All Americans: the 10th annual SMA Managers of the Year differ in size, process and ZIP code, but they're all at the top of their investment game.
However, they're very similar in their consistency, especially in their outperformance over many years and through various business and market cycles. They hew to their own sustainable and repeatable investment processes. They're also clearly members of a team.
While the lead managers of these strategies are undeniably brilliant, those managers are also cognizant that they don't stand alone, and shouldn't, in forming and monitoring portfolios for the ongoing benefit of advisors' end clients.
For the 10th straight year, Investment Advisor has partnered with Envestnet | PMC to research, identify and honor those managers in the separately managed account space who we deem to be outstanding and worthy of advisors' consideration.
What are we looking for? Performance above their peers over time, significant assets devoted to the strategy, well-tenured management, great customer service, tax efficiency and wide availability to advisors (the complete process and criteria can be found at ThinkAdvisor.com).
Tim Clift, chief investment strategist at Envestnet | PMC and a member of the judging committee, said that when considering finalists for these awards, "it generally boils down to trying to evaluate an alpha thesis: What differentiates them from other managers in the universe? What's unique and sustainable? What's their edge over other managers? What can they replicate going forward?" And finally, "Where are the returns coming from?"
Gib Watson, vice chairman of Envestnet and a member of the committee for all 10 years, put it this way: "It's much more than historical performance reviews, and more than just holdings-based analytics on the managers."
According to Watson, the overall SMA marketplace continues to grow. He cited Cerulli research that found as of the end of Q1 2014, "the SMA market went past $900 billion in AUM, in both traditional SMAs and model-based SMAs." While SMAs were traditionally more of a "wirehouse type of product line, now we're seeing a lot of growth in the independent BD space, among RIAs, regional broker-dealers, and bank and trust channels," he said. Why? "Much of it has to do with an SMA's features: The individual investor owns the cost basis of the securities in the portfolio, so advisors can engineer better tax-efficient strategies, more restrictions and can build globally diversified SMA accounts," Watson said.
Clift argued that renewed demand for SMAs "has come from higher tax rates" but also SMAs' customization, since specific equities (or bonds) can be excluded at the owner's request. "We'll see more asset managers come up with more specialized strategies to meet the needs of the markets," Watson said of the future of SMAs, while Clift pointed out that values-based investing is "becoming more and more important; the main way to do that is through an SMA--you can say 'I don't want any tobacco or firearms'" in your account.
That's why next year we'll be adding another category to the SMA Managers of the Year--an "impact" award honoring a particular portfolio that considers environmental, social, corporate governance or faith-based criteria in its investment process, reflecting Envestnet's partnership with Veris Wealth Partners in building an Impact Investing Solutions program.
But this year, we honor those outstanding managers in our traditional categories in the pages that follow, highlighted by the intermediate fixed income strategy offered by Oklahoma City-based Tom Johnson Investment Management, this year's overall SMA Manager of the Year.
Watson said the intermediate fixed income strategy team at TJIM, led by Richard Parry, CIO, and portfolio manager Doug Haws, "was really impressive in that they were able to preserve capital and generate positive returns" in an otherwise dreary 2013 for fixed income. Clift pointed out that the team at TJIM, which is 100% employee-owned, "proved their worth" last year, with a portfolio featuring "a conservative investment process, very liquid" with a "flexible mandate, being able to adjust to market conditions."
Read on to learn more about this year's SMA Managers of the Year. You can find extended profiles and video interviews on ThinkAdvisor.com.
U.S. EQUITY LARGE-CAP
DANA INVESTMENT ADVISORS' LARGE-CAP EQUITY STRATEGY
The first of two SMA Managers of the Year in this category is Dana Investment Advisors for its Large-Cap Equity portfolio. Duane Roberts, who has managed the strategy since its inception in 1999, said Dana's process "is designed to give us some consistency to outperform in most market environments," and outperform it has, only underperforming the S&P 500 in two calendar years. The story behind those two years tells you why the strategy is so successful. "Our process is designed to be consistent, but there's a weakness to any investment process," Roberts said. "Because of our belief in equal-weighting holdings, which help us avoid volatility risk when performance is heavily concentrated in mega-cap companies" or when the index is being led by lower-quality companies, the Dana portfolio will underperform in comparison. Year in point, 2009, when "you had a lot of low-quality 'rebound' companies that were on the verge of bankruptcy before the recovery started in March, and then you saw 200% to 300% returns," said Roberts.
