BNY Mellon’s Seyi Bucknor and Moustapha Abounadi might take different sides, but they are very much on the same team.
The duo are co-heads of manager research at BNY Mellon, with Bucknor overseeing equity strategies and Abounadi fixed income. Although their asset classes, and sometimes approaches, may vary, the rival soccer fans are both on the hunt for the same thing: truly active managers.
With the rise of passive investment options, particularly factor-based strategies, they are searching for managers who can truly differentiate themselves.
‘We are very cognizant of how the entrance of smart beta and the growth of index funds is threatening the pool of alpha that traditional active managers have been fishing in,’ Bucknor says. ‘What we are looking for now are managers who are aware of those headwinds, who are attuned to the risk and whose portfolios actually deliver true alpha.
‘As there is more fee pressure from regulation and passive funds, more people are going to want to pay for alpha and managers who are able to construct portfolios that parse alpha and separate beta and systematic risks are the types we are trying to isolate from the packs.’
They will often do this as a team, visiting and interviewing managers together, and occasionally playing good cop, bad cop.
‘Sometimes we will resort to that kind of dynamic,’ Abounadi says. ‘I can’t say we necessarily go into a meeting with that as an objective, but sometimes you do get those kinds of dynamics precisely because of differences in personalities.
‘On many occasions we interview managers together and it is always interesting to have someone from a different asset class in the room asking questions. Even though we evaluate the same factors, there is always nuance to the asset class and it is interesting to see when we combine those interactions.
‘You can’t leave personal style behind. Each analyst has their style and I personally find it interesting to watch.’
Between the two of them and their teams, Bucknor and Abounadi compile a recommended list of some 750 strategies. This is then used by five main groups within BNY Mellon: BNY Wealth Management, Lockwood Advisors, Pershing FundVest 200, the firm’s trust service called Fiduciary Solutions, its multi-asset pension solutions arm BNY Mellon Investment Strategy & Solutions Group (ISSG).
FundVest is a list of 211 researched funds which sit on Pershing platform, which are reviewed quarterly.
All the other services have their own investment teams who make allocation decisions and oversee portfolio construction, but who work off the research and insights provided by Bucknor and Abounadi.
The duo has one additional role, which is to evaluate the strategies offered by BNY’s 14 affiliate asset managers and report to BNY Mellon Investment Management chief executive Mitchell Harris about what is working well, or not, as the case may be.
The fact BNY has these 14 affiliate asset managers might lead some to assume Bucknor and Abounadi lean toward strategies from these firms when recommending managers.
Although around 250 of the 750 recommended strategies are from affiliated boutiques, the majority are not and the pair currently cover offerings from 156 third-party asset managers.
Although the vast majority of assets under management in BNY Wealth Management, Fiduciary Solutions and ISSG sit with affiliated managers, all the assets under management for Lockwood and FundVest 200, a combined $20.2 billion, sit with third-party managers.
The 750 strategies are spread across vehicles. The majority are in mutual funds (733), with 212 separately managed accounts, 41 exchange-traded funds (ETFs) and 63 limited partnerships. There is some overlap here hence the number of total strategies is smaller than the individual vehicles employed.
To arrive at this list the pair assess strategies based on six headline factors that then have a further four sub-factors each. These are: organization, personnel, philosophy, process, implementation and performance
‘It is not a black box that adds up to certain number, just a framework that helps the analyst be clear about their views,’ Abounadi says.
Using these factors, the team arrives at a thesis about a fund and recommended managers have a report written up that is available to the team’s various internal clients. If the thesis becomes invalid due to changes at the asset manager level or a changed perception at research level, the manager will come off the list. Annual turnover is around 10%.
Abounadi is keen to stress that performance is looked at as a means to validate other observations they have made about the manager, not as a simplistic measure in and of itself.
‘Our core philosophy is predicated on the idea that just looking at past performance in a vacuum is a really poor indicator of how a manager or strategy is likely to perform,’ he says.
Their search for alpha means they like managers who have a clear and well-defined philosophy as well as a handle on risk management.
‘A lot of investment managers don’t really have a driving philosophy to their investments, so we spend a lot of time trying to analyze that,’ Abounadi says.
‘On the fixed income side we look at the implementation, particularly portfolio construction, that emphasizes the right convexity, where managers aren’t just trading on a view but trying to balance that with ensuring positive convexity.
‘We are also looking at trading and how that impacts performance and risk management from a research perspective and from a process perspective – what kind of seat does risk management have at the table. Is it an afterthought or placed in the right sequence?’
Bucknor adds: ‘Risk management used to be the domain of quants, who understood systematic versus idiosyncratic risk, but it is now something a stock picker who runs a 40-stock portfolio is also going to ramp up their knowledge of.
‘Quite frankly, that 40-stock portfolio 10 years ago could have delivered alpha consistently, but now with so many quant funds and smart beta ETF offerings also trading on the same alpha or beta sources that managers used to call alpha, it is more difficult for you to squeeze out that pure idiosyncratic risk.
‘We are looking for managers who understand that dynamic.’
The pair declines to name individual strategies but Bucknor says that one such manager to fit this billing is a London-based global equity manager who set up a boutique after leaving a larger shop in the city.
‘It is a genius stock picker who knows macro events,’ he says. ‘A lot of stock pickers say, “I don’t worry about the macro,” but this is someone who is able to frame both the macro and the bottom-up in a very intuitive way and constructs portfolios that are very good at expressing views but minimizing macro bets. This is someone who put together a firm, a process and strategy that gets across his best ideas.’
Although the duo are not keen on managers who hide behind beta, they have no problem using passive or indeed active funds expressly based on capturing specific factors.
‘We think they have a place in client portfolios. They give you cheap, consistently liquid, transparent exposure to beta that people do need in their portfolios,’ Bucknor says.
There is clearly a mutual respect between the pair who share an interest in English Premier League soccer. Bucknor enjoys the upper hand here at the moment with his team Chelsea set to be crowned champions this year.
Abounadi is having a more miserable time of things with his team Arsenal in a state of turmoil after a period of underperformance that may yet lead to their manager being shown the door. If the team decides to look for a new one, perhaps Abounadi and Bucknor might have some tips.