There was a change to proceedings this week, as I was joined on my travels by our new starter Isaiah Green and our editor Alex Steger. The three of us headed out to the Windy City to meet with just about every kind of gatekeeper going, to hear about the impact of the on-again off-again fiduciary rule. With meetings booked with registered investment advisors (RIAs), outsourced chief investment officers (OCIOs), retail consultants, institutional consultants and subadvisory selection teams, our itinerary really was packed.
But before I get to that, a quick word on my new colleague. Isaiah has joined us from Quinnipiac University and is, like yours truly, a Nutmegger. He is focused on building relationships with RIAs across the country, identifying the key decision makers in fund selection and manager research. RIAs between $250 million and $2 billion in assets under management, don’t hesitate to get in touch with him at firstname.lastname@example.org or on 646-532-6317.
After touching down in Chicago, we headed to our first meeting of the day with Sean Chatburn at Mercer Investment Consulting. He is a part of the manager research team, made up of roughly 145 analysts around the globe. The team is headed up by Deb Clarke, who is based in the Chicago office with Chatburn. As opposed to being split by asset class coverage, the US Equity team, which consists of nine analysts, is broken down by geographic region. Chatburn covers the Northeast and mid-Atlantic regions.
Pictured left to right: Sean Chatburn, me and Isaiah Green.
Mercer has three lines of business: tools (research), advice (consulting services) and solutions (OCIO). Solutions oversees nearly $160 billion in assets, while advice is responsible for just over $10 trillion. The clients who use these services are mainly institutions such as endowments, foundations and defined benefit and contribution pension plans.
The global manager research team works to develop a central ratings system used by Mercer advisors when selecting investment strategies for their clients. Ratings range from A, through B+, B, and C, and then down to R. Strategies with an A rating are the highest conviction strategies, while an R rating indicates that not enough research has been performed to assign a rating.
Globally, Mercer’s asset class specialists perform roughly 3,500 manager meetings a year to meet their clients’ needs and evaluate strategies using a quantitative and qualitative approach. In the US equity space, Mercer covers a total of 3,000 strategies – 1,200 of which are analyzed by the team. Only 175 receive an A rating. Ultimately, the team’s task is to identify unique and interesting strategies to support their clients’ investment objectives.
While Mercer has not had to make any big changes to its business because of the Department of Labor’s fiduciary rule, which is now delayed until July 2019, it has benefited from the proposed reform, as retail shops look to supplement their coverage and shore up their overall offerings.
In May 2015, wirehouse UBS partnered with Mercer to give its investment manager research team access to Mercer’s manager research and performance analytics. By working together, UBS has expanded its overall coverage, freeing up its in-house research team to focus on its high conviction list. Similar moves have since been made by Merrill Lynch and Ameriprise, which have teamed up with Morningstar and Wilshire Associates respectively, meaning investment consultants are increasing their presence in the retail market.
Our next meeting was my favorite kind: a lunch meeting. It was with Paul Courtney, who founded research and OCIO firm SpringTide Partners last year.
Pictured left to right: Paul Courtney, Isaiah Green and me.
So far, SpringTide has nine clients that advise on assets under management of approximately $1.2 billion. Courtney and his partner Aaron Dirlam have a unique approach, looking to use managers who have underperformed recently.
‘We tend to make contrarian allocation and manager selection decisions, but not for the sake of it,’ he said. ‘In practice we fade three- and five-year performance numbers when making initial asset class and manager selection decisions, not because it is fun – it is not – but because it works over the long term.’
Courtney believes that the tendency of performance over those time periods to systematically mean revert is one of the most widely documented and least widely implemented facets of investing.
‘We believe in this ebb and flow of factors and manager performance so strongly that we named the firm after it,’ he said.
Like Mercer, SpringTide has benefited from increased demand for outsourced research and investment services brought on by the DOL rule. Courtney said that an uptick in the number of firms outsourcing their fiduciary responsibility drove him and Dirlam to offer OCIO services in addition to investment research.
After lunch we headed to our last meeting of the day with the Jackson National subadvisor selection team.
Pictured left to right: Bill Harding, Kyle Ottwell,Sean Hynes, Mark Pliska, Isaiah Green, me, Liza Hill, John Thomas, Kerry O’Boyle, Dave Larsen, Matt Maronta and Adam Wiklund.
Former cover star and friend of the magazine Bill Harding had kindly set up the meeting for us, bringing nine of his analysts and portfolio managers together in one room. Harding is chief investment officer for the firm, which is an advisor on $212 billion of assets under management in variable annuity funds. Jackson currently has 149 mutual funds on its variable annuity platform, run by 61 subadvisors. The firm is launching 21 new funds on its variable annuity platform this month, including 10 subadvised by Vanguard, seven with Mellon Capital and one with emerging markets star Rajiv Jain.