Another time when the strategy will underperform for good reasons? "When you have speculative growth companies leading the markets," which Roberts said "might not be low-quality per se but at valuation levels we don't like."
So what is the process? "First and foremost, we approach the stock selection process from a value perspective; there's a consistent value tilt to our portfolio," said Roberts. While the Dana team's securities selection process "is consistent with a value manager's approach, growth is an important part of valuation. So we emphasize the growth piece--we want to make sure people don't miss that when they talk about us." On the value side, however, "you'll never see us compete with deep discount managers; we have a relative value approach, without sacrificing growth."
Dana also has learned the lessons of behavioral finance. "On the quant side," Roberts said, value might be "expectational," but when focusing on valuation, you should remember that "some stocks are cheap for a reason." And growth? "There are many behavioral characteristics tied to high-momentum, high-growth stocks," which he said Dana tries to avoid. "We sometimes view momentum as indicating why the market is excited" about a given stock, but that "doesn't make it a long-term" prospect.
Roberts said, "We want to be long-term investors. If you find companies valued correctly you can hold them for a long time, but markets are dynamic and companies are dynamic. We'd love to buy and hold companies forever, but we're not afraid to sell, even if we like them. We want to be in long-term relationships, but we're not married to the stocks" in the large-cap portfolio.--James J. Green
U.S. EQUITY LARGE-CAP
ROBECO INVESTMENT MANAGEMENT BOSTON PARTNERS' LARGE-CAP VALUE STRATEGY
In assessing our second SMA honoree in the large-cap space, Envestnet | PMC's analysts highlighted the minimal turnover on Boston Partners' research team of 23 experienced analysts and the portfolio's clearly articulated alpha thesis and consistent alpha generation. There's another, more illustrative way of thinking of Robeco Boston Partners' Large-Cap Value portfolio: Think of a Venn diagram with three circles representing valuation, business momentum and business fundamentals.
"Where they intersect," said David Pyle, "that's what we buy." Pyle, who has been co-portfolio manager on the strategy since 2000 (lead manager Mark Donovan started the portfolio in 1995), said that the approach is based on the work of John Fullerton of The Boston Company in 1987, which he said was "controversial back then because value managers didn't look at" business momentum and fundamentals.
That approach is followed religiously not just on the Large-Cap Value strategy, but throughout Boston Partners, where Todd Knightly is director of research. The managers ask on valuation, "How much are we paying?" On business fundamentals they ask, "What are we buying?" On business momentum, they ask, "Is the business getting better, staying the same or getting worse?" Pyle said that "what we don't try to do is predict the future," whether it's corporate earnings, the economy or the actions of politicians. "We simply look at any company and ask those three questions. Does it have those characteristics?"
What about the strategy's approach to risk? First, he said, focus on "winning by not losing. Keep pace in rising markets, outperform in falling markets and diversify your exposure." Beyond that, Pyle said it's important to separate risk into "two major buckets": statistical risk and the "risk of losing money."
On the first measure, Pyle said that as a large-cap manager he must be aware of issues like tracking errors, but an overemphasis on statistical risk "can lead you astray." For instance, he said, "I've never seen an optimizer that doesn't tell us to sell our overweight [positions] or buy underweight." However, "we don't let the tools make portfolio decisions"; but rather "reference where our statistical risk lies."
And the risk of losing money? "I've never met a client who has to pay their bills with relative money. The laws of compounding mathematically dictate that protecting capital is the only risk that matters."
The portfolio's best performance has come when the markets are stable or weak, Pyle reported. "So from 2007 to March 2009 we outperformed, but from March 2009 we just kept up with the market, which was fine: By losing less, you're winning."--James J. Green
SMALL, MID- AND SMID-CAP EQUITY
GLENMEDE INVESTMENT MANAGEMENT'S SMALL-CAP EQUITY STRATEGY
On a recent trip to Chicago, during which he had to contend with major flight delays, Chris Colarik, portfolio manager for Philadelphia-based Glenmede Investment Management's Small-Cap Equity strategy, was dismayed to find that because he hadn't flown in such a long time, he could no longer avail himself of the privileges U.S. Airways offers its frequent fliers.
That caused some momentary discomfort, but in the grander scheme of things, Colarik didn't mind at all.
