Guggenheim Grows Beyond Its Insurance Roots Pension Plans, Endowments, Foundations Now 30% of AUM

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August 5, 2013 PIonline.com

THE INTERNATIONAL NEWSPAPER OF MONEY MANAGEMENT

Money Management Guggenheim grows beyond its insurance roots Pension plans, endowments, foundations now 30% of AUM

By RANDY DIAMOND 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, GROWING: Todd Boehly says the firm will use $700 million in financing for a broker-dealer. Mark Walter, Liberty Hampshire’s CEO and co- expansion and debt refinancing. founder, is CEO of Guggenheim Partners, Guggenheim Investments’ parent. Boehly, who is based in New York, said in an interview. He wouldn’t Neither Guggenheim Investments — based in Santa Monica, say how much debt the firm has. Calif., and New York — nor its parent discloses financial information. Borrowing terms were LIBOR plus 325 basis points, with a LIBOR Still, the money manager has been successful enough to help floor set at 100 basis points. Mr. Boehly said the loan was Guggenheim Partners lead groups of investors buying controlling Guggenheim Investments’ first foray into the capital markets. stakes in various life insurance companies, as well as to expand into He said the money will be used to refinance debt and expand, investment banking in 2011. opportunistically. He wouldn’t be specific. One possible use: acquir- The strength and stability of the investment management busi- ing another money management firm or other investment teams. ness is an important component of the value that has been created at Guggenheim Partners, President Todd Boehly said in a state- ‘Always talking’ ment. “This value has helped support the overall growth of In a separate interview, Santa Monica-based Scott Minerd, global Guggenheim Partners, in both asset management and chief investment officer for both Guggenheim Investments and Guggenheim’s other businesses.” Guggenheim Partners, said, “We are always talking to people about (A consortium led by Mr. Walter and that includes Mr. Boehly acquisitions.” formed Guggenheim Baseball Management and purchased the Los In 2009, Guggenheim Partners purchased Claymore Group, an Angeles Dodgers last year.) exchange-traded funds provider, following up in 2010 with the Guggenheim Investments, meanwhile, got a capital injection July acquisition of Rydex SGI, a money manager with a large ETF con- 22, receiving $700 million in new low-cost financing in the form of a centration. seven-year term loan from a consortium of five banks. It will be used But the biggest potential deal never happened. to refinance higher-cost debt and expand opportunistically, Mr. “We couldn’t come to terms,“ said Mr. Minerd of the publicly dis-

