Reprinted with permission from– August 5, 2013

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Money Management

Guggenheim grows beyond its insurance roots Pension plans, endowments, foundations now 30% of AUM By RANDY DIAMOND Guggenheim Investments, known for managing insurance company assets, is luring a more diverse group of institutional clients with its solid investment performance while it raises capital to expand even further. Guggenheim specializes in fixed income, but also manages some equities and alternatives. It attracted its first non-insurance client in 2007. Corporate and public pension plans, along with foundations and endowments, made up 30% of the firm’s $148.3 billion in assets under management as of June 30, company officials say. Its growth has been rapid; assets rose more than 75% in the last 5½ years. The firm opened 14 years ago, part of a deal that merged the business of specialty financial company Liberty Hampshire Co. with the family office of the fabled Guggenheim family and Links Securities, a broker-dealer. Mark Walter, Liberty Hampshire’s CEO and cofounder, is CEO of Guggenheim Partners, Guggenheim Investments’ parent. Neither Guggenheim Investments — based in Santa Monica, Calif., and New York — nor its parent discloses financial information. Still, the money manager has been successful enough to help Guggenheim Partners lead groups of investors buying controlling stakes in various life insurance companies, as well as to expand into investment banking in 2011. The strength and stability of the investment management business is an important component of the value that has been created at Guggenheim Partners, President Todd Boehly said in a statement. “This value has helped support the overall growth of Guggenheim Partners, in both asset management and Guggenheim’s other businesses.” (A consortium led by Mr. Walter and that includes Mr. Boehly formed Guggenheim Baseball Management and purchased the Los Angeles Dodgers last year.) Guggenheim Investments, meanwhile, got a capital injection July 22, receiving $700 million in new low-cost financing in the form of a seven-year term loan from a consortium of five banks. It will be used to refinance higher-cost debt and expand opportunistically, Mr.

GROWING: Todd Boehly says the firm will use $700 million in financing for

expansion and debt refinancing. Boehly, who is based in New York, said in an interview. He wouldn’t say how much debt the firm has. Borrowing terms were LIBOR plus 325 basis points, with a LIBOR floor set at 100 basis points. Mr. Boehly said the loan was Guggenheim Investments’ first foray into the capital markets. He said the money will be used to refinance debt and expand, opportunistically. He wouldn’t be specific. One possible use: acquiring another money management firm or other investment teams.

‘Always talking’ In a separate interview, Santa Monica-based Scott Minerd, global chief investment officer for both Guggenheim Investments and Guggenheim Partners, said, “We are always talking to people about acquisitions.” In 2009, Guggenheim Partners purchased Claymore Group, an exchange-traded funds provider, following up in 2010 with the acquisition of Rydex SGI, a money manager with a large ETF concentration. But the biggest potential deal never happened. “We couldn’t come to terms,“ said Mr. Minerd of the publicly dis-

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August 5, 2013

closed, unsuccessful negotiations between Guggenheim Partners and Deutsche Bank in 2012 to purchase of part of Deutsche’s asset management business. A successful deal could have added more than $500 billion to Guggenheim’s AUM, although talks were scaled down after months of negotiations to the sale of just one Deutsche asset unit — its $63 billion RREEF division, which focuses on real estate investments. In another deal, an investor group organized by Guggenheim Partners and that includes unidentified Guggenheim shareholders, completed the $1.35 billion purchase of the annuity business of Canadian insurer Sun Life Financial Inc. on Aug. 2. Guggenheim Investments will be managing several billion dollars of the general account assets of the company, said Mr. Minerd. Acquisitions aside, Mr. Minerd — who is very visible as a market commentator — attributes most of Guggenheim Investments’ AUM increase to organic growth fueled by the company’s bottom-up, fundamental investment approach. The process replaces securities in the company’s portfolios as new issues with better risk/return ratios are found. Mr. Minerd said portfolio managers cannot make decisions about which securities can be held in the portfolios. Instead, securities are picked by sector teams, which specialize in researching specific areas such as energy or aviation, while the portfolio manager focuses on optimizing the portfolio. “It’s different than other money managers,” Mr. Minerd said, “where you get assigned portfolio manager A vs. portfolio manager B, and your portfolio can look entirely different just based on what a portfolio manager wants to do. Basically, we have an approach that is designed to provide more constant performance across portfolios.” Guggenheim Investments’ fixed-income strategies also can include securities from the firm’s middle-market direct lending securitization, aircraft leasing and infrastructure teams. These securities together can make up 10% to 15% of portfolios, including core fixedincome ones, Mr. Minerd said. It’s hard to argue with the performance of a composite of Guggenheim’s largest strategy — core institutional fixed income, with $77.7 billion. It handily outperformed the Barclays U.S. Aggregate Bond index and almost every other core fixed-income strategy during the 10 years ended June 30, according to data from eVestment LLC, Marietta, Ga. For the 10 years ended June 30, the composite returned an annualized 6.56%, vs. 4.52% for the Barclays’ index and 4.98% for the median core fixed-income manager, eVestment data show. Its five-year numbers are even better: Guggenheim’s composite returned 8.91% vs. 5.19% for the benchmark and 6.07% for the median manager, according to eVestment. Mr. Minerd said AUM at Guggenheim Investments has grown 20% a year on average since the firm’s founding, and that even if it slows to 15% a year, assets will double in five years. The CIO is not worried about growing too big. He insists Guggenheim’s investment approach is scalable and will work as the firm becomes bigger.

