Bloomberg News

Avenue, Investure Add Cash While Awaiting Opportunities

July 13, 2011

(Adds comments from Wagner and Keating on U.S. large-cap growth stocks in eighth paragraph.)

July 13 (Bloomberg) -- Alice Handy, founder of endowment manager Investure LLC, and Sonia Gardner, co-founder of distressed-debt firm Avenue Capital Group, are stockpiling cash.

The two are among asset managers at a U.S. Treasury Department symposium on Women in Finance who said yesterday that they or their clients are setting cash aside rather than being fully invested. Susan Wagner, a co-founder of BlackRock Inc., and Catherine Keating, the head of JPMorgan Chase & Co.’s U.S. institutional asset-management business, said their customers are allocating a larger portion of their assets to more liquid securities.

“We want to have dry powder,” Gardner said during the event at Treasury headquarters in Washington, adding that her firm expects more mid-size companies in the U.S. and Europe to fall behind on their debt. “This is the most opportunity we have seen in a while in Europe.”

Stashing assets in money-market funds, government bonds or bank accounts can be a drag on returns, with two-year Treasuries yielding about 0.38 percent. Top money managers and their institutional clients are increasingly accepting this short-term cost because it ultimately can increase their gains, serving as a buffer against losses when markets crash and as a source of capital when assets are cheap.

Focus on Risk

Handy, whose Charlottesville, Virginia, firm manages about $8.5 billion, primarily for colleges and universities outsourcing endowments in search of better returns, said Investure recently completed a study that shows holding cash for several years doesn’t necessarily penalize performance. Smith College, Handy’s first client and a proxy for 10 others, earned 16 percent on its $1.2 billion in the year ended June 30, 2010, out-pacing both Harvard and Yale universities.

Wagner, vice chairman of New York-based BlackRock, the world’s largest money manager, said the focus on risk among the firm’s institutional clients is “dramatically higher” since the 2008 market decline, when the Standard & Poor’s 500 Index fell 38 percent. She added that it is “extremely expensive to derisk” at present.

“We see a higher allocation to liquidity,” Wagner said, adding that BlackRock is helping some institutions develop strategies that provide both broad, diversified market exposure and the ability to raise cash when necessary.

U.S. large-cap growth stocks represent an “enormous value,” Wagner said at the symposium. JPMorgan’s Keating expressed a similar view, calling such stocks “compelling.”

Searching for Value

At JPMorgan, wealthy individuals are keeping twice as much money in liquid assets as they did before the 2008 crash, said Keating, chief executive officer of the New York-based bank’s U.S. Institutional Asset Management. At the same time, these clients are being “more opportunistic,” investing in areas such as private equity and emerging markets when the potential for profit increases, she said.

Handy said her firm looks for investments that offer the best value rather than focusing on asset allocation. That approach led her to buy put options in early 2007 on the S&P 500 Index, a bet that would pay off should the U.S. equity benchmark fall. When the market collapsed the following year, Handy was able to cash in the puts at a profit and buy other assets that investors were dumping at fire-sale prices.

Puts give buyers the right to sell an underlying security at a set price and date.

Camouflaging Weakness

Avenue Capital’s Gardner said the low default rate among “middle market” companies reflects the willingness of banks to amend and extend loan terms, thereby camouflaging weakness in that part of the credit markets.

Many of the companies will default when the banks can no longer continue providing extensions, and New York-based Avenue wants to have cash on hand to buy their loans at distressed prices, she said.

“There are opportunities in managing the pipeline,” Gardner said. “We look at good companies with bad balance sheets.”

--Editors: Josh Friedman, Steven Crabill

To contact the reporter on this story: Miles Weiss in Washington at mweiss@bloomberg.net

To contact the editor responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net


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