For their part, nonactivist investors in closed-end funds tend to keep an eye on moves by the activists. “If we see Bulldog or someone like them getting some traction, we may pile in and help them get over the finish line,” says James Robinson, founder and chief executive officer of Robinson Capital Management, a Grosse Pointe Farms, Mich.-based firm that oversees $500 million.
Robinson runs open-end funds that invest in closed-end funds. He mostly stays away from the type of companies Lipson and other activists target, though. “Our experience for the most part is the runway is extremely long and the payoff is suspect,” he says. “We tend to focus more on the large companies that have good governance in place. They’re more focused on these smaller entities.” Closed-end funds may be a relative backwater these days, but so was the bond market in the 1970s. In fact, Lipson says he shifted to fixed income at investment bank Kuhn Loeb simply because he didn’t want to deal with the hordes in equities. “I’ve always looked at underserved areas of the market,” he says. “The disadvantage is you have to do all the grunt labor yourself because there’s no existing databases or reference materials. The advantage is if you’re right, you don’t have competition.”
Lipson leveraged his background as a computer programmer—then a relatively rare skill—into fixed-income research. His firm raced bond king Salomon Brothers to create a comprehensive index for the U.S. bond market. When Lehman Brothers acquired Kuhn Loeb in 1977, Lipson’s research effort came along as part of the deal. As Lipson tells it, his index won out because he gave away his data for nothing. By contrast, Salomon Brothers wanted to protect its methodology and charge for it.
After Lehman Brothers fell during the financial crisis, Barclays, which bought the bankrupt New York-based firm’s investment banking business and other assets for $1.75 billion, had the benchmarks land in its lap.
Jack Malvey, who was Lehman’s chief global fixed-income strategist up through the firm’s demise, says he and his Lehman colleagues had fielded inquiries about selling the indexes for years. None became too serious, until the crisis forced their hands. “Barclays got a deal that was a tremendous home run,” Malvey says. “They didn’t have time to do any due diligence; it was basically part of the furniture of Lehman Brothers.” Now mutual funds overseeing about $2.8 trillion of bonds—roughly 80 percent of assets in the fund category—benchmark themselves to various offshoots of Lipson’s creation, according to Morningstar. The Bloomberg Barclays U.S. Aggregate Index, in particular, is the most widely followed measure of fixed-income performance worldwide.
In December 2015, Barclays agreed to sell the indexes and related analytics to Bloomberg LP. The transaction was completed in August. (Bloomberg LP is the parent of Bloomberg News.)
Lipson finds it ironic that his index ended up in the hands of Bloomberg, because it was the advent of the eponymous terminals that hastened his exit from Wall Street. The computer background that gave him a leg up in creating the index was no longer ahead of the pack.
Lipson says he’s happy to have fled the Wall Street life, however, and insists there will always be a niche for his activist strategy. “I don’t know if it’s stupidity or greed or whatever, but the fund companies don’t respond—they just keep doing the same thing,” he says.
As for his index—the benchmark for the $100 trillion global bond market—Lipson doesn’t need to track it much for his day-to-day work. But he still keeps an eye on it. “I kind of have a long-term parental interest,” he says. “My child has gotten married and divorced several times since then, but I definitely follow it.” Chappatta covers government bonds at Bloomberg News in New York.
This story was provided by Bloomberg News.