Gates Hires SunAmerica Junk Bond Maven to Invest $500 Million

Gates' personal investment could could bode well for the whipsawed sector, junk bond players say.
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Microsoft

(MSFT) - Get Report

Chairman Bill Gates has hired a junk bond guru from

SunAmerica

to manage $500 million of his money in a move some junk bond investors say could renew interest in the sector.

Robert Sydow, formerly with Los Angeles-based SunAmerica, now a unit of recent merger partner

American International Group

(AIG) - Get Report

, was lured away from the star junk bond trading desk, according to a SunAmerica official and three junk bond investors.

A SunAmerica spokesman confirmed Sydow had left within the past few weeks to "run a money management firm" with money from Gates. The spokesman declined to provide more details. A spokeswoman for Microsoft says the software manufacturer doesn't comment on Gates' personal investments.

"It's not the dollar amount that's important, but that it could help underpin the market," says Steven Ruggiero.

Junk bond fund managers are intrigued by Gates' commitment -- despite its somewhat paltry size compared to his net worth -- and say it could bode well for the whipsawed sector. Based on annual returns, last year was the high-yield bond market's fourth worst in the past 13 years, says Walter McGuire, managing director at

Bear Stearns

. Last year when Russia defaulted on its domestic debt, investors fled to low-risk securities and away from high-risk securities such as junk bonds.

Gates' entry is "interesting, and may be a vote of confidence in the market," says another corporate high-yield bond fund manager. "But for Bill Gates, is $500 million a lot of money?" Just based on his Microsoft stock, Gates' net worth totals roughly $80 billion.

"Somebody like that staking an allocation of his wealth is probably under-allocating," says Steven Ruggiero, managing director of high-yield research at

Chase Securities

. "But still, it's not the dollar amount" that's important, "but that it could help underpin the market."

Why junk bonds? McGuire says, "Gates may simply have noticed that the high-yield markets are funding most of the important businesses in this country -- telecom and cable, among them -- and some very important companies," including

Amazon.com

(AMZN) - Get Report

. "So he got a good manager and put some money to work."

Microsoft recently invested $200 million in

Qwest Communications

(QWST)

, a broadband communications company, and $500 million in

NTL

(NTLI)

, the U.K.'s No. 3 cable television operator.

Another reason for Gates' interest in the high-yield market could be that, like every Wall Street-obsessed baby boomer, Gates is just getting serious about retirement. The eager search for portfolio diversification "has made the boomers more aggressive on the equity side, and it's getting them more aggressive on the fixed-income side," leading them into mature, high-yield asset classes, McGuire says.

Little is known about Sydow, who was listed in SunAmerica's most recent annual report as a 43-year-old senior vice president.

So why did Gates pick him?

Sydow has a junk bond pedigree: He joined SunAmerica in 1989 and worked with Peter McMillan as co-head of SunAmerica's well-respected junk team. McMillan and Sydow helped choose the investments that were used to back SunAmerica's massive $20 billion fixed-annuity portfolio, which boasted stellar returns under their watch.

"SunAmerica's return spreads continued to widen, even in the '93 and '94 years that wiped out other junk bond trading desks on Wall Street," says one banking analyst who asked not to be identified.

In an interview with the

Los Angeles Times

last summer, McMillan said the high-yield component he directly oversaw had consistently beaten industry averages. SunAmerica's high-yield portfolio generated a 16.75% annual return from January 1990 through May 1998, compared with 13% for the high-yield market overall, McMillan told the newspaper.

Those returns may have played a part in SunAmerica's acquisition, since SunAmerica's retirement and savings expertise attracted the attention of Hank Greenberg, AIG's chief.

McMillan, currently chief investment officer at the merged financial services giant, didn't return calls. Even with the loss of Sydow, though, SunAmerica won't be bereft of talent. Rafael Fogel and other junk bond analysts who worked on Sydow's and McMillan's team have assumed their spots on the desk.