Billions served

Executive Summary
Company. Wasmer, Schroeder & Co. Industry. Financial services Key. Firm has grown by seeking top-quality municipal and taxable bonds with less risk than their benchmarks.

Wasmer, Schroeder & Co. was born in a one-bedroom apartment in Naples more than 28 years ago when two young financiers, Martin Wasmer and Michael Schroeder, hatched a plan for a money management firm focused on fixed-income investments.

“Our whole business plan was four pages,” chuckles Schroeder, now 55 and the firm's president and chief investment officer, who adds that three of those pages contained only data.

Their plan remains as simple today as it was then: Manage fixed-income portfolios and charge a fee to do it. Clients are advisers who select investments for high-net-worth individuals, families and institutions.

The company recently crossed the $5 billion threshold in assets under management by following a strict discipline of seeking top-quality municipal and taxable bonds with less risk than their benchmarks. The firms charge on average 0.25% of assets annually, though that varies according to account size (the minimum to invest is $500,000).

Technology advancements are a big part of the firm's growth, giving investors instant access to the firm's separately managed portfolios. Wasmer, Schroeder's dozen portfolio strategies are available on 105 different financial-service platforms for wealth managers nationwide, including Schwab, Fidelity, Citigroup and Merrill Lynch.

It's the same technology that allows boutique wealth management firms that specialize in managing money for high-net-worth individuals, charitable organizations and institutions to blossom. Automated trading and outsourcing of accounting and other backroom operations has given financial advisers time to focus on selecting skilled money managers such as Wasmer, Schroeder for their clients.

Wasmer, Schroeder isn't done growing. “Our goal is to double in size,” says Wasmer, 57, the firm's CEO.

And while few firms manage as much money as Wasmer, Schroeder on the Gulf Coast, in bond investing there's plenty of room to get bigger. The world's biggest bond mutual fund, Pimco Total Return, manages $125 billion, for example.

The strategy to grow at Wasmer, Schroeder is to stick to managing tax-exempt municipal bonds and taxable bonds. It doesn't plan to add stocks or target individual investors. And as interest rates rise and baby boomers retire, interest in bond investing will continue to grow, executives say.

Less risk
Wasmer, Schroeder, in the bond world, is best known for its expert picks in the municipal bond market, and its biggest account manages tax-exempt municipal bonds,
Because of strict regulatory issues, Wasmer, Schroeder doesn't publish testimonials and declines to name specific clients. But the firm's returns speak for themselves, money managers who have used Wasmer, Schroeder's portfolios say privately.

For example, even after deducting expenses, Wasmer Schroeder's intermediate tax-exempt fixed income strategy returned 3.65% annualized over the last five years. That's 0.21 points better than the Barclays Capital five-year municipal bond index that is its benchmark. While that may not seem like significant outperformance for stock investors, it's meaningful for bond investors who measure performance by fractions of a percent.

Wasmer, Schroeder also achieves returns with less risk than its benchmark index. “We haven't changed that from day one,” says Schroeder, who reasons that investors select bonds for safety of principal first. “This is not the money they want to take risk with.”

The firm also seeks to minimize portfolio turnover by not trading frequently, and it discourages frequent traders by charging redemption fees if clients hold investments less than 60 days. “Our clients are into tax efficiency,” Schroeder says. “We want to avoid big inflows and outflows.”

Efficient growth
The recent asset growth at Wasmer Schroeder has come with less staff. The firm now manages $5.3 billion in assets with 42 employees and three interns. Two years ago, when it managed $4 billion, the firm employed 48 people. “That's largely because of technology,” says Wasmer.

Technology improvements allow Wasmer, Schroeder's managers to spend more time on the portfolios than on administrative tasks that can be handled electronically. “Every one of those areas gets touched by technology,” Wasmer says.

Recruiting the right people to use that technology to come to Naples is a challenge. But the climate, and working at the offices of Wasmer, Schroeder on Fifth Avenue South in downtown Naples, can be an appealing proposition over a freezing urban location in a northern city.

“Now they think we're smart,” Wasmer chuckles. “We get a lot of looks from business schools.”

The firm has its name prominently posted on the mock trading room at the Lutgert College of Business at Florida Gulf Coast University in Fort Myers. Seven FCGU grads now work at the firm.

Schroeder says the firm can easily handle the next $5 billion in assets with current staff, noting that one undisclosed competitor has 56 employees managing $20 billion. Wasmer, Schroeder also has a team of four portfolio managers who handle taxable bonds at an office in Cleveland, in addition to three full-time business development people.

Unlike firms that focus on small company stocks, effectively managing a growing portfolio of fixed-income investments is easier because there are plenty of bonds to choose from. For example, the size of the U.S. bond market is $39.1 trillion, of which $3.6 trillion are municipal bonds, according to the Securities Industry and Financial Markets Association. That's more than double the size of the market capitalization of all U.S. listed companies on the stock exchanges.

Although it's always exploring new products, Wasmer, Schroeder will remain focused on serving wealth managers and their high-net-worth and institutional clients with fixed-income strategies, the founders say. It recently launched a high-yield mutual fund (symbol: WSHYX), but it's an institutional fund not targeted at individual investors because it requires a $100,000 minimum.

“We don't do any advertising,” Wasmer says. No need: For now, results are Wasmer, Schroeder's best marketing.

On the down low
Low rates are here to stay, at least through 2015.

Despite the anticipated rise in short-term interest rates later this year as the Federal Reserve starts to tighten monetary policy, Michael Schroeder says there are plenty of reasons why low longer-term rates are here to stay. Schroeder, president and chief investment officer at Wasmer, Schroeder & Co. in Naples, oversees the management of $5.3 billion in fixed-income investments for the firm he co-founded with CEO Martin Wasmer.

Schroeder expects growing demand for bonds from an aging population. Older people will shift more of their assets to the safety of high-quality bonds as they age, and as a result, this strong demand will keep bond prices elevated and yields low.

Global investors also seek out U.S. bonds because yields will remain higher than those of many developed countries. U.S. bonds are attractive because foreign investors will be paid back in dollars that are appreciating in the currency market, Schroeder says.

One more point: Regulatory constraints on lending are pushing banks to invest in bonds, which adds to the demand. After all, bankers can park deposits in relatively safe bonds and still make a profit on the margin without having to lend it.

Schroeder says the Federal Reserve won't be in a hurry to raise short-term rates significantly as long as inflation remains low. In particular, wages remain stagnant despite rising employment. “We're starting to see some sign of improvement in the job market, but from what?” he wonders.