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closed, unsuccessful negotiations between Guggenheim Partners and An advantage Deutsche Bank in 2012 to purchase of part of Deutsche’s asset man- Mr. Boehly, Guggenheim Investments’ president, said agement business. Guggenheim’s status as a private company is an advantage A successful deal could have added more than $500 billion to because the company can be thoughtful about its growth and not Guggenheim’s AUM, although talks were scaled down after months have to adhere to Wall Street’s desire for continued earnings of negotiations to the sale of just one Deutsche asset unit — its $63 growth each quarter. billion RREEF division, which focuses on real estate investments. Not all of Guggenheim’s investment strategies have been success- In another deal, an investor group organized by Guggenheim ful. Since March 23, 2012, the company has liquidated 21 ETFs, Partners and that includes unidentified Guggenheim shareholders, according to data from Morningstar Inc., Chicago. Some were completed the $1.35 billion purchase of the annuity business of launched by Guggenheim; some came with the acquisitions. Canadian insurer Sun Life Financial Inc. on Aug. 2. The large number of ETF closures raises questions as to whether Guggenheim Investments will be managing several billion dollars there was adequate due diligence before opening the strategies in the of the general account assets of the company, said Mr. Minerd. first place, said Josh Charney, alternatives investment strategist at Acquisitions aside, Mr. Minerd — who is very visible as a market Morningstar Inc., Chicago. commentator — attributes most of Guggenheim Investments’ AUM increase to organic growth fueled by the company’s bottom-up, fun- damental 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 BOOMING: Scott Minerd says Guggenheim Investments’ bottom-up funda- include securities from the firm’s middle-market direct lending secu- mental investment approach is the powerful engine driving the firm’s contin- ritization, aircraft leasing and infrastructure teams. These securities ued growth. 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 Mr. Charney said while Guggenheim’s corporate culture nurtures Guggenheim’s largest strategy — core institutional fixed income, with innovation, it can be a double-edged sword, because those strate- $77.7 billion. It handily outperformed the Barclays U.S. Aggregate gies that are too niche are at risk of being cut because of a lack of Bond index and almost every other core fixed-income strategy dur- investor interest. ing the 10 years ended June 30, according to data from eVestment Mr. Minerd said of the 21 ETF's that Guggenheim closed, 16 were LLC, Marietta, Ga. legacy Claymore or Rydex ETF's. A significant number of these For the 10 years ended June 30, the composite returned an annu- were closed because of redundancy between the Claymore and alized 6.56%, vs. 4.52% for the Barclays’ index and 4.98% for the medi- Rydex ETF product lines, he said. an core fixed-income manager, eVestment data show. Guggenheim has gotten some negative attention from news that Its five-year numbers are even better: Guggenheim’s composite the Securities and Exchange Commission was investigating returned 8.91% vs. 5.19% for the benchmark and 6.07% for the medi- whether Michael Milken advised on investment transactions at the an manager, according to eVestment. firm. Mr. Milken, the infamous junk bond king who served time in Mr. Minerd said AUM at Guggenheim Investments has grown 20% prison for securities fraud, is allowed to manage his own money but a year on average since the firm’s founding, and that even if it slows is barred for life from acting as an investment adviser or broker. to 15% a year, assets will double in five years. Mr. Minerd said Mr. Milken is a valued client, but he could not dis- The CIO is not worried about growing too big. He insists cuss the matter further. In a statement in March, Guggenheim Guggenheim’s investment approach is scalable and will work as the Partners officials said Mr. Milken, “does not have an ownership or firm becomes bigger. managerial role in the firm in any way, shape or form.” Ⅲ

The content above has been adapted from a longer article which originally appeared in the August 5, 2013 issue of Pensions & Investments. Reprinted with permission from Crain Communications Inc., ©2013.

© Entire Contents copyright by Crain Communications Inc. All rights reserved. The article referenced herein is for informational purposes business units including Guggenheim Real Estate, Guggenheim only and should not be considered as investment advice Aviation, GS GAMMA Advisors, Guggenheim Partners Europe, or a recommendation of any particular security, strategy or Transparent Value Advisors, and Guggenheim Partners investment product. The article should not be considered India Management. Values from some funds are based research nor is the article intended to provide a sufficient upon prior periods. basis on which to make an investment decision. Any opinions The reference to a “composite of Guggenheim’s largest contained herein are not necessarily those of Guggenheim strategy – core institutional fixed income” in the article means Partners, LLC or its subsidiaries and are subject to change Guggenheim’s Core Fixed Income Composite (the “Composite”). without notice. Forward looking statements, estimates, That Composite is comprised of accounts with a total return and certain information contained herein are based upon objective and invests in broadly diversified portfolios of proprietary and nonproprietary research and other sources. primarily investment grade fixed income instruments, rotating This reprint has been provided by Guggenheim Investments opportunistically among sectors where perceived relative value and certain affiliated entities, including Guggenheim exists. Derivatives may be used to hedge interest rate and credit Distributors, LLC and Guggenheim Funds Distributors, LLC. risks. Leverage may be employed when appropriate market Guggenheim Investments represents the following affiliated conditions exist. Derivatives are used to hedge various risk investment management businesses of Guggenheim Partners, components of the composite and may make up a material LLC: Guggenheim Partners Investment Management, LLC, part of the composite strategy. Interest rate derivatives are Guggenheim Partners Europe Limited, GS GAMMA Advisors, used to hedge interest rate risk and credit default derivatives LLC, Guggenheim Aviation, Guggenheim Funds Distributors, are used to hedge underlying credit risk. The use of leverage LLC, Guggenheim Funds Investment Advisors, LLC, may be employed when appropriate market conditions exist, Guggenheim Partners India Management, Guggenheim generally in the form of reverse repurchase agreements and Real Estate, LLC, Security Investors, LLC and Transparent securities lending. Value Advisors, LLC. This material is intended to inform For comparison purposes, the Composite is measured against you of services available through Guggenheim Investments’ the Barclays U.S. Aggregate Index. The Barclays U.S. Aggregate affiliate businesses. Index represents securities that are SEC-registered, taxable, Guggenheim Investments Assets Under Management (AUM) and dollar denominated. The index covers the U.S. investment is as of 6.30.2013 and includes $11.720B of leverage. AUM grade fixed rate bond market, with index components for includes assets from Guggenheim Partners Investment government and corporate securities, mortgage pass-through Management, LLC, Guggenheim Funds Investment Advisors, securities, and asset-backed securities. Benchmark returns Security Investors, LLC and its affiliated entities, and some are not covered by the report of independent verifiers.