"The successful performance of our product means that we haven't had to go out on the road to market it," he said. "We sowed all the seeds, and now all we really need to do is follow up."
Colarik--who has been with Glenmede since 2001--co-manages the Glenmede Small-Cap Equity strategy with lead manager Bob Mancuso, who's headed the team since 1993. The duo manages a total of $1.8 billion in the strategy, of which $500 million is split between SMA and UMA accounts. Both men are invested in the strategy that they manage.
Colarik credits the success of Glenmede's $1.8 billion Small-Cap Equity product to consistency, discipline and "never wavering from our core strategy."
Getting the best out of the small-cap equity space means thinking long term, Colarik said, and that means tuning out the daily, weekly and even quarterly noise, and assessing companies in an in-depth manner over the course of a complete market cycle.
As a firm, Glenmede, named SMA Manager of the Year in the small-, SMID- and mid-cap category, believes in diversifying across sectors, industries and individual securities, and combining that with an emphasis on quality. The firm sorts its universe of 3,500 stocks into eight economic sectors and ranks them according to their valuation; growth and profitability; earnings and company-specific catalysts; and market confirmation of price momentum. Those stocks that rank in the top 20% of each sector and that are either in the Russell 2000 or have less than $2.75 billion in market capitalization then form Glenmede's "buy list" of about 400 stocks.
"Whatever name we want, we'll pick from this opportunity set," Colarik said.
The second component of the process entails combing through news articles, research reports, thought pieces and the like to get a sense of the big themes at play in the U.S. economy and how they translate into the small-cap space.
The crux of the Glenmede approach lies in matching investment themes and ideas with names on the buy list and only on the buy list. For Colarik, though, the most important factor in Glenmede's success is that it sticks to what it's supposed to do.
"We are small-cap managers, and we make sure we stay in that box so we don't become mid-cap managers," Colarik said.--Savita Iyer-Ahrestani
SMALL-, MID- AND SMID-CAP
REINHART PARTNERS' MID-CAP PRIVATE MARKET VALUE EQUITY STRATEGY
Mequon, Wise.-based Reinhart Partners is a 100% employee-owned firm in which a small team, selected with great care through the years, works closely together to leverage the best of their experience, expertise and skills in order to deliver their clients top-class returns, particularly in volatile markets.
In today's more stable market environment, "our numbers may not look that special," said Brent Jesko, lead portfolio manager of Reinhart's Mid-Cap Private Market Value Equity strategy, which has $950 million in the portfolio. However, "investors have continued to choose us because we have been able to navigate the bear markets, and we do very well in volatile environments."
That was clearly the case back in 2008.
When all major indexes were down by 30% or 40%, Reinhart's portfolio was down by just 26%. And in the last seven years, the Mid-Cap Value Equity strategy has posted annualized total returns of 9.92%, compared to 6.85% for the Russell Mid-Cap Value Index.
With Matthew Martinek, Jesko manages the Mid-Cap Private Market Value strategy, SMA Manager of the Year winner in the small-, mid- and SMID-cap U.S. equity category. He credits Reinhart's success in the mid-cap space to its core investment strategy: assessing the intrinsic value of a company by determining how much an acquirer would be willing to pay for it in a private buyout.
Figuring out private market value (PMV), as Jesko terms the approach, anchors a disciplined investment process that gets to the heart of a company's value. The "beauty of it," he said, "is that we can customize to any industry, so we're very well-diversified across the mid-cap space."
Currently, the Mid-Cap Value Equity strategy holds about 40 or 50 names, Jesko said, that represent "the best ideas" in different industry sectors ranging from consumer discretionary and consumer staples to energy, telecom, health care and financials. The portfolio limits individual position sizes to no more than 4%, and sector weights are held within 10% of the benchmark.
Because Reinhart focuses on companies' business models and competitive advantages in the long term, and does its own research and modeling, the firm can tune out much of the noise coming from Wall Street, Jesko said, and avoids falling prey to short-term ups and downs.
