If Beacon Pointe Advisors puts the same level of effort into meeting managers as it does journalists, then I pity an underprepared portfolio manager.
The firm’s due diligence team, which is led by Ellie Chizmarova and her two lieutenants Derek Newcomer and Jason Overholtzer, could not have been more prepared for this interview.
Every preliminary question was answered, in detail. Requests for stats, fulfilled. Follow-ups, followed up. To the point that I almost had nothing left to ask when we met. Still, I wasn’t about to turn down a trip to California, and (on a more professional note) I believe you can learn more about a person in one meeting than you can from 100 questionnaires.
Luckily, Chizmarova, Newcomer and Overholtzer agree on this last point.
A lot of the managers we end up recommending didn’t necessarily come from a database screen, they came from a meeting
Jason Overholtzer, Beacon Pointe Advisors
‘We meet a lot of managers,’ says Overholtzer, a south California native who specializes in fixed income analysis. ‘A lot of the managers we end up recommending didn’t necessarily come from a database screen, they came from a meeting, which then prompted due diligence.’
Chizmarova, who focuses on traditional equity strategies, believes meeting managers helps her know whether she can invest with them or not.
‘I can come away from a meeting with a gut feeling of whether I can trust that person,’ she says. ‘Likeability not so much, but integrity and trustworthiness are very important. The person behind the strategy matters. It is not the only factor we consider, but it is an important one.’
Newcomer, the firm’s resident alternatives guru, concurs.
‘For long-dated investments in the private realm, you have to have trust,’ he says. ‘You can come out of meetings and say “he’s a smart guy, but I don’t trust him” and lo and behold, something happens down the road.
‘Trust comes not just from talking to that one guy, but to every single person in that circle of industry and asking “what is this person like?” It doesn’t end with meeting that person, but with all the people you can meet who know that person. That due diligence is important for us as we want to know we are investing with the right people who will do the right thing when trouble hits the fan.’
Slow marriage, quick divorce
The firm is headquartered in Newport Beach, California. Its head office sits in the shadow of Pimco’s monolithic tower block and a stone’s throw from Bill Gross’s scorned glare. (More on that later).
It is one of the largest independent registered investment advisors in the country, with $8 billion in assets under management.
Chizmarova and her team are responsible for building and maintaining the focus list of some 110 strategies, which is used by the firm’s 30 advisors when recommending investments for their high-net-worth clients.
Although meetings are important, the firm also place a huge emphasis on quantitative research. To be considered for the list, a manager must have a five-year track record and $100 million in assets. They are then assessed on their risk-adjusted returns, volatility, downside risk and consistency, to name just a few of the criteria.
On the qualitative side of things, there are a few key features the trio likes to see in managers and their firms, including:
- independent boutique structures;
- significant employee ownership;
- long-tenure terms;
- portfolio managers’ own money in a strategy;
- high active share, benchmark agnostic approach;
- a focus on capital preservation;
- willingness to be contrarian.
Getting on this list is not a quick process.
‘The shortest for me has been one year, but usually it’s longer, Chizmarova says. ‘Usually we have got to know a firm more casually over three to four years. Some have been talking to us for nine years, who I am sure are frustrated but they keep us updated, and either they are not the right fit or it’s not the right time. It’s like dating, you don’t want to rush into marriage.’
Getting on the focus list is like dating, you don’t want to rush into marriage
Ellie Chizmarova, Beacon Pointe Advisors
Although turnover on the list is low, once the firm decides to remove a strategy, a quick divorce can be on the cards.
‘It’s much quicker, unfortunately, for the manager who would probably want to stay there a little longer,’ Chizmarova says.
Short-term underperformance is not a cause for concern, but changes in a fund’s management or ownership structure are and big red flags can result in a strategy going within a day.
‘The most obvious example was Pimco,’ Chizmarova says. ‘The morning we learnt of Bill Gross's departure, we made a decision to move out of the Pimco funds. Our main concerns were investor outflows and continued organizational uncertainty with the potential for further investment professional turnover. We had close to $1 billion in various Pimco strategies. So it was a huge undertaking.
‘The obvious red flag is a key person leaving. It might not always be as obvious a name as Bill Gross, but if it’s a person we consider essential to the investment process, we would not hesitate to make a quick decision.’
In that instance the firm turned to its ‘bench’ – a list of up to five strategies per asset class on which it has completed due diligence but not yet invested in – to find replacement funds.
Smaller is better
Although these are all large institutions, the trio has a preference for boutiques.
‘What we like is that they tend to be owned by the people making the investment decisions and they are very focused on the clients’ experience, as opposed to meeting sales targets or launching new products or getting a big bonus at the end of the year,’ Chizmarova says. ‘So we feel the culture is very strong at those small firms. The teams tend to be very stable, especially if members of those teams have equity in those firms. They rarely leave if they have ownership in the firm.
‘They also tend to invest their personal assets alongside their clients', so they feel the pain of underperformance. They also pay attention to taxes.’
She also highlights how they are willing to lower minimum investments and negotiate on fees with the firm.
One example on the fixed income side, as highlighted by Overholtzer, is Belle Haven Investments, a manager Beacon Pointe hired in 2008 when it was a small, unknown manager with approximately $250 million. It now manages $5 billion. Managers Brian Steeves and Matthew Dalton are both AAA rated by Citywire for their risk-adjusted returns.
On the equity side of things, Chizmarova mentions two firms she feels best exemplify why the firm has a bias toward boutiques.
The first is Fiduciary Management, a value-oriented firm based in Milwaukee, Wisconsin, not to be confused with Fiduciary Management Associates, which is based in Chicago. Beacon Pointe first invested in the firm’s large-cap strategy 10 years ago, back when ‘it was not a juggernaut.’ Today, the asset manager has around $20 billion and in 2015, Chizmarova and her team added its international equity fund to their focus list.
‘After completing the due diligence process, we concluded that the international equity fund shares many attractive attributes with the large-cap equity strategy and would be a good fit for our clients. Furthermore, it differentiates itself from its peers by hedging all foreign currency exposure in the portfolio,’ she says.
The second boutique she mentions is St. Louis-based Alpine Capital Research, which runs a value-oriented equity strategy that Beacon Pointe started working with four years ago, back when it had less than $1 billion in assets.
For long-dated investments in the private realm, you have to have trust. You can come out of meetings and say “he’s a smart guy, but I don’t trust him” and lo and behold, something happens down the road
Derek Newcomer, Beacon Pointe Advisors
‘When we first started talking to them they said they will close their Equity Quality Return fund when they get to $3 billion and they did it,’ Chizmarova says. ‘This is one thing we really respect, when a manager says something and then they actually do it. We have heard others who say “well, we think capacity is $2 billion” but then when they get there they say “well, the market has changed and so we think capacity is maybe $4 billion” and they keep moving the target and so you have to start to question whether they are getting a little greedy. I am not saying they are but you have to start thinking about it and maybe dig into their asset class, specific securities, liquidity constraints and other issues.’
‘We see a lot of managers who will raise a $150 million fund to $300 million to $700 million and that leap scares us,’ he says.
He cites a Del Mar-based real estate strategy that bucked this trend and behaved the right way.
‘We did our due diligence and the management team kept its word, it managed portfolios the way we had envisioned it to do so, it raised subsequent funds similar in size and put up to 20% of its own internal capital alongside clients in these funds. So we know it is investing not for manager fees' sake, but it is investing a meaningful amount of money, alongside our clients', because that is how it is going to make its money.’