygel has managed to stay independent for a quarter of a century and Payden says her firm, which has $55bn (£29.8bn) of assets under management, will remain independent. “People come around and bang on our door quite often, but we’re not for sale.” Being independent means she doesn’t have to worry about what newfangled products the bankers next door are selling to clients, she says.

Importantly for the firm, this year also marks ten years since Payden & Rygel launched into the UK and Europe. Payden appointed Robin Creswell, who had previously worked at Man Group, in 1998 to launch and run the UK and European business. As part of its strategy, Payden and Rygel Global, as the firm is called in Europe, formed a joint venture in Germany with Metzler, the country’s oldest private bank.

The European business now has clients in Asia and the Middle East as well as Europe, and these include pension funds, foundations and sovereign wealth funds.

Ten years ago, says Creswell, there were not many US specialist investment managers trying to enter the global market place. A lot of managers that tried, failed, he says.

“US managers tried to land first in Europe and then do the same in Asia. But European opportunities tended to fall foul of disparate regulatory regimes and cultures, while Asia just wasn’t ready for those kinds of businesses.”

Creswell says Payden’s success rested on an institutional-only focus and on not rushing into every single jurisdiction.

A sterling idea
But crucial also was the firm’s belief that it could bring the world to local investors through smart product development.

“At that time, the City was changing. The euro was in and sitting on Britain’s front lawn. You had a Europe that was looking to become more international and the British wanted to compete with it. We wanted to be strong in Europe and the UK at the same time, so the timing was good.”

The break came with the offer of a cash mandate, which Payden was able to engineer to gain global exposure.

“When a large sterling-based institution asked us to run a cash mandate, we did not just think of investing it in the sterling cash market. We knew there were all manner of global bonds that we could hedge back to sterling and pick up yield.

“Institutions that we approached with our idea were willing to look at this. They were yield-hungry UK institutions and charities following several years of declining interest rates.”

Payden created a sterling-based income fund with 30 exposures to non-UK bonds hedged back to sterling.

“The non-UK exposure meant that we could have foreign high-yield, Eurobonds and global corporate bonds in the portfolio. Before, if we had run a sterling mandate like this with 15% targeted at high yield, it would have been restricted to the UK high-yield market, which was only small, and there would have been no exposure to the euro or any other market.”

Creswell says this led people to realise there were other economies out there that could be invested in relatively efficiently.

Payden also launched an international bond fund “that truly was international”. The fund initially hedged to sterling, the dollar, euros and yen, and later added other currencies, and again helped investors attain a global exposure.

If Payden is an innovative, rather than conservative firm, then its innovation is also revealed in its approach to Ucits 3, the European fund structures that allow the use of derivatives. “Our main Irish fund vehicle is a Ucits fund. In Ireland, you can choose to be a Ucits 3 ‘non-sophisticated’ investor or a ‘sophisticated’ investor. ‘Sophisticated’ means you can use derivatives for investment purposes.

“When we looked at the guidance for sophisticated investors, it looked challenging. We decided that we would be one of the first sophisticated investors to become fully Ucits 3-compliant.

“We developed a model that gave us the ability to act as a sub-contractor to our clients who could not do their own Ucits 3 compliance and we now have a number of UK high street bank funds that have offshore Ucits 3 funds and have delegated their Ucits 3 compliance to us. We are also the manager of these funds. With this we have won mandates that we could otherwise have not won.”

The firm was quite late to market its equities products in Europe.

“We launched global equities three years ago. We were running equities before, but we only chose to market this out of London three years ago.  This is because we had a certain number of objectives when Payden launched in Europe, but of course resources are limited so we chose to become well known in fixed income first.”

When markets dived last year, Payden was quick to flag up its liquidity funds, and this type of product is where the firm expects innovation to head. Creswell says he expects corporate treasurers to cause a revolution in the way that surplus cash is managed.

“Corporate treasurers are understandably worried about managing their cash. They tend to think a lot about the funding of their business, but are limited as to where surplus cash can best be deployed.”

Surplus cash
He adds: “Of course, some of their day-to-day operating cash should be in the bank. But surplus cash can be better managed. We do not think money market funds and banks are the best people to handle this surplus.

“For example, US money market funds are constituted under the US Money Market Act. Their NAVs may not vary by more than 0.1% a day! But they still contain securities we consider unsuitable for the purpose. Several funds had to be supported with cash injections from their managers this year.”

Creswell expects that over the next twelve months a “true corporate cash management system” will develop in Europe.
Beyond this, Creswell thinks Payden should offer a another high-income global bond fund.

“Fund managers are now in a familiar environment in terms of interest rates, with a differential between British, European and US short term rates and opportunities to add value from global credit spreads.  We would probably do well to offer another high-income global bond fund. It’s a great time to be global.” ©  2008 Funds Europe

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