For Jesko and the rest of the Reinhart team, private market value is a great tool with which to not only measure the volatility in the public market but also take advantage of that and leverage it to their benefit.--Savita Iyer-Ahrestani
INTERNATIONAL OR GLOBAL EQUITY
CAMBIAR INVESTORS' INTERNATIONAL ADR STRATEGY
When it comes to the global financial markets, Jennifer Dunne, portfolio manager and senior investment analyst for Denver-based Cambiar Investors' International ADR strategy, believes that the only true constant is change. That's why the name "Cambiar," which in Spanish means "to change," is a perfect fit for a firm that since the 1970s has been investing successfully in the international markets and continues to deliver consistent and superior returns to its clients over different market cycles. It does so by strictly adhering to a single investment discipline that's centered on looking worldwide for high-quality companies that offer relative value.
"We're looking for compressed valuations--for companies that are trading in the lower quartile of their long-term historical range--but we're also looking for high-quality companies," Dunne said.
That means Cambiar seeks out companies with strong management teams, low debt levels and strong balance sheets; that are well-capitalized, with strong business models that can consistently get them through different market cycles.
Cambiar divides the globe up among the members of its investment team by sector rather than geography. "This approach lets us do a deep dive and makes us truly aware of companies' competitive advantages regardless of their geographic domicile or capitalization," Dunne said.
This approach also best utilizes the experience and skills of each member on the team, including President and CIO Brian Barish, and leverages Cambiar's collective intellectual property to its fullest. It's also the most effective way, Dunne said, to find companies across the globe that fit that high-quality/relative-value equation and to get a sense of their potential in the long term.
The firm is benchmark-agnostic and because it runs such concentrated portfolios, has a 50% upside target for its holdings. Individual positions are weighted at 2%; they're sold when a stock reaches its price target, although an analyst can introduce a new holding at a 3% weighting.
However, when it comes to the downside, Cambiar holds its staff to extremely strict standards.
Any portfolio holding that falls below Cambiar's 20% downside target will be the subject of an intense, detailed discussion on whether or not it should remain in the portfolio. During that discussion, if an analyst can make a strong enough case to keep the holding despite its poor performance, the firm may well keep it.
But "you only get one chance to bring an underperformer back to portfolio weight," Dunne said.
Cambiar is a 100% employee-owned firm, and almost everyone is a partner in the company. "We're all paid to buy equity in the firm, and this aligns our interests directly with those of our clients," Dunne said.--Savita Iyer-Ahrestani
CUSHING ASSET MANAGEMENT'S MLP ALPHA TOTAL RETURN STRATEGY
That the United States is heading steadily toward energy independence is an exciting prospect for the global energy industry as well as for the U.S. economy. But the energy renaissance isn't just about increased production and sale of oil and natural gas.
What's really important at this stage and will continue to matter going forward, said Libby Toudouze, president at Dallas-based Cushing Asset Management, is the infrastructure-pipelines, transportation facilities, storage and treatment assets-that's required to bolster the U.S. energy industry in order to ensure the production and supply of oil and natural gas.
Toudouze believes that there's a need for close to $900 billion in new infrastructure by 2025. That represents a huge investment for investors in the midstream master limited partnerships (MLPs) that own the requisite energy infrastructure, and for investors, including pension funds and endowments, that are looking at the space with great interest.
MLPs, Toudouze said, offer superior risk-adjusted total return potential and an attractive relative yield among income-oriented vehicles. They also have a low correlation to other asset classes and provide less risky exposure to the energy markets than traditional energy exploration and production companies.
However, "there are winners and losers in the MLP space, and they are not cheap," she said. "But the potential for returns is certainly there, and the key to maximizing those lies in going with a manager who has been in this space and dedicates the time and the resources to do the necessary research."
Cushing, which manages over $3.8 billion in assets under management, has a long track record in the MLP space, and offers a broad range of MLP investment options including long-short and long-only vehicles, open- and closed-ended mutual funds and index products.
The key to the firm's success and what drives the strong performance of its products lies in "consistent and disciplined" stock picking, said Toudouze, who manages the long-only MLP Alpha Total Return strategy, the SMA Manager of the Year in the Specialty category.
Cushing boasts a strong, 18-member investment team and 12 research analysts, all of whom have vast experience in the energy sector, infrastructure in particular. They've served as energy consultants, engineers, investment banking underwriters and asset allocators.
The firm's founder, Jerry Swank, is a leader in the MLP space, Toudouze said, and has over 40 years experience in energy research and investing.
What's most important about Cushing, though, is its knowledge of the entire energy industry: midstream, upstream and downstream.
