Bond Buyers

Bond Buyers

FINANCE by Jean Gruss | Editor/Lee-Collier

Wasmer, Schroeder & Co. has managed money for wealthy individuals and families for more than a decade. Now it plans to do the same for big institutions.

People may find that bonds are boring, but not Martin Wasmer or Michael Schroeder.

The two Naples-based money managers have steadily built their company, Wasmer, Schroeder & Co., to $1.5 billion in assets under management since they teamed up in the early 1990s. They're one of just a handful of Florida-based firms that specialize in managing bond portfolios for wealthy individuals and foundations.

Now, Wasmer Schroeder's assets under management are likely to grow faster as they target large institutional investors with deeper pockets. Ed Morton, the retired chief executive officer of NCH Healthcare System, recently joined the firm to help land more institutional clients such as hospitals and universities.

By now, Wasmer Schroeder's investing track record is well established and its fixed-income portfolios outperform their benchmarks with less risk, even after management fees are deducted. These are the kind of results that are likely to appeal to institutional investors, they say.

For example, the firm's intermediate tax-exempt fixed income portfolio reported five-year annualized returns of 4.09%, net of fees. Even though the managers took less risk to generate these returns, they outpaced the benchmark Lehman Brothers five-year municipal-bond index' annualized returns of 3.82%. Although the margin of outperformance may seem small to stock investors, it's big for bond managers who score by tiny hundredths of percentage points.

To accommodate the projected growth, Wasmer Schroeder has built a staff of 26 people and most of them work in offices overlooking tony Fifth Avenue South in Naples. The firm also has a small office in Cleveland. Wasmer, 49, the firm's chief executive officer, and Schroeder, 46, the president and chief investment officer, decline to reveal growth targets. However, they say the firm can manage up to $3 billion based on its current staffing level.

Friends and family

Prior to founding the firm in 1987, Wasmer was a municipal-bond trader with Paine Webber. Schroeder, who was a vice president of investment services at USF&G Asset Management, joined Wasmer in 1991.

It was slow going at first, mostly because they were young and didn't have a track record. Friends and family were initial customers. By 1996, five years after Wasmer and Schroeder teamed up, the firm was managing $102 million, mostly for wealthy individuals and foundations in the Naples area. "Once you get a five-year track record, it makes it a lot easier," says Schroeder.

But the late 1990s were boom years for stocks and investors generally shunned bonds. Wasmer Schroeder didn't break the $200 million asset level until 2000, when it reported managing $222 million.

By the late 1990s, however, brokers were leaving firms such as Merrill Lynch and starting their own wealth management companies to cater to the growing ranks of millionaires. Wealth management firms tailor investment portfolios to clients' individual needs and outsource the money management to companies such as Wasmer Schroeder.

As wealth managers proliferated around the country, so did Wasmer Schroeder's business. "It really took off in 2000," Wasmer says. Instead of gathering assets one investor at a time, Wasmer Schroeder could now generate more business by courting wealth managers and their dozens of clients. "It's sort of a leveraged sales force," Wasmer explains.

Because of the potentially larger volume of business, Wasmer Schroeder offers lower fees for wealth managers. This is typical in the money management business. For example, Wasmer Schroeder charges individuals 0.375% for the first $5 million in assets invested in its intermediate tax-exempt fixed income portfolio. For wealth-management accounts, the fee is 0.25%.

From 2000 to 2005, Wasmer Schroeder's assets under management rose from $222 million to $1.1 billion. Today, 60% of the firm's assets come from money management firms spread mostly across the eastern half of the country.

Aiming for institutions

Institutions look at how long a firm has been in business, what its track record is and how much money it manages. "Money sort of attracts money," Wasmer says.

With assets now at $1.5 billion and a track record that spans more than a decade, Wasmer Schroeder's strategy is to court more institutional accounts. Institutions range from hospitals to universities and pension funds and they typically invest $25 million to $50 million or more at a time.

Enter Morton, NCH's former chief executive, who is now a shareholder in the firm. "It's not so much his connections, it's his know-how," says Wasmer. "He can go into a hospital, sit down with management and have an in-depth conversation."

Morton understands how the bond market works too because the hospital has issued bonds to finance its expansion, Wasmer says. What's more, that knowledge can translate to selling services to other institutions, such as universities. Florida Gulf Coast University in Fort Myers already is a client and the firm is bidding to manage the fixed-income assets of the University of North Florida.

But going after institutional money means competing with major players of the bond-management world. Fortunately for Wasmer Schroeder, there are fewer than half a dozen money management firms headquartered in Florida that focus exclusively on bonds, according to Thomson Nelson Information.

Still, money managers are not restricted by boundaries and there are many successful large firms that dominate the business nationally. One of the biggest is Pacific Investment Management Co. (better known as PIMCO), which manages $641 billion in assets.

Although Wasmer Schroeder's investment strategy will remain the same for institutions as for individuals, it has had to bulk up staff in order to accommodate potential growth. "You have to staff up today," Wasmer says. It now has two teams to provide service to clients, one for wealth managers and institutional clients and the other for high-net-worth individuals. With another two employees, Wasmer and Schroeder say they can handle the doubling of assets to $3 billion.

What's more, the company has upgraded the software technology so that it can manage accounts more efficiently. Wealth managers and institutions are more likely to use the Internet than high-net-worth individuals.

Institutional investors are also more focused making sure fees are low. That's in contrast to individual investors, whose primary concerns are advice and trust. At the institutional level, management fees are determined through negotiation. In general, the volume in business from institutional investors is enough to overcome lower fees.

Still, Wasmer says fees can only go so low. "We're not going to do business if we lose money."

THE WASMER SCHROEDER STRATEGY

Bond managers cheer every hundredths of a percentage point of returns they can get above their benchmark bogeys.

That's because most bonds don't move up and down as much as stocks do, so managers try to get every edge they can when they manage a portfolio of bonds.

Michael Schroeder tries to go one step further. The president and chief investment officer of Naples-based bond manager Wasmer Schroeder wants to earn that extra return for his clients, but do it with less risk than the benchmark indexes.

After all, any bond manager can try to boost returns for a short time by buying riskier bonds. But most investors want bonds in their portfolios because they're less risky than other assets, such as stocks. Municipalities, corporations and government agencies borrow money from investors by selling bonds, and some are riskier than others.

"There's ways to add yield without taking on more risk," Schroeder explains.

For example, Schroeder likes housing-sector bonds issued by agencies such as the Florida Housing Finance Corp. because they yield more than comparable municipal bonds and are no more risky.

With about half of the research done in house, Schroeder says analysts can spot opportunities. For example, California municipal bonds were cheap before Arnold Schwarzenegger was first elected because the state faced a fiscal crisis. Despite the gloomy forecasts at the time, Wasmer Schroeder bought some high-quality California municipal bonds because it believed they were undervalued and the state's fiscal woes could be resolved. It turned out to be a good move, because the bonds rebounded after Schwarzenegger was elected and fixed the state's fiscal mess.

For taxable accounts, Schroeder is currently buying taxable municipal bonds that are backed by revenues such as sewer fees or toll collections. He uses them in the place of U.S. Treasuries because of their safety and better yields.

Wasmer Schroeder's bond-selection process combines an assessment of the economy and interest rates with the analysis of individual bonds. About 65% of the money the firm manages is invested in municipal bonds with the rest in taxable bonds.

Committees of portfolio managers and analysts run the portfolios and recommend investment decisions. "The committee structure has worked well for us," Schroeder says. "It gives everyone a chance to ask questions and get feedback."

Still, the buck stops with Schroeder. "I have to approve every trade," he says.

-Jean Gruss