Mike Foggia, evp, and PK Jain, md, at Advisors Asset Management, answer SCI's questions

Q: How and when did Advisors Asset Management (AAM) become involved in the structured credit market?
MF: Advisors Asset Management is a diversified broker-dealer with a growing separately managed asset accounts group that has been in business since 1979. About 10 years ago the partners at AAM established a fixed income platform, with the aim of serving a niche in the retail sector that was underserved in terms of outsourced financial solutions - independent advisors. The idea was to bring an electronic pipe that aggregated Street bond offerings into retail shops and apply a high-touch coverage model on behalf of the broker-dealers they worked for.

We established a dedicated marketing team to service the sales reps and administer the
Mike Foggia                  compliance and education functions on their behalf. These days plenty of broker-dealers offer the pipe, but not the high-touch service - which has given us an edge.

Now we have service agreements with 90 independent broker-dealers that employ around 45,000 financial advisors. This coverage includes the broad fixed income spectrum, from retail CDs to securitisation product, with these flows being at the heart and soul of the company.

AAM was historically a client of Merrill Lynch, where Rick Perretti - now also an AAM evp - and I previously worked. About four years ago, AAM ceo and cio Scott Colyer met us both to talk about potential new product going into the AAM pipe and this evolved into a small equity infusion into the firm from Merrill Lynch. We developed a close relationship, which ultimately led to Rick and I moving to AAM.

Q: What are you focusing on at the moment?
MF: Five years ago the firm expanded into the advisory business by acquiring a unit investment trust sponsor, Matrix Trust, which enabled us to launch our own-branded UITs and sell them into bulge-brackets, independent brokerage firms and retail RIAs. From this foundation, we began offering separately managed accounts as well. We currently have a US$2.5bn 
Robert Sainato, John Sullivan and PK Jain                                                                   structured product sub-advisory mandate and are aggressively building this out via institutional and retail referrals.

Our focus at the firm is establishing an institutional sales platform, which we began in Q408 - helped by the problems being experienced at that time by bulge-bracket firms. Our New York-based institutional business is split across three buckets: municipal bonds (accounting for around 50% of our retail flow); corporate debt; and structured products/mortgages, which is run by PK, together with Robert Sainato and John Sullivan. We have been able to leverage institutional flows from our strong retail flows.

Q: How do you differentiate yourself from your competitors?
MF: We can be creative and flexible around product mandates, including incorporating securitisation and credit-linked exposures into our offerings. Another of our strengths is having extremely robust buy-side analytics and modelling tools, which translates to unbiased opinions when it comes to advising clients.

PKJ: Our analytics are as strong as those of bulge-bracket firms, yet we're willing to work with smaller clients and provide them with the same level of service - the bigger shops can't do this. This is important because smaller clients can be as sophisticated as institutional customers, but the size they trade isn't as big, so they don't get the attention from large firms. In addition, our product engine is more sophisticated than those offered by most regional broker-dealers.

Q: Which challenges/opportunities does the current environment bring to your business and how do you intend to manage them?
MF: The synergies from retail clients has taken longer to cultivate for securitised products because they're more complex, but flow in lightly structured deals should create a foundation for us to build upon. Our team has a wide mandate in terms of product set with which to build out our ABS/MBS capabilities.

The next step for us is to build out an emerging markets platform - first in Latin America and then Eastern Europe. We're in the process of doing due diligence on those opportunities.

PKJ: In terms of the macro-environment, markets appear to have snapped back faster than fundamentals would suggest. Liquidity and capital have returned quickly, which means that firms that beefed up last year are now facing tighter margins.

Smaller shops don't necessarily have the wherewithal to make it and so we'll see a consolidation among regional broker-dealers, with some falling by the wayside and a displacement of personnel occurring. Some will end up at bulge-bracket firms again.

However, our model - based on diversity of client coverage - should enable us to continue expanding in this environment. We'll be buyers of talent in this market.

Q: What major developments do you need/expect from the market in the future?
PKJ: With banks continuing to rebuild their balance sheets and the asset overhang remaining, there are still opportunities to be had in the market dislocation. Our portfolio advisory work should help us in this environment: our model can handle many different line items, which is important given the scale of assets/liquidations coming to the market.

In general the market can absorb these liquidations - non-bank lender appetite has returned for these assets, with credit funds, private equity shops and hedge funds all getting involved from a total return basis. Activity includes robust demand for mezzanine and equity assets.

Importantly, certain segments of ABS new issue supply have also been revitalised, thanks to re-REMIC technology and government support.

But all of these developments could be derailed by overzealous CDS regulation; for example, if every trade is driven onto an exchange. This would hurt prop trading and market-making for bulge-bracket firms, and would force costs to be passed on to customers.

We're more concerned about potential market set-backs than regulation itself - an overreach could be harmful to the market and won't achieve regulators' objectives.

CS