October 17, 2008
Bonds, Baseball King
MarketBeat HOME PAGE

By David Gaffen
Rob Curran reports:

The U.S. stock market is so rough that even Major League Baseball players are scared — and stockpiling government-guaranteed bonds.

Frank Beck manages money for professional baseball players and other heavyhitters as chief investment manager at Capital Financial Group and affiliate Pro-Player Investing in Austin, Texas. During the summer, Mr. Beck reduced stock weightings for his sports clients to about 25%, positioning about 50% in cash, with 6% in gold bullion and the remainder in bonds.

Recently, he started buying his clients agency mortgage bonds, the securities sold by Fannie Mae and Freddie Mac that are now guaranteed by the government.

Among stocks, Mr. Beck likes natural-gas pipeline operators structured as dividend-paying master-limited partnerships. These companies, like Boardwalk Pipeline Partners LP and El Paso Pipeline Partners LP have sold off sharply with natural gas — even though their business models are more dependent on volumes than prices of natural gas. Plus, they pay a generous yield — 12% in the case of Boardwalk Pipeline, and 9% in the case of El Paso.

Mr. Beck also placed clients in an exchange-traded fund that takes a short position on European and Asian stocks, the ProShares Short MSCI EAFE. That’s up 59% for the year, to date, as markets from Ireland to Australia feel the economic effects of what started as a financial crisis,even moreso than the U.S.

The principal reason Mr. Beck is positioning portfolios for more economic weakness at home and abroad: “The sheer amount of debt people are carrying,” he said. With the unemployment rate rising, home prices falling and stock portfolios losing value, Mr. Beck expects more debt crunches for the U.S. consumer, something that has repercussions for the U.S. economy and for exporters in Europe and Asia.

The “negative feedback loop” between credit and economic activity is a powerful force, markets have learned recently. As Federal Reserve Chairman Ben Bernanke outlined in a speech Wednesday: When people miss debt payments, banks run into trouble and reduce lending. That slows business activity, hurting the job market and causing people to miss payments all over again. Another reason Mr. Beck is bearish: Monday’s naive reception of the latest bank-recapitalization plan as the long-awaited panacea.

“Another ultimate outcome of this, and why I think gold will go up, the sheer amount of dollars being created by our government and other governments” will have an inflationary effect, Mr. Beck said. Gold is a traditional hedge against inflation: as paper money loses its value, the relative value of the hard asset increases.
Of course, sports guys are often risk-takers, and some clients are tempted by the high yields on the very mortgage-backed securities that capsized Bear Stearns Cos. and Lehman Brothers Holdings Inc.

For the most part, Mr. Beck and junior partner Justin Simmons direct these clients to agency mortgage bonds because of the explicit government guarantees. Those agency bonds can yield as much as 7% to 7.5%, with even higher yields to maturity,Mr. Beck said.

In 2006, Mr. Beck befriended Mr. Simmons, who pitched the winning game for the University of Texas in the 2002 College World Series before joining the Los Angeles Dodgers system. Mr. Beck and Mr. Simmons, who has a degree in finance, got to talking about the niche for managing the money of sports pros.

“I always believed the niche was there; how to approach it was the tough part,” said Beck, an avid sports fan. “As we got to know each other and talk more about it, we decided it was something that would make our jobs enjoyable.”
In May 2006, Simmons joined the firm, tapping his contacts in the game to launch Pro-Player Investing. Out of $1.1 billion in assets under management at Capital Financial Group, about $150 million is in pro-player accounts. Beck said they were particularly strong in baseball.

For the year to date, the average return on all accounts at the firm was a loss of 16.2%, Mr. Beck said, compared with a loss of 38% for the Standard & Poor’s 500 Index. For 2007, Beck’s average return was 23.7%.
Sports-pro money management brings its own challenges. Different strategies are required for different career stages, for example. “If you’re in minor-league baseball, you have a certain amount of money … usually a big bonus paid when you signed up,” Mr. Beck said. “Once you get that first big contract, then life changes.”

Then there’s the conflict of interest caused by client loyalty.

“We’ve got players on competing teams in the playoffs right now … who do you root for?” Mr. Beck said.