MUNIFICENT RETURNS
William Heyman gave up a high-profle Wall Street career to become one of the gray men of insurance. Travelers shareholders couldn’t be happier.
William Heyman gave up a high-profile Wall Street career to become one of the gray men of insurance. Travelers shareholders couldn’t be happier.
If you feel at all bewildered by the wild and sometimes bizarre machinations of the current market, take comfort that a guy who has spent nearly four decades on Wall Street managing everything from hedge funds to insurance assets feels the same way. “You have equities at historically high prices and fixed income is priced as if there were a global depression. Interest rates look like they did in the 1930s,” says William Heyman.“i get up every morning and by 8:30 my head is spinning.”
But Heyman, the 66-year-old vice chairman and chief investment ofcer of New York City’s Travelers, has been able to prosper by sticking to a simple rule. “Ninety-nine percent of the time the proper reaction to any new piece of information is to file it away mentally and do just what you were doing before,” he says.
Heyman is an uncelebrated breed of investor. From a gray steel ofce building in Midtown he quietly runs the $76 billion portfolio of Travelers, the only insurance company in the Dow Jones industrial average.
Over the years many insurance companies have been run as if they were private funds, businesses that existed to give their top executives a cheap source of capital (i.e., premium income) to pursue corporate ambitions and to invest boldly. Risk-averse Warren Bufett through Berkshire Hathaway has been the most successful in leveraging his significant insurance assets in this way. Others, like Hank Greenberg of AIG, which became mired in subprime-mortgage-related problems, and Fred Carr of Executive Life, perhaps the biggest junk bond junkie of the Milken era, saw their premium-fueled empires collapse.
Travelers’ Heyman may be the most conservative of the bunch. He insists that his main purpose is to support his company’s writing of insurance, where the real returns are made by prudently investing the assets generated by the underwriting activities. Leading up to the financial crisis, for example, he held a tax-efcient portfolio packed with municipal bonds that coasted through the meltdown unscathed.
In fact, over the last ten years Travelers stock has returned 267%, compared with the 109% return of the Standard & Poor’s 500 and the 156% return of Berkshire Hathaway. Travelers is not the only insurer that has adopted this strategy, but it’s arguably the most successful and prominent.
“I think Bill has proven time and time again that he not only takes the long view but that he has the discipline and strength of conviction to avoid the temptation—and withstand the pressure—to invest in the latest ‘new thing’ or to follow the masses,” says Ajit Jain, who runs Berkshire Hathaway’s big reinsurance group. “Even during extended periods of time when the masses are enjoying considerable success.”
What happens when institutional investors urge Heyman to buy more equities and dial up the risk? Those are short conversations. “My job is to keep a company with 150 years of history of the ash heap,” says Heyman. “Some might consider that a trivial goal, but think about how many people couldn’t pull it of the last time around—and I think there may still be a next time around.”
If those sound like the words of a sheepish investor, think again. Heyman has been around the block on Wall Street and understands risk. He’s the son of George Heyman Jr., one of the early prominent arbitrage investors who ran Abraham & Co., competing with Gus Levy’s Goldman Sachs in the 1960s. He is married to Katherine “Wendy” Dietze,
the former chief operating ofcer of Credit Suisse First Boston’s investment bank.
As a child Heyman was surrounded by legendary investors like Laurence Tisch and Benjamin Graham, the father of value investing who rode the suburban train from Scarsdale, N.Y. with Heyman’s dad. While at Princeton Heyman spent two summers as a clerk on the New York Stock Exchange working for specialists Donald Stone and Bernard “Bunny” Lasker, the former chairman of the Big Board. “I think there is a benefit in growing up around smart guys, principally because of what you learn about risk, what they think is risky and less risky,” says Heyman.
At the age of 31, in 1979, the Harvard Law graduate took a calculated gamble, quitting his career as a lawyer and starting one of the early risk arbitrage hedge funds, Mercury Securities. Heyman was inspired by Ivan Boesky’s model of arb investing through a partnership that was not a member of the New York Stock Exchange. But that is where the similarities end. In fact, once on a trip to California to meet with his happy clients, Heyman remembers bumping into Boesky at the Beverly Hills Hotel and being admonished by him, “The only time you need to see the clients is when things are going badly,” according to Heyman.
But while Boesky was headed to Lompoc prison for insider trading, Heyman’s arbitrage firm rode out the stock market crash of 1987 and recovered all its losses within six months. A year later Heyman left and went to work for Sandy Weill, heading up Smith Barney’s arbitrage department. Then he spent two years as the director of the Securities & Exchange Commission’s market regulation division, lured by his former law firm ofce mate, then SEC chairman Richard Breeden.
