Guggenheim Looks to Europe to Diversify

Financial services firm Guggenheim Partners has attracted attention recently for its involvement in high profile deals: it led a group of investors in buying the Los Angeles Dodgers baseball team and helped engineer Verizon's $130 billion acquisition of Verizon Wireless.

But it is the firm's lower-profile asset management division that has been winning investors' interest of late. The division has quietly quadrupled its assets under management from $40 billion at the end of 2008 to $164 billion at the end of September and now represents the lion's share of its parent's $190 billion in assets under management.

Notably, investors poured more than $4.6 billion into Guggenheim's signature bond funds and exchange-traded funds in 2013 - the same period when they were draining more than $44 billion out of bond funds from Pacific Investment Management Co (PIMCO), the firm known for its fixed income expertise, according to Morningstar data.

Now Guggenheim Partners is looking to Europe to continue fueling its growth, which may result in additional products for asset management clients looking to diversify outside of U.S. fixed income as interest rates are expected to rise.

Guggenheim Partners this month opened a London office focused on real estate investing and plans to expand its direct lending to middle market companies in Europe. While both efforts stem from opportunities the parent company sees to grow outside of asset management, it could result in products for fund investors looking for alternatives outside of the U.S., consultants said.

Ultimately, Guggenheim wants to boost its profile with retail investors, which makes up about 25 percent of its business.

"We used to joke that we were the best kept secret in the investment management business," Scott Minerd, chief investment officer of the firm, told Reuters in an interview. "That is what we are trying to change."

ATYPICAL BOND FUNDS

Guggenheim, with a fixed-income specialty, has won investors in a challenging bond environment because it specializes in funds that invest in either niches of the market, like bank loans, or have the ability to invest across several fixed income sectors. These funds are believed to better withstand the rising interest environment the Federal Reserve is expected to usher in than core fixed income funds.

U.S. investors are expected to move $1 trillion away from core fixed income strategies into areas like floating-rate instruments and multi-currency portfolios, according to Casey Quirk & Associates, a Darien, Connecticut-based consultant to investment managers.

Guggenheim's most popular bond fund, the Guggenheim Floating Rate Strategies Fund, attracted $864 million in the first 11 months of 2013.

Minerd recognizes that Guggenheim shares the challenge that many fixed income fund managers face today in that the booming equity markets have grabbed investors' attention.

Though the Guggenheim name might have resonance - the firm started as a private office managing the fortune of the famous family that endowed the New York art museum - it doesn't have the brand power that PIMCO does, nor does it have a talking head with the star power of PIMCO's co-chief investment officer, Bill Gross. That could hold the company back.

"Guggenheim has really made a good name for itself on obscure, off the run sectors," said one former employee who wished to remain anonymous. "(But) it's hard to commercialize and in this business you really need a signature product."

Minerd said that the firm's jump in assets under management is proof, however, that investors are aware of its funds' performance.

EUROPEAN OPPORTUNITIES

While Guggenheim's ambitions in Europe go beyond asset management, the firm's added capabilities may help that business grow.

Because Guggenheim has its hand in so many different businesses, ranging from asset management to private equity, it can build products around these two new businesses as it sees fit, said Todd Boehly, president of Guggenheim Partners.

So, for example, if there is an opportunity to create a fund leveraging its real estate investing expertise out of London, the firm can do so, but it can also bring an investment opportunity to its private equity clients, he said.

Guggenheim also plans to buy at least some of its growth in Europe, both in asset management as well as other areas.

So far, the firm has been daunted on at least two deals: It lost an October bid for Lloyds Bank's fund management arm Scottish Widows, according to people familiar with the deal. Aberdeen Asset Management ended up winning that business for 660 million pounds ($1.1 billion). The firm also saw a 2012 deal to buy Deutsche Bank's AG 's asset management business for 1.4 billion euros ($1.81 billion) fall apart.

And the European asset management space is becoming increasingly crowded as more U.S. firms look to grow there, particularly in the fixed income space, said Yariv Itah, a partner at Casey Quirk.

But Guggenheim remains undeterred. "I think that a number of the banks in Europe are going to be under capital pressure and will be looking to potentially sell their asset management businesses and I think we will look at them," Minerd said.