Patience is a virtue that comes naturally to Gene Needles, a man who takes his time to hire, and also to fire, his managers. For the chief executive of America Beacon, one of the largest providers of subadvised funds in the country, playing the long game is what it’s all about.
‘Most individual investors and the vast majority of institutional investors act too quickly on the sell side,’ he says. ‘They don’t give a manager enough time.’
‘If you have underperformance for a year or a year and a half, they will sell off the manager and that’s exactly the wrong time to do that. We do so much diligence on the front end that it’s very rare we change a manager.’
The firm currently offers 32 mutual funds, which are subadvised by 36 asset management firms. The majority of the funds have a single subadvisor, although there is a range of five multi-manager offerings that have multiple subadvisors. In total these mutual funds account for $57.2 billion in assets under management.
The company’s business model would not work if the single subadvisor strategies were available to advisors elsewhere, meaning Needles must find not only top performers, but top performers no one else can access. Often they are based overseas or just run institutional strategies.
To achieve this, Needles, alongside his right-hand-man, chief operations officer Jeff Ringdahl, looks for top managers before launching a fund, rather than the other way around.
This process helps them avoid scouring the earth for a specific strategy, although the downside is their pool of managers is potentially unlimited.
‘One out of every 100 conversations, we find something that’s extraordinary and fits all of the things we want: best in class, true active management, long-term view and a good culture,’ Needles says.
‘If and when we find that opportunity, we will bring it to market.’
Their search criteria for managers spans institutional quality, enduring value and underappreciated investment excellence.
On the quantitative front, they typically use databases to evaluate how predictable and repeatable a manager’s process is. They avoid end-point bias, which looks at three- and five-year track records, and instead focus on rolling periods in order to get a better idea of how a manager performs over time.
Regardless of how well any meetings or analysis goes, the firm does not add any subadvisors unless there is a consensus view by its product management committee.
‘Anything can be killed by anyone even after coming out of that committee,’ Needles says. ‘We’ve had products killed where managers had compliance violations we couldn’t live with.’
On other occasions things do not need to progress this far for Needles to say no.
‘I will generally phase someone out if it becomes apparent they don’t have the chops for investment management,’ he says. ‘Either they’re over simplifying how hard it is to be a great portfolio manager or, when you dig into their discipline, it’s clear it isn’t repeatable and there isn’t a lot of intellectual capital brought to that.
‘Whether its quantitative management or fundamental management, you’re paying for something there and there is no free lunch. You’re either digging in with significant individual research or you have a very robust framework from a quantitative standpoint. This isn’t something you can do from your garage, there is just too much competition these days.’
Needles is not fan of benchmark huggers either. If a manager claims to be active, Needles likes to see concentrated portfolios to back up the claims.
‘We like high-conviction and concentrated managers,’ he says. ‘Concentrated doesn’t necessarily mean riskier – lots of academic studies show that when you get to 18 holdings, the diversification provided by additional holdings is de minimis.’
One manager that fits Needles’ criteria is TwentyFour Asset Management, a UK-based fixed income boutique and subsidiary of Vontobel Asset Management.
American Beacon created a multi-sector bond fund, based on TwentyFour’s core strategies, which the group subadvises. The fund, launched at the beginning of April, is called the American Beacon TwentyFour Strategic Income fund and is managed by Mark Holman, Gary Kirk, Eoin Walsh, Robert Arnold and Pierre Beniguel.
Although Needles’ process means he sees a lot of managers, the same was true for the directors at TwentyFour, who had met with 26 