By the mid-1990s Heyman was back working for Weill, starting Tribeca Investments, the internal hedge fund that invested some of Travelers’ premium income. Ultimately he rose to chairman of Citigroup Investments, which managed more than $100 billion. Tribeca Investments traded options and distressed securities, but the big money maker was convertible hedging, and Heyman’s returns were excellent. But Heyman never felt that Citi’s top brass gave him his due respect, so in the spring of 2002 he quit without another job. “I was never going to be on the inside there,” says Heyman.
Soon after he left Citi, Heyman was walking to lunch in midtown when out of nowhere Jay Fishman, the CEO of St. Paul Cos. and Citi’s former co-chief operating ofcer, jumped out of a car and suggested Heyman come to work for him. Heyman would be named chief investment ofcer, and within two years St. Paul acquired Travelers’ assets after Citi spun them of. “The luckiest thing in my entire career happened,” says Heyman.
If Fishman is the architect of Travelers’ seemingly unshakable success, Heyman is his most trusted consigliere. “An arbitrage mentality is somebody who can think rigorously about risk and reward probabilities, and that is what Bill grew up doing,” says former Treasury Secretary Robert Rubin,
who started his finance career as a Goldman Sachs arbitrageur. “Applying that mind-set more broadly to the full range of asset-liability matches is logical.” When he first got to St. Paul, Heyman ditched much of its equity investments, including $800 million in venture capital. Going into 2008 Heyman held few CDOS and almost none of the toxic acronyms held by bailout recipients AIG or The Hartford. But through thick and thin Travelers never stopped repurchasing its stock, a key component of its success.
The financial crisis unleashed tremendous deflationary forces, and central banks and governments responded with inflationary policies. The percentage bet has always been in favor of inflation because “when government wants inflation it usually gets it,” says Heyman. Nevertheless, deflation stubbornly remains a threat. Heyman has tried to position Travelers’ portfolio so that it prospers whichever way things break. He’s got 90% of his assets in bonds. Yes, he’s matching his investment assets with his insurance liabilities, but he has kept duration down to 3.5 years while not reaching for yield and working to keep credit quality pristine. “If things break in favor of inflation, lower duration means you get your money back a little sooner to reinvest at higher rates,” says Heyman. “If things break the other way, it wouldn’t really matter that your duration is a little lower— credit quality would trump everything.”
With many municipalities crushed by rising entitlements and underfunded pensions, and cities like Detroit struggling to stay solvent, it might seem strange that Heyman is more exposed to the tax-exempt market than any of his competitors. He’s got $34 billion, or nearly half of his portfolio, in municipal bonds. In fact, Heyman was buying munis while Meredith Whitney was crying wolf on 60 Minutes in late 2010, and he is still buying them today. Last year was a stellar one for munis—the S&P Municipal Bond index was up 9%. “I don’t meddle” with Bill’s portfolio, says Fishman. “One thing he has taught me is that in the taxable securities arena we accept that no two securities are the same. The same thing holds true, even more so, in tax-frees.”
About $8 billion of Heyman’s munis are prerefunded—refinanced with the proceeds put in U.S. Treasurys. He is picky; of the tens of thousands of municipal issuers out there he owns only 800 or so. He focuses on credits with contractual obligations, making sure he knows where the principal and interest money is coming from and what the legal protections are. He likes the bonds issued by the Orange County, N.C. water and sewer authority and the Portland, Ore. water system because both are situated in good economies and ofer protections like rate covenants. But Heyman wouldn’t go near the highly rated bonds recently sold by rich Vadnais Heights, Minn., even though he loves the suburb’s credit, because the bonds are backed only by revenues from a new ice arena.
Heyman has been a big buyer of school district bonds and owns some $8 billion of those. “We like them because they are secured by taxes that people have a high incentive to pay,” says Heyman. “We pick school districts where people are serious about educating their kids.” Heyman concedes you need to be careful. Many school districts pay into poorly funded multiparty municipal pension plans. But even there he’ll make exceptions. He owns bonds of the New Trier school district in affluent Winnetka, Ill., despite the fact that it contributes to Illinois’ underfunded pension plan. He favors districts like Elmbrook, a wealthy tax base west of Milwaukee with low debt and a wellfunded teachers’ pension, and the Rochester (Minn.) independent school district, which enjoys stable finances and a rich tax base grounded by the Mayo Clinic. “Given the size of his portfolio and the skill with which he has managed it, he is a legendary muni investor,” says George Walker, chief of fund company Neuberger Berman, which owns about $700 million of Travelers shares.
As for the 10% of his portfolio in equities, Heyman has positions in private equity and real estate funds. He claims not to be troubled by largely missing the stock market’s run-up in recent years and has a disdain for most hedge funds. Says Heyman, “It’s great that there are institutions who will pay 2% for an 8% return. We are not one of them.”
FINAL THOUGHT
“Variety may be the spice of life, but consistency pays the bills.”
— DOUG COOPER