California Investment Paid Off Big


The fixed-income arm of Bel Air Investment Advisors LLC knows its sweet spot, and it’s the “middle market.”

No, it’s not that middle market – L.A.’s large concentration of mid-sized private companies – but the marketplace where bond dealers buy and sell fixed-income debt.

Kenneth Naehu, the Century City firm’s managing director, said Bel Air eschews buying its bonds from large investment banks that may have positions on the debt they sell. Instead, it does business with well-known brokers such as Titus & Donnelly and J.J. Kenny Drake.

Naehu said the strategy works well for the company’s business model, which involves hiring experienced bond traders who are on the lookout for the very best deals for a limited clientele of some 300 high-net worth individuals and families.

“For the most part, the vast majority of our clients give us full discretion and with that discretion comes the simple mandate: maximize the yield with minimal risk,” said Naehu, who has headed Bel Air’s bond division since leaving Bear Stearns’ West Coast municipal bond department in 1998.

“With the nature of wealthy clients who have differing and changing tax issues it behooves the manager to be nimble. We have different clients with different goals.”

For example, consider the municipal bond market, where offerings are often tax exempt but lately worries have grown over the fiscal soundness of issuing cities.

“You are constantly scrutinizing the underlying municipals’ ability to make debt service payment. Now more than ever, it’s important to have a trader who can scrutinize quality,” Naehu said. “You have to have a trader’s expertise to go into the market and bid for bonds.”

Bel Air has about $2.7 billion of fixed-income assets under management, and like other bond funds has seen a big influx of late as investors flee equities. The current average yield of clients’ portfolio tops 4.25 percent.

The firm requires clients to open minimum accounts of $10 million. Those restrictions mean the firm deals only with a small clientele. But it means Bel Air’s three fixed-income portfolio managers have plenty of time to tailor individual portfolios by buying and selling individual bonds.

The firm has the confidence to take risks. Last year, Bel Air loaded up on investment-grade corporate debt, which became attractively priced given the widespread fear that the financial crisis might lead to a total economic collapse.

In the first quarter of 2009, Bel Air also decided to invest in California general obligation bonds, both as new issues and on the secondary market.

At the time, there was talk of the state going bankrupt amid the severe recession and many portfolio managers shied away from the debt. There was a lot of what Naehu referred to as “headline risk,” or negative publicity about the state.

But managers believed the risk wasn’t that great since the California constitution requires that debt payments stand second only to education in priority. “I would argue that California’s credit is much higher than many AA credits in other states,” Naehu said.

Of course, the state did not go broke.

“It has played out terrifically,” he said, noting Bel Air acquired state bonds with durations of 10 years or less yielding 4.75 to 5.25 percent at maturity.

Bel Air Investment Advisors

Century City

Founded: 1997

Fixed Income Assets: $2.22 billion

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