"So although our portfolios only invest in midstream companies, we make sure we understand the entire energy supply chain because it's important to identify the dynamics of the industry as a whole," Toudouze said. --Savita Iyer-Ahrestani
FIXED INCOME AND OVERALL SMA MANAGER OF THE YEAR
TOM JOHNSON INVESTMENT MANAGEMENT INTERMEDIATE FIXED INCOME STRATEGY
When discussing who should win SMA Manager of the Year in fixed income, the awards committee was first impressed with Tom Johnson Investment Management's Intermediate Fixed Income strategy's positive return in 2013, a dismal year for fixed income. Looking beyond that headline, PMC's analysts highlighted the strategy's high performance over the last three- and five-year periods on both an absolute and risk-adjusted basis. The Oklahoma City-based firm is also highly committed to the space--nearly a third of the company's total assets are invested in this strategy.
The committee also thought TJIM worthy of praise for its "exceptional client service," for its investment team's long tenure together and for the employee-owned firm's culture.
"We've stuck to a real niche in the intermediate fixed income world," said Douglas Haws, TJIM's vice president and portfolio manager on the strategy. The portfolio holds A-rated or better bonds, "but with a duration that's set to 75% to 125% of our benchmark [the Barclays Intermediate Government/ Credit Index]." That allows TJIM clients to "know what they're getting," said Haws. "We're not taking big duration bets, but we have an opportunity to scale along that ratio."
Haws said the flexible yet conservative approach allows the strategy to "provide excellent returns, even leaving out" holdings rated BBB and below. "It gives us that opportunity to outperform over the long run," Haws said. "That's one of the key aspects of intermediate fixed income--it doesn't often lose money."
President and CIO Richard Parry said in an email interview that the portfolio has "broad yet conservative guidelines" for the strategy. Those guidelines, he said, "allowed us to take advantage of the extreme widening and subsequent tightening in credit spreads for financial issuers and other corporate bonds since 2008, and our duration guidelines during this period of time offered the consistency."
When asked what sets TJIM apart, Parry listed four areas. First, he wanted to ensure that the entire team was recognized: "Doug Haws, Cory Robinson, Steve Schenk, Ned Schrems are all CFA charterholders. Our trader, Nick Pointer, is a CFA Level III candidate."
Second, that team works on both fixed income and equity portfolios. "The insights we gain from economic, earnings and credit work provide illuminations for each of our portfolios," Parry said. As an example, he said, "sometimes our earnings work yields fixed income security selections and sometimes credit work yields equity insights."
The third differentiator is the "four lever" fixed income process at the firm, he said: a duration lever, a sector lever, a structure lever and a quality lever. "We adjust these levers based on the relative attractiveness of different risk factors in the bond market," and the position of each of the levers "determines the resultant portfolio duration, structure and yield, and how the portfolio will perform under different environments."
The fourth differentiator, Parry said, is that the entire Tom Johnson Investment Management staff is "motivated by interesting work" and has "the autonomy to find unique solutions." The firm's culture includes a "flat organizational chart, a solid base salary and participation in the profits of the organization based on contributions to our success in client retention, marketing and investment performance."
So what will the future bring? If it was difficult to provide positive returns from a fixed income portfolio in 2013, will 2014 and beyond be more amenable to bond investing?
Parry said TJIM is focusing on employment; inflation and deflation; and tapering or stimulus by central banks in the United States, Japan and Europe and their impact on interest rates. He said, deadpan even in an email, that "it is a difficult time to be a conservative bond manager," citing low absolute yield levels, "fairly tight" credit spreads and the fact that high-quality corporate bonds "are trading as a fairly homogeneous group." TJIM is taking a conservative approach, he said, since "opportunities are fairly limited." The firm is maintaining a lower duration, moving more toward Treasuries for liquidity, and has "begun buying floating rate bonds."
One other item of interest to advisors: Parry said that TJIM "isn't a household name and doesn't have an army of wholesalers." Still, so many advisors who use TJIM for the first time "are surprised to be able to call us and to speak directly with one of our investment decision makers." By dint of its culture, its outperformance and its overall SMA Manager of the Year award, you may be hearing more about Tom Johnson Investment Management.--James J. Green
Group Editor-in-chief Jamie Green can be reached at firstname.lastname@example.org. Savita Iyer-Ahrestani is a freelance writer and regular contributor to Investment Advisor and ThinkAdvisor.com based in Pennsylvania.