“The best-kept secret in Los Angeles is how much money is being managed here,” says Jim Muzzy, managing director of Pacific Investment Management Co., a Newport Beach firm with more than $13 billion in assets.
The main reason for this “secret” may be that it is still so new. Over the last half a decade, a flood of money has poured into Southern California, seeking savvy management. Not surprisingly, existing money-management firms have expanded and a rash of new firms has sprung up to accommodate it.
The Southland has emerged, almost overnight, as a major investment center, and experts believe that management of wealth will become a significant factor in the local economy over the next decade. There are even some so bold as to predict that Los Angeles may rival New York or London as a financial center by the turn of the century.
Los Angeles area money managers--the experts who invest the wealth created by their corporate or individual clients--controlled about $100 billion in 1986, according to E. Herbert Hafen, senior consultant for the Consulting Group, a Bateman Eichler, Hill Richards subsidiary that acts as adviser to pension funds and other large financial institutions. Add investment managers such as banks and insurance companies, says Hafen, and the total rose to $150 billion--a whopping 88% jump over 1984, when funds under local management amounted to just $80 billion.
To be sure, this explosive growth was due partly to the long-running bull market on Wall Street, which increased portfolio values of money managers everywhere. The value of stocks on the Standard & Poors 500 list increased at a 28% annual rate over the past four years. That has changed, of course, with the recent dramatic selloff which sent portfolio values into a tailspin. But local money managers say that because a significant portion of their assets are invested in bonds or cash investments, the overall value of money managed here has not dropped precipitously as a result of the Oct. 19 stock market crash.
And not all of the local increase in money management can be traced to the bull market. Los Angeles firms clearly have captured new monies above and beyond portfolio appreciation, although “there’s no way of quantifying it,” Hafen says.
Trust Company of the West Managing Director Tom Larkin, whose firm has grown to $13 billion in assets since its launch 16 years ago, figures that half his firm’s growth stems from portfolio appreciation and half from new clients lured by the investments it offers in leveraged buyouts, high-yield “junk” bonds and other non-traditional products.
Only a handful of the 140 Southland firms handling accounts of wealthy individuals or institutions--pension funds, foundations, university endowments and union and government-employee benefits--are more than 20 years old. According to pension consultant Wilshire Associates, at least six management firms have appeared in the last year alone.
The growth has been “mind-boggling,” says Robert Kirby, chairman of Capital Guardian Trust, which at age 56 is the Methuselah of local money managers. With more than $17 billion in assets, Capital Guardian is also Southern California’s largest firm specializing in money management.
Add to this the expanded role of the region’s banks and insurance companies, which also manage sizable portfolios for major clients. For instance, Wells Fargo Bank’s investment advisory unit, with $71 billion under management as of Aug. 31, reigns as California’s biggest funds watcher.
Money managers typically make investment decisions on behalf of their clients, buying stocks, bonds, real estate or other things to increase the value of a portfolio. Increasingly, money managers have specialized in areas such as junk bonds, company buyouts or small, non-public stock issues.
That trend has favored Southern California, whose money managers have become known for their expertise is specialized investments. The junk bond market, for instance, developed largely as a result of the success of mega-manager Michael M. Milken at the Beverly Hills office of investment firm Drexel Burnham Lambert.
Despite the enormous growth, however, Los Angeles has a long way to go before it overtakes its larger competitors in the money-management field. According to Hafen, local firms, banks and other entities command a market share of about 4.5%, roughly equivalent to that of San Francisco. In contrast, Boston weighs in with 10% of funds under management and New York with a whopping 29%.
But Southern California firms have not been around as long. East Coast money managers have far longer track record, a significant consideration in a business based almost entirely on trust between client and manager.
That isn’t stopping new entrants from seeking to manage a portion of the wealth pouring into Southern California. Among the most visible are investment banking houses, which may wield discretionary power over clients’ funds or simply advise institutions and individuals on how and when to trade.
Many of the biggest Eastern investment bankers have dramatically expanded their Southern California operations. For example, Goldman Sachs has doubled its Los Angeles professional staff to more than 120 in the past two years.
Venture capitalists, the firms that find money for riskier investments such as new businesses, have also contributed to money-management growth. Brentwood Associates, the largest Los Angeles venture firm, boasts assets of $300 million, compared to less than $100 million only five years ago.
Most of the money under local management isn’t local. For instance, more than 70% of Capital Guardian’s institutional clients are based outside of California, a figure corroborated by several other major money managers. In part, money managers say, that’s because the number of Fortune 500 companies with hefty pension plans headquartered in California is far smaller than in the Northeast.
At one time, Los Angeles area managers claimed a slightly different approach to investing: They argued that they were less susceptible to the steady stream of Wall Street rumor and thus less likely to make panicky decisions. They also tended to know more about their territory, says Hafen: Five years ago, “you could pretty much tell a California-managed portfolio because it had so many technology stocks.”
But those distinctions have blurred. Apart from their individual strengths and weaknesses, there’s nothing to distinguish West Coast firms from those on the East Coast, industry officials say.
Southern California investment managers still tend to be more familiar with California companies, Trust Co.'s Larkin argues. “A lot of people who hire West Coast firms are looking for geographic diversity,” he says. Hafen believes that local managers are more prone to invest in the stocks of younger, newly capitalized companies, reflecting the region’s tradition of entrepreneurism.
Not surprisingly, the region’s money managers now are eyeing the Pacific Basin as a source of new business: “There’s no question there’s a huge potential market there,” Larkin says. But it has yet to materialize.
Local money managers say that despite evidence of considerable Japanese capital pouring into Los Angeles, Japanese firms thus far have preferred to retain Japanese banks and brokerage firms to make their investment decisions. Says Muzzy: “We’ve discovered Europe and Japan as far as money management, but the opposite isn’t yet true.”
Some are making forays, however. Trust Co. and Pacific Investment, for example, have dispatched representatives to Japan to court customers.
Just how successful the firms will be in attracting Japanese clients is still a question. According to Kirby, Japanese investors tend to be short-term investors in U.S. equities. “One has yet to prove there’s a growth opportunity there for money managers,” he says.
Investment banking houses don’t seem to share that hesitation. Several have opened major offices in the Far East, and Bear, Stearns & Co. has agreed to sell a 20% interest to Hong Kong trading house Jardine Matheson Holdings. “Somewhere down the line there might be money from Hong Kong managed here and money from here managed there,” says Marshall Geller, Bear Stearns senior managing director.
There also may be more individual wealth to manage which, unlike institutional funds, tends to be invested with managers or brokers closer to home. Southern California is “full of entrepreneurs, deal people, people who really have a desire to create,” Geller says.
That translates into first- and second-generation wealth, which--unlike foundations established three or four generations ago and ruled by bank trust departments--tends to be controlled by the people who created it. Such individuals are more likely to depend on investment bankers, where they have input into decisions, than on money managers who have been granted carte blanche. “The thinking is, ‘It’s my money. I can do it better,’ ” says Goldman Sachs co-resident partner Richard Atlas.
That augers well for investment bankers courting rich individuals. According to Atlas, such individuals typically place 50% to 90% of their assets with a single broker or management firm.
Such entrepreneurial activity may attract more venture capital as well. “One sort of feeds on the other,” Brentwood’s Jones says. “The more venture capital, the more money there is to start companies and vice versa.”
But all the growth could create a problem for local money managers. In the next few years, they are likely to come under intense fee competition. Some big clients already are griping that while the value of their assets has risen dramatically along with the stock market, money managers’ costs stayed virtually flat while fees--a percentage of a transaction’s value--have soared. Admits one manager, “The value added has been zilch.”