By : Steve Garmhausen | January, 19 2009
A nightmare for most other institutional portfolio managers has been a boon for BNY Mellon Beta Management.
Mark Keleher, the Bank of New York Mellon Corp. unit's chief executive, said the economic turmoil has created more business for his operation and that he expects its assets under management to at least double this year as demand increases for liquidity.
"I think we're still very much in the initial stages," Mr. Keleher said in an interview last week. "Once liquidity starts to return to the market and people can physically rebalance, we might see less demand, but it's still a good long-haul business." Clients "are facing a very illiquid market and they have ongoing cash needs."
BNY Mellon Beta Management has a specific mission: to help institutions meet their asset allocation goals during market turmoil, using futures, forward agreements, and other instruments to help institutional clients gain liquidity. It announced last week that it passed the $1 billion mark in assets under management in less than 18 months.
October was a strong month, as institutions sought help in the wake of Lehman Brothers' bankruptcy filing. "After the Lehman collapse, I think people took a real hard look at counterparties and counterparty risk, and at whether they really wanted to do this themselves," Mr. Keleher said.
For investment managers, the combination of illiquidity — specifically within fixed-income holdings — and depressed stock is a conundrum. Their institutional customers need cash to meet their obligations, which range from employee benefits to charitable grants to capital calls from private-equity managers.
The question is where to get the cash. Selling stocks would lock in steep portfolio losses and exacerbate the overweighting of fixed-income holdings, which have become a larger percentage of portfolios because stocks' values have declined faster than bonds.
That can mean that a portfolio designed to be 60% equities and 40% bonds is now 50% bonds and 50% equities, Mr. Keleher said. Institutions can sell bonds to buy more stocks, but they are struggling to find buyers, he said.
Selling fixed-income holdings is difficult because there is so little demand in the markets for many of the investment types in that category, Mr. Keleher said. "Until six or nine months ago it was relatively easy to sell most fixed-income securities," he said. Then equity markets fell and credit-related fixed-income values sunk.
Real estate-based securities are a poster child for the problem; they are nearly frozen because they are highly leveraged and credit is scarce. "Real estate is very illiquid," Mr. Keleher said. "It's not easy to sell an office building."
Liquidity services specialists — BNY Mellon Beta Management and rival units at State Street Corp. and Russell Investments — appear to be well positioned. There is no end in sight to the liquidity crunch, said Espen Robak, the president of Pluris Valuation Advisors LLC, a New York company that specializes in illiquid securities. "It's going to take a while to work through all this," Mr. Robak said. "In terms of overarching problems, it really kind of boils down to the fact that a great many of the securities that have been generated were just not worth anywhere near what they were marketed as."
That should be good news for BNY Mellon Beta Management. The eight-person outfit uses futures, forward agreements, exchange-traded funds, and swaps to change an asset allocation profile without necessitating the sale of the underlying assets.
Bank of New York Mellon was no stranger to overlay strategies before it launched BNY Mellon Beta Management. Mr. Keleher joined Mellon Financial Corp. in 1992 to work on a fund involved with the strategy.
"More and more clients" were "asking us about overlay and cash equitization," he said. "We took a look at the market and decided this was something for which there would be an ongoing need."