An advantage Mr. Boehly, Guggenheim Investments’ president, said Guggenheim’s status as a private company is an advantage because the company can be thoughtful about its growth and not have to adhere to Wall Street’s desire for continued earnings growth each quarter. Not all of Guggenheim’s investment strategies have been successful. Since March 23, 2012, the company has liquidated 21 ETFs, according to data from Morningstar Inc., Chicago. Some were launched by Guggenheim; some came with the acquisitions. The large number of ETF closures raises questions as to whether there was adequate due diligence before opening the strategies in the first place, said Josh Charney, alternatives investment strategist at Morningstar Inc., Chicago.

BOOMING: Scott Minerd says Guggenheim Investments’ bottom-up funda-

mental investment approach is the powerful engine driving the firm’s continued growth.

Mr. Charney said while Guggenheim’s corporate culture nurtures innovation, it can be a double-edged sword, because those strategies that are too niche are at risk of being cut because of a lack of investor interest. Mr. Minerd said of the 21 ETF's that Guggenheim closed, 16 were legacy Claymore or Rydex ETF's. A significant number of these were closed because of redundancy between the Claymore and Rydex ETF product lines, he said. Guggenheim has gotten some negative attention from news that the Securities and Exchange Commission was investigating whether Michael Milken advised on investment transactions at the firm. Mr. Milken, the infamous junk bond king who served time in prison for securities fraud, is allowed to manage his own money but is barred for life from acting as an investment adviser or broker. Mr. Minerd said Mr. Milken is a valued client, but he could not discuss the matter further. In a statement in March, Guggenheim Partners officials said Mr. Milken, “does not have an ownership or managerial role in the firm in any way, shape or form.” 䡲

The content above has been adapted from a longer article which originally appeared in the August 5, 2013 issue of Pensions & Investments. Reprinted with permission from Crain Communications Inc., ©2013. The Publisher’s sale of this reprint does not constitute or imply any endorsement or sponsorship of any product, service or organization. Crain Communications 732.723.0569. DO NOT EDIT OR ALTER REPRINTS. REPRODUCTIONS ARE NOT PERMITTED.#4463 © Entire Contents copyright by Crain Communications Inc. All rights reserved.

business units including Guggenheim Real Estate, Guggenheim Aviation, GS GAMMA Advisors, Guggenheim Partners Europe, Transparent Value Advisors, and Guggenheim Partners India Management. Values from some funds are based upon prior periods.

The article referenced herein is for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. The article should not be considered research nor is the article intended to provide a sufficient basis on which to make an investment decision. Any opinions contained herein are not necessarily those of Guggenheim Partners, LLC or its subsidiaries and are subject to change without notice. Forward looking statements, estimates, and certain information contained herein are based upon proprietary and nonproprietary research and other sources.

The reference to a “composite of Guggenheim’s largest strategy – core institutional fixed income” in the article means Guggenheim’s Core Fixed Income Composite (the “Composite”). That Composite is comprised of accounts with a total return objective and invests in broadly diversified portfolios of primarily investment grade fixed income instruments, rotating opportunistically among sectors where perceived relative value exists. Derivatives may be used to hedge interest rate and credit risks. Leverage may be employed when appropriate market conditions exist. Derivatives are used to hedge various risk components of the composite and may make up a material part of the composite strategy. Interest rate derivatives are used to hedge interest rate risk and credit default derivatives are used to hedge underlying credit risk. The use of leverage may be employed when appropriate market conditions exist, generally in the form of reverse repurchase agreements and securities lending.

This reprint has been provided by Guggenheim Investments and certain affiliated entities, including Guggenheim Funds Distributors, LLC. Guggenheim Investments represents the following affiliated investment management businesses of Guggenheim Partners, LLC: Guggenheim Partners Investment Management, LLC, Guggenheim Partners Europe Limited, GS GAMMA Advisors, LLC, Guggenheim Aviation, Guggenheim Funds Distributors, LLC, Guggenheim Funds Investment Advisors, LLC, Guggenheim Partners India Management, Guggenheim Real Estate, LLC, Security Investors, LLC and Transparent Value Advisors, LLC. This material is intended to inform you of services available through Guggenheim Investments’ affiliate businesses.

