Archive

Team smelled trouble, cut equities and left Merrill to launch new firm

Though the market crisis caught many by surprise, Rob Skinner and Kim Ip heard the warning bell as far back as the fall of 2006, when they worked in the private-banking and investment group at Merrill Lynch & Co. Inc.

Though the market crisis caught many by surprise, Rob Skinner and Kim Ip heard the warning bell as far back as the fall of 2006, when they worked in the private-banking and investment group at Merrill Lynch & Co. Inc.

“We took a meeting with John Paulson’s firm, Paulson & Co., and listened to a presentation about the housing bubble, the amount of lending and credit supplied to borrowers and the decrease in the creditworthiness of the buyer,” explained Mr. Skinner, who with Ms. Ip is a partner, co-head of investment research and co-manager of portfolio construction at Luminous Capital LLC.

The presentation also covered the wave of mortgage rate resets, which the team found most upsetting.

Mr. Skinner was also aware that since highly leveraged investment banks, including The Bear Stearns Cos. Inc. and Merrill Lynch & Co. Inc., were invested in securities that were backed by residential mortgages, the marketplace was in for a lot of trouble.

The impending trouble was Mr. Skinner and Ms. Ip’s cue to pull back to a defensive position. Their team aggressively reduced equity exposure from 2007 to 2008 and shunned investments that looked attractive but were risky.

“We were presented with an opportunity to invest in some large buyout funds, and we passed that up because the high-yield-debt market was at all-time highs,” said Ms. Ip. “We knew that environment would not be able to continue.”

“In most of our families’ portfolios, we cut the risk quite a bit,” said Mr. Skinner. “Most of our accounts were more conservative than how they were positioned from 2003 to 2007.”

But the crisis did more than just change the way the team positioned its clients’ portfolios. It was one of the factors that got Mr. Skinner, Ms. Ip and three other advisers, Mark Sear, David Hou and Alan Zafran, thinking about parting ways with Merrill.

The group of five broke away in May 2008 to form Luminous Capital, which now manages $2.15 billion in discretionary assets. Early this year, the firm, which is based in Los Angeles and Menlo Park, Calif., added a sixth partner, Eric Harrison. Typical clients are ultrahigh-net-worth families and entrepreneurs with a range of $10 million to $500 million in investible assets.

“What got the banks in trouble were the principals’ investing the firm’s money in mortgages,” Mr. Skinner said. “Our business is just for the ultrahigh-net-worth base. We have no other lines of business that can negatively affect what we do every day.”

“Like most of our clients, who are entrepreneurs, we had wanted to build something that was forward-thinking and unique,” Mr. Skinner said. “We had an entrepreneurial spirit, and we wanted to build something different and forward-thinking in the marketplace.”

The firm now sees potential in distressed credit that’s being sold at a major discount, and non-dollar bonds.

“We spend our time researching potential investments that do well and that perform well in inflation,” said Mr. Skinner.

He and Ms. Ip expect that inflation might be the next risk. “We like the distressed environment; it’s early in the de-leveraging process, and the banks will be cleaning their balance sheets,” Mr. Skinner added.