Fledgling with years of experience
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Stone Harbor Investment Partners is a young business, just over a year old. But its origins date back 16 years to Salomon Brothers’ entry to the asset management business. Tom Brock, Stone Harbor’s chief executive, was on the executive committee of Salomon at the time. His first hire was Peter Wilby, who joined as head of fixed income and is now chief investment officer at Stone Harbor.
“We started a fixed-income business at Salomon Brothers in 1989,” Mr Brock says. Coming late to the game, Salomon focused on credit-based and allocation strategies in
a deliberate move to differentiate its offering from established fixed-income houses such as Pimco and BlackRock. “So our track records date back that far,” he says.
The business grew substantially through the 1990s until Salomon Brothers was acquired by Travelers Group in 1997, which then merged with Citigroup the following year. Mr Brock, who had spent 25 years with Salomon by then, decided it was time to move on.
Mr Wilby and other colleagues carried on until Citigroup decided to exit the asset management business through a deal with Legg Mason. Legg Mason was already in the fixed-income business through Western Asset Management. There were difficulties bringing the two fixed-income divisions together. “The team now at Stone Harbor had been together for 13 years with no defections. A move to Pasadena, California (where Western is based) was not going to work,” Mr Brock says.
Mr Wilby decided to launch a fixed-income boutique and enlisted Mr Brock’s assistance. “We reached an agreement with Western: we negotiated the right to solicit the transfer of 34 old accounts that didn’t have much overlap with their core competencies and helped the transition of the rest to Western,” Mr Brock says.
All but one of the accounts moved to Stone Harbor, so the business started with $8.5bn under management and boasted positive cash flow from day one. It is 100 per cent owned by employees. All 50-plus of the original employees became partners immediately, and new employees become equity holders on their annual review date.
It now has $11.4bn under management with 43 clients, “so we typically have large mandates and a close relationship with our clients”, Mr Brock says.
The firm is growing at an acceptable pace, he says. “We wanted to control growth to ensure existing clients get what they were getting in the past. We want to retain the culture of a boutique.”
There is no ambition to rival Western or Pimco in terms of size, although Stone Harbor is happy to take on such firms in beauty parades. “We were up against the big managers in most of the final presentations we have been in. People are looking for alternatives to the big three,” Mr Brock says.
The firm offers a range of products under the four headings of allocation strategies, core fixed income, high yield debt and emerging debt. “We made a serious investment decision: we could have been an emerging market and high yield boutique, but decided to include the core and asset allocation side. We want to be involved in the whole asset allocation process of clients, offering cash-plus and core-plus strategies that blend investment grade and non-investment grade.”
One area where Mr Brock has no intention of competing is the hedge fund space. “Long-only managers like us have found it difficult to balance people on a 2 and 20 (fee) structure with those on a different structure. We are a close-knit company and value that a lot,” Mr Brock says.
But demand from clients is likely to push Stone Harbor towards hedge fund-style investing techniques such as leverage. “The market will take us there, but we want to make sure we are comfortable with all the aspects and will move very cautiously.”
Clientele is global with one-third of assets under management sourced outside the US. There is an office in London to service non-US business, but UK business is “building” rather than established, with three UK clients picked up.
“We’re finding that UK clients are increasingly interested in cash plus and unconstrained mandates,” Mr Brock says. The UK ought to be a good market for the firm, he adds, with the trend towards liability driven investment and pension funds trying to make their bond portfolios work harder.
US managers take a different approach to fixed-income management than UK ones, he points out. UK managers seek to add value through making duration and currency decisions. “We make credit decisions. We were one of the first teams to invest in emerging markets and had a large emerging market debt business early on, as well as high yield.” Continental Europe has proved easier to crack than the UK, as is often the case for US asset managers. Stone Harbor has clients in the Netherlands, Scandinavia and Switzerland.
“It is different on the continent,” Mr Brock says. “The large funds have in-house expertise. They have been pushing into emerging markets and selecting individual managers. UK funds want someone who can do the asset allocation as well as the investment.”
The hardest decision Mr Brock and Mr Wilby have faced so far was what to call their firm. “Hedge funds have taken all the names,” Mr Brock says.
Stone Harbor turns out to be a place in New Jersey where Mr Wilby had been on holiday. “It had the right implied meaning,” Mr Brock says.
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