For comparison purposes, the Composite is measured against the Barclays U.S. Aggregate Index. The Barclays U.S. Aggregate Index represents securities that are SEC-registered, taxable, and dollar denominated. The index covers the U.S. investment grade fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities. Benchmark returns are not covered by the report of independent verifiers.

Guggenheim Investments Assets Under Management (AUM) is as of 6.30.2013 and includes $11.720B of leverage. AUM includes assets from Guggenheim Partners Investment Management, LLC, Guggenheim Funds Investment Advisors, Security Investors, LLC and its affiliated entities, and some

Investment Results as of 06.30.2013

YTD

1 YR

3 YR

5 YR

7 YR

10 YR

SI (01.01.1999)

Guggenheim: Core Fixed Income Composite (Gross)

-0.53%

4.58%

8.08%

8.91%

8.00%

6.56%

7.01%

Guggenheim: Core Fixed Income Composite (Net)

-0.78%

4.06%

7.54%

8.37%

7.46%

6.04%

6.48%

Index: Barclays U.S. Aggregate

-2.44%

-0.69%

3.51%

5.19%

5.60%

4.52%

5.39%

4

2

1

1

2

1

2

-2.28%

0.33%

4.29%

6.07%

6.13%

4.98%

5.79%

250

250

246

241

229

210

152

Manager Universe Comparison*: Percentile Rankings Median - Manager Return # of Observations

GuggenheimPartners.com

Investment Results as of 12.31.2013

1 YR

3 YR

5 YR

7 YR

10 YR

SI (01.01.1999)

Guggenheim: Core Fixed Income Composite (Gross)

0.97%

7.56%

9.60%

7.09%

6.71%

6.88%

Guggenheim: Core Fixed Income Composite (Net)

0.46%

7.03%

9.06%

6.56%

6.18%

6.35%

Index: Barclays U.S. Aggregate

-2.02%

3.26%

4.44%

4.91%

4.55%

5.23%

4

1

3

2

1

1

-1.42%

4.01%

5.87%

5.49%

5.01%

5.65%

263

260

252

243

224

157

Manager Universe Comparison*: Percentile Rankings Median - Manager Return # of Observations

*Manager Universe Comparison Guggenheim Investments composite peer rankings represent percentile rankings which are based on monthly gross of fee returns and reflect where those returns fall within the eVestment Alliance (EA) U.S. Core Fixed Income Universe. Rankings data as of 06.30.2013 was obtained from EA on 07.23.2013. Rankings data as of 12.31.2013 was obtained from EA on 01.28.2014. EA provides third party databases, including the institutional investment database from which the presented information is extracted. The EA institutional investment database consists of over 1,500 active institutional managers, investment consultants, plan sponsors, and other similar financial institutions actively reporting on over 10,000 products. Additional information regarding EA rankings is available on EA’s website. Past performance does not guarantee future returns. The value of any investment may rise or fall over time. Principal is not guaranteed, and investors may receive less than the full amount of principal invested at the time of redemption if asset values have declined. Individual account performance may be greater than or less than the performance presented for this composite. Composite results are not meant to represent the performance of any fund and are not intended to predict or suggest returns that might be experienced by a fund. Given the inherent volatility of the securities markets, it should not be assumed that investors will experience returns comparable to those shown here. Market and economic conditions may change in the future producing materially different results than those shown here.

GuggenheimPartners.com

All investments have inherent risks. Gross-of-fee (“Gross”) returns are presented net of non-reclaimable foreign withholding taxes applicable to U.S. investors and includes the reinvestment of income. Net-of-fee (“Net”) returns are calculated by reducing gross-of-fee returns by the strategy’s highest applicable management fees, which includes incentive or performance fees where applicable. Performance numbers for time periods greater than one year are annualized. All performance is expressed in U.S. dollars. Index data source: RIMES. The views and strategies described herein may not be suitable for all investors. Investors are urged to consider carefully whether such services in general, as well as the products or strategies discussed in this material, are suitable to their needs. Fixed income investments are subject to credit, liquidity, interest rate and, depending on the instrument, counterparty risk. These risks may be increased to the extent fixed income investments are concentrated in any one issuer, industry, region or country. The market value of fixed income investments generally will fluctuate with, among other things, the financial condition of the obligors on the underlying debt obligations, general economic conditions, the condition of certain financial markets, political events, developments or trends in any particular industry and changes in prevailing interest rates. In general, any interest rate increases can cause the price of a debt security to decrease and vice versa.

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