Investment, like house-hunting, can often be narrowed down to three important factors: location, location, location. Pick the right spot and long-term returns can follow.
However, knowing where to invest is one thing; figuring out what to invest in requires some extra know-how. That is what Californian asset and wealth management firm Bailard specializes in – top-down analysis with a touch of in-house quantitative savvy.
‘When you go to choose a home for your family, you don’t just drive around any random place… you choose a neighborhood first and within that neighborhood, you find the home that suits you,’ said Eric Leve, the firm’s chief investment officer.
The Foster City-based group has been perfecting this approach for half a century; next year is its 50th anniversary. The firm started life as a financial planner before becoming a fully-fledged wealth and institutional asset management firm at the end of the 1980s.
Today, Bailard has 67 employees who help to oversee $4.1 billion in assets under management, with $2.3 billion in institutional asset management and $1.8 billion in wealth management.
It offers nine long-equity and alternative investment strategies, which cover international, emerging markets, large-cap growth, small-cap value, fixed income and real estate.
All of the firm’s strategies use four factors: momentum, valuation, earnings quality and analyst revisions. For its flagship international equity strategy, the team puts greater emphasis on momentum, value and risk.
While the group embraces a top-down approach, chief executive Peter Hill (pictured below) said that each fund’s process requires its own tweaking.
‘We have a commitment and philosophy to do things in a very sophisticated and quantitative way, but we have recognized that there are some nuances for each product,’ Hill said.
Both Hill and Leve are part of the fabric of Bailard, having each spent more than three decades at the firm and having helped to spearhead its quantitative process in the mid-1990s. Between them, they oversee a team of 14 portfolio managers, 12 analysts and 10 commercial real estate business experts.
‘We simply have a philosophy of being prudent and being diversified,’ Leve said. ‘You will not find a five-stock portfolio at this firm.
‘In each of them, there is something that reflects that intellectual curiosity and a foundation that is often quantitative but that can go very far afield from that.’
Bailard currently subadvises four Nationwide funds: the $179 million Nationwide Bailard Emerging Markets Equity, the $544 million Nationwide Bailard International Equities, the $149.5 million Nationwide Bailard Technology & Science and the $98.9 million Nationwide Bailard Cognitive Value fund. It also subadvises the
$71.4 million Dunham Emerging Markets Stock fund, which Hill and Leve manage alongside Daniel McKellar and Anthony Craddock.
Picking your spot
Within its emerging market and international equity strategies, the firm uses a dynamic country factor model to overweight the highest scoring countries.
As a starting point, the investment team combs through its proprietary database of roughly 8,000 securities, which go back as far as 30 years. Leve said that for each country they look at fiscal and monetary policy, changes in culture, accounting standards and the relationship between corporations and government.
Next comes investor behavior. ‘We find that when investors are confident, momentum drives the country allocation decisions, whereas when investors are more risk-averse, things such as valuation and risk tend to become more important,’ he added.
Only after the team is completely comfortable with a country allocation does individual security selection follow. One recent example was Argentina. Leve explained that the firm’s research helped it realize that the country’s current president, Mauricio Macri, was on the up.
‘It’s a country that was among the 10 wealthiest in the world per capita in 1920 but had been relegated to the third tier. Finally, in June , MSCI announced it was considering Argentina again to move back into the emerging market space, and it has been one of our top-ranked and top-performing markets for much of the past two years.’
And so while real estate experts are anticipating 2018 to be a sellers’ market, Bailard will soon find out whether that will rub off on the equity market too.