Being David Amid Financial Service Goliaths Has Advantages
What future can there be for Payden & Rygel, a smallish Los Angeles money management partnership, when the entire world of financial management is going global and seems to be consolidating into giants?
Possibly a very bright future, but the firm, founded 16 years ago by Joan Payden, will have to be nimble.
In the latest big deal, majority ownership of Pimco Advisors Holdings of Newport Beach, the largest bond management company in the United States, is being acquired by Allianz of Munich, Germany, a diversified insurance firm that already manages $360 billion. With Pimco’s $250 billion in assets, the merger will create one of the world’s biggest investment managers.
Other European firms have reached out to acquire U.S. expertise in investment management, a growing field as the Continent awakens to the need for private pension funds and retirement plans for millions of aging employees.
Zurich Financial Services Group of Switzerland owns Scudder Stevens & Clark, the firm for which Joan Payden ran West Coast operations before starting Payden & Rygel in 1982.
Major U.S. financial service firms--Merrill Lynch, Goldman Sachs, the enormous Citigroup--are also bulking up in money management, seeing it as more stable than trading as a source of earnings.
Yet Payden and her top managers, many of whom are partners with stock in the firm, have no intention of selling Payden & Rygel, which now manages $28 billion, mostly in fixed income investments for corporations, unions, universities and municipal clients.
The partners, led by Payden who owns 70%, think size is relative and being small allows focused money management. “We thought of opening an East Coast office but decided it would be a distraction for our collegial decision making,” Payden says.
As to Europe’s opportunities, her company formed a joint venture last year with Germany’s Metzler Bank, a centuries-old private bank. The venture has given Payden & Rygel entree to accounts in Europe as well as a mutual fund of European growth companies to sell to U.S. clients.
Payden earned a degree in mathematics and physics at Trinity College in Washington and worked as an engineer before taking up money management in the 1960s--”I was hired at a 25% discount because I didn’t know the difference between a bond and stock,” she says.
She believes that financial markets in Europe are going to grow dramatically. “The euro and debt markets in Europe will develop faster and bigger than most Americans realize,” Payden says.
She is not alone in that judgment. Pimco’s chief bond manager William Gross says the main reason his firm sold a 70% interest to Allianz is the German company will give Pimco worldwide distribution. “They have 35,000 agents and the ability to offer Pimco funds and expertise all over Europe and also in Japan,” Gross says.
He and his professional staff of 90 will remain in Newport Beach, where they will get an additional $100 billion of investments to manage from Allianz.
The foreign companies are drawn to U.S. markets for their great variety of debt instruments, from municipal and corporate bonds to mortgage-backed securities and high-yield bonds.
Perhaps improbably, Payden & Rygel is playing in such big leagues because it has attained high status as a specialized money manager. The colossal firms, Merrill Lynch and others, engage in numerous areas of investment management. But in fixed income securities, such names as Fischer Francis Trees & Watts of New York, Pimco and Payden & Rygel rank high.
Joan Payden, who was the first woman to become a managing partner of Scudder Stevens in the 1970s, built it shrewdly.
“She was smart to create mutual funds so her firm had a standardized product to offer relatively small pension funds,” says Patricia Klink, head of Advisers Capital Management, a Santa Barbara-based manager of bonds and commercial paper.
Payden & Rygel’s 250 clients include retirement funds of Hoag Memorial Hospital, Texas A&M; and the corporate cash accounts of Amazon.com.
She saw the need for overseas exposure early and brought out a global bond fund, concentrated in British, Canadian, Australian and New Zealand issues, in 1988.
Now Payden & Rygel has offices in London and Dublin for distribution of its funds in Europe as well as the link with Germany’s Metzler.
But global bond markets won’t be easy to navigate. Nor have they been lately. “The greatest debacles of this decade have been in bond markets,” notes Scott Weiner, who heads the Metzler-Payden joint venture. “In 1994, bonds collapsed when the Federal Reserve raised interest rates and last year when the Russian economy went down.”
Right now, bond markets are lacking liquidity--meaning it is hard to trade many grades of bonds without giving up enormous differentials in pricing. One reason is that very large firms are refusing to hold inventories of bonds for fear of losses if prices fall because of Y2K.
But such minefields offer opportunities for her firm to offer bond management, Payden says. “There are always worries. When I set up the company, I worried I wouldn’t get clients. But that was no problem. The real challenge was hiring the right people.”
Now she has eight junior partners--seven men and one woman--in a firm that earns more than $50 million a year and might fetch a price approaching $3 billion, based on what Allianz is paying for Pimco.
But Payden isn’t impressed by the big money, and her partners think they can do better on their own, managing investments from Southern California--a significant center of money management, with Pimco, Trust Co. of the West, Capital Group and many others. “To Europeans, California is the exciting place to be,” Payden remarks. “They think more globally and are less provincial than many Americans.”
