Long before tech behemoths such as Facebook and Twitter came to dominate our everyday lives, Luis Maizel, co-founder and senior managing director of LM Capital, understood the value of a strong social network.
He believes that the contacts and relationships he has built up over the course of his career – in person rather than online – have been crucial to his emerging market debt strategy.
‘80% of the companies in the emerging market world are still owned by the founding family. They go public for estate purposes… so you have to know whether you are buying their bonds for them to build a better company or for them to buy a bigger jet for the family,’ he said. ‘I would say that 70% of our analysis is financial and 30% is the social network that we’ve developed in the different countries that we invest in, where we call and ask for references.’
Friends in the all right places
Born and raised in Mexico, Maizel initially trained as a mechanical engineer but ended up becoming the youngest member of his class at Harvard Business School and graduating before the age of 23. He later became a faculty member at the school before testing out his business skills in the financial services industry.
Maizel loves the people side of the money management business and has been able to evade fraud and credit risk in emerging market debt by putting his social network to work.
For example, Maizel was able to dodge a recent bond issuance from a Mexican textile company by calling a friend in Mexico who worked in the same industry. He asked the friend if he would lend money to the family that was putting on the roadshow and issuing the debt, to which the friend responded ‘never.’ As a result, Maizel did not invest in the firm, despite being impressed by the quality of the presentation.
‘The issue came out in September. At the first quarterly report in December, the bonds were down 14 points,’ he said. ‘[It] turns out a lot of what the prospectuses said was not true. We were lucky. In spite of the beautiful presentation, we didn’t do anything, just because this friend of mine said “Don’t touch it,”’ Maizel recalled.
Over the course of almost three decades, LM Capital has grown to become a $4.6 billion fixed income specialist. The San Diego, California-based firm adopts an investment approach that combines top-down and bottom-up for its seven strategies, which are all available as separately managed accounts. The flagship Core Plus strategy, which invests in high yield and emerging market debt, started out 29 years ago when the term ‘core’ did not even exist, Maizel says. Today, it has about $3 billion in assets.
For all seven strategies, the investment process starts with a top-down macroeconomic analysis of the country being considered, during which the firm examines the past 12 months of inflation data, economic indicators, account deficits, trade balances, currency movements and the spread against US Treasury bonds.
The research and portfolio management team then assigns a numerical score to each country, from very good, through good, neutral and bad, to very bad – each represented by 1.5, 1, 0, -1 or -1.5.
‘We double count inflation and economic indicators and we just add the six categories to get a score for the country. That score will tell us how we want to position our portfolio,’ Maizel explained. It’s a proprietary methodology that he developed while teaching at Harvard Business School.
‘For the US right now, my latest metrics came out at -0.5 – almost neutral. To me, a -0.5 means that I’m not seeing a good environment for bonds, so I position the portfolio about 10% short against the benchmark,’ he said.
Once the countries are selected based on the trend identification scores, the firm blends the top-down analysis with a bottom-up approach, in which a four-person team puts together an approved list of 110 companies that the portfolio managers can select to construct the portfolio. From that point on, every single selected name will be monitored closely through financial statements and on-site visits.
What really sets the firm apart though, according to Maizel, is LM Capital’s ‘global scenario planning’ stage in the investment process, when he and the team sit down and map out the worst-case scenarios for unexpected future events – political, economic or social – that could affect the global economy.
‘Starting with the shooting of the president, the bankruptcy of a major central bank, a North Korean nuclear attack on the US or Japan, the price of oil going above $100 or Israel attacking Iran…’ Maizel said. ‘We are not forecasting – we hope they never happen – but we play through our response to the event before the event happens. So God forbid, if it does happen, we can immediately react and be ahead of other managers in responding to it.’