The CLOs included mezzanine debt tranches with 15 percent yields, acquired at 40 cents on the dollar. Other money managers shun Mezz CLOs, which can fall to zero in a default, because they don’t have Guggenheim’s resources, Minerd says, including a team of in-house lawyers who pore over indentures in search of claims priorities under different stress scenarios. “You can make money two ways,” he says. “You can take risk or you can work. We do work.”
Guggenheim’s edge, according to Minerd, comes in part from handpicking debt products outside benchmarks such as the 10,000-security Bloomberg Barclays U.S. Aggregate Bond Index, which determines allocations for passive investors. He currently likes portfolios shaped like a barbell, with low-risk, low-yield securities, such as Treasuries, at one end balanced with esoteric asset-backed securities or collateralized mortgage obligations on the other end. He looks for relative value, rotating sectors or changing asset allocations as opportunities come and go. “About 80 percent of our securities aren’t in the index,” he says, noting that the benchmark aggregate represents a minority share of more than $40 trillion in the U.S. bond market. “Why limit yourself?”
The Guggenheim Total Return Bond Fund institutional class earns five stars, the highest possible rating, based on performance, low volatility, and relatively low fees, says Todd Rosenbluth, director of fund research for CFRA. But its 14 percent stake in unrated securities as well as ABS and CLO holdings poses a downside if the fund ever faces large redemptions because of their lack of liquidity, he says. “It’s a risk that investors perhaps need to be mindful of,” Rosenbluth says. “This fund has experienced strong inflows in its life. If and when that reverses, unrated securities would be harder to sell.”
Another concern is Guggenheim’s lack of senior talent and tenure below Minerd, especially on the credit desk, according to Eric Jacobson, a Morningstar Inc. fixed-income analyst, who visited Guggenheim’s Santa Monica offices in February to begin preparing a formal review of the funds. “You’d expect to see more of that in a team that has so much responsibility for getting securities into the Total Return portfolio, for example, where they have such a huge focus on structured credit and because it’s considered such a core competency,” he says.
Guggenheim paid a $20 million fine in August 2015 to settle Securities and Exchange Commission charges that it breached its fiduciary duty by failing to disclose a $50 million loan that an unnamed executive received from a client in 2010. The SEC also found Guggenheim charged a client fees for assets that weren’t under its management and failed to enforce its code of ethics that restricted taking flights on clients’ private airplanes. Guggenheim directed questions to the SEC order and a statement issued at the time of the settlement, which said the executive implicated in the scandal left Guggenheim and that the firm had implemented more comprehensive compliance policies and procedures. “We are fully mindful of—and deeply committed to—our fiduciary responsibilities to our clients,” the statement reads. “Any failure to perform to the highest level is not acceptable.”
In December, Minerd shared a Manhattan banquet stage with then-Vice President Joe Biden and Starbucks Corp. CEO Howard Schultz as the three men each received a Robert F. Kennedy Ripple of Hope Award. Minerd was recognized for his involvement in charities, such as a Los Angeles family planning clinic, a homeless mission, and a sanctuary in Uganda for persecuted gay, lesbian, and transgender people. “I don’t feel entirely worthy,” he said in his acceptance speech. “The acts were meant to be private, motivated by conscience and love in a secret place in my soul.”
Minerd credits Scripture as his guide, and often recites passages from memory. He describes his leadership style by quoting Matthew 8:9, about the Roman centurion whose faith was a marvel to Jesus: “For I myself am a man under authority, with soldiers under me.” He recalls how his dog, a mixed breed stray, was slated to be euthanized in a shelter before her rescue. When a friend suggested naming the dog Grace, Minerd says, a letter from the Apostle Paul sprang to mind, including the passage: “For by grace you were saved, and that is not of yourself but a gift from God.” Minerd brings the dog to his office; she even joins him when he flies cross-country on the company jet. “I realized that Grace was saved by grace, a gift from God,” Minerd says as he scratches her between the ears after breakfast in Santa Monica. The two make an odd couple—the knee-high mutt and the muscular Minerd. He’s the master investor, but in some ways she’s the boss, the one who gives his life structure and purpose. “We’ve been here too long,” Minerd says, as if reading Grace’s mind. “There’s squirrels to be seen.”
The two walk out, slowly.
This article was provided by Bloomberg News.