INVESTMENT RESULTS as of 06.30.2013 YTD 1 YR 3 YR 5 YR 7 YR 10 YR SI (01.01.1999)

Guggenheim: Core Fixed Income Composite (Gross) -0.53% 4.58% 8.08% 8.91% 8.00% 6.56% 7.01%

Guggenheim: Core Fixed Income Composite (Net) -0.78% 4.06% 7.54% 8.37% 7.46% 6.04% 6.48%

Index: Barclays U.S. Aggregate -2.44% -0.69% 3.51% 5.19% 5.60% 4.52% 5.39%

Manager Universe Comparison*:

Percentile Rankings 4 2 1 1 2 1 2

Median - Manager Return -2.28% 0.33% 4.29% 6.07% 6.13% 4.98% 5.79%

# of Observations 250 250 246 241 229 210 152

GuggenheimPartners.com *Manager Universe Comparison Guggenheim Investments Composite peer rankings represent All investments have inherent risks. Gross-of-fee (“Gross”) percentile rankings which are based on monthly gross of returns are presented net of non-reclaimable foreign fee returns and reflect where those returns fall within the withholding taxes applicable to U.S. investors and includes eVestment Alliance (“EA”) U.S. Core Fixed Income Universe. the reinvestment of income. Net-of-fee (“Net”) returns are Rankings data as of 06.30.2013 was obtained from EA on calculated by reducing gross-of-fee returns by the strategy’s 07.23.2013. EA provides third party databases, including the highest applicable management fees, which includes incentive institutional investment database from which the presented or performance fees where applicable. Performance numbers information is extracted. The EA institutional investment for time periods greater than one year are annualized. database consists of approximately 1,680 active institutional All performance is expressed in U.S. dollars. Index data managers, investment consultants, plan sponsors, and source: RIMES. other similar financial institutions actively reporting on The views and strategies described herein may not be suitable approximately 10,350 products. Additional information for all investors. Investors are urged to consider carefully regarding EA rankings is available on EA’s website. whether such services in general, as well as the products Past performance does not guarantee future returns. The value or strategies discussed in this material, are suitable to their of any investment may rise or fall over time. Principal is not needs. Fixed income investments are subject to credit, guaranteed, and investors may receive less than the full amount liquidity, interest rate and, depending on the instrument, of principal invested at the time of redemption if asset values counterparty risk. These risks may be increased to the extent have declined. Individual account performance may be greater fixed income investments are concentrated in any one issuer, than or less than the performance presented for this composite. industry, region or country. The market value of fixed income Composite results are not meant to represent the performance investments generally will fluctuate with, among other things, of any fund and are not intended to predict or suggest returns the financial condition of the obligors on the underlying debt that might be experienced by a fund. Given the inherent volatility obligations, general economic conditions, the condition of of the securities markets, it should not be assumed that certain financial markets, political events, developments or investors will experience returns comparable to those shown trends in any particular industry and changes in prevailing here. Market and economic conditions may change in the future interest rates. In general, any interest rate increases can producing materially different results than those shown here. cause the price of a debt security to decrease and vice versa.

9821 GuggenheimPartners.com