Harding could not speak about the new funds as they had not launched at the time of our meeting, but said that the decision to add more passive options to the platform had been driven by an increased focus on fees – itself a product of the fiduciary rule.
With a packed schedule and sore feet it was a relief to know that we didn’t have to catch a flight back to New York that evening. So, like many Chicago tourists before us, we set off to find the finest deep dish pizza the city had to offer. Our arteries may not thank us but our taste buds certainly did.
The next morning we kicked things off with a cramped cab ride, and arrived at our first meeting of the day with Morningstar.
On entering the Morningstar offices, it’s hard not to be struck by the modern decor. It looks more like a trendy tech start-up than an established financial research shop.
Our meeting was set up by Josh Charlson, a director in the manager selection team, which is headed by Peter Di Teresa. Charlson had really gone above and beyond for us, roping in Di Teresa, Laura Lutton (director of manager research practice for North America) and Ben Johnson (director of passive strategies, global manager research). While Charlson and Di Teresa are busy building select lists for retirement plans, Lutton and Johnson oversee the teams that evaluate North American portfolio managers, with Lutton focusing on active managers and Johnson analyzing the passive space.
Pictured left to right: Peter Di Teresa, Laura Lutton, me, Josh Charlson, Isaiah Green and Ben Johnson.
Last year, Morningstar launched sustainability ratings for 20,000 funds worldwide to show how well strategies meet ESG criteria. Di Teresa said investor interest in ESG had grown such that he was in the process of building a select list consisting purely of such funds for one client, with the expectation that demand for curated ESG lists will grow. He said that the team was incorporating both intentional ESG funds and those without a specific ethical mandate but that have a good track record for sustainability ratings.
In the passive world, Johnson noted the rise of strategic or smart beta ETFs, but stressed that these should not be considered passives, as active decisions are still required to tilt a portfolio toward value, momentum, growth or another factor.
Charlson pointed out that the number of new liquid alternative launches has slowed recently after a period of oversupply, and noted that the market’s relative youth makes it difficult to find managers with meaningful track records. However, he has managed to find a few that he believes have added value and diversification.
Morningstar is now working with Merrill Lynch to cover funds on the wirehouse’s platform that are not overseen by the research team in the home office. Like Mercer and SpringTide, the firm has benefited massively from the DOL rule. Although Morningstar was already a huge player in the retail market, its work with Merrill is part of a trend toward greater involvement of third-party consultants in advice firms’ selection processes – a job which Lutton said now takes up much of her time.
Our final stop was with Sumit Desai and Bob Martin at Mesirow Wealth Advisors, a $5 billion RIA.
Pictured left to right: Isaiah Green, Sumit Desai, Bob Martin and me.
Desai and Martin both conduct due diligence, vetting funds for their recommended list of 15 to 25 high conviction active managers and several passive options. Their process is vehicle agnostic and involves parsing a portfolio manager’s thesis on individual holdings. The pair said they are longterm, valuation-sensitive investors, but also believe that many investors are wrong to simply divide the world into value and growth.
‘Value investors who look just at valuation, for example, seem to flock toward persistently low-multiple sectors like financials or energy, which hasn’t worked well in recent years. Time will tell how these strategies perform going forward,’ Desai said. ‘On the other hand, growth investors who don’t pay attention to valuation will probably lag over a full market cycle too.’
Instead, the pair split the investment universe into high-quality versus low-quality, or cheap versus expensive. Over time, they hope this will help them avoid value traps.
Like Harding, Desai said the fiduciary rule has placed a new emphasis on the cost of investment. ‘The DOL rule and the broad shift toward fee-based advisory models has certainly highlighted the need for cost-conscious investing and the benefits of deep and thorough research. To the extent that an advisor uses active funds, there’s significantly increased scrutiny to determine whether the manager’s approach justifies higher fees than passive options.’
West coast retreat
Citywire’s Due Diligence Retreat will be held at the Four Seasons Beverly Hills on October 19 and 20. The event will bring together heads of research and due diligence from RIAs, family offices, broker-dealers, wirehouses and subadvisor selection teams at asset management and insurance firms. Over the two days, you will hear from leading portfolio managers and network with your peers. If you would like to register please email email@example.com or give me a ring at 646-532-6301.
My name is Amelia Garland and I am a relationship manager at Citywire. My aim is simple: to get to know the professional buyers across the US and engage with heads of manager research and due diligence, directors of investments and anyone who selects third-party products for their platform.
I am constantly on the road, if you would like me to pay you a visit, please don’t hesitate to get in touch at firstname.lastname@example.org or give me a ring at 646-532-6301. Don’t forget to tweet @GarlandGoesWest if you would like me to visit your city.
Next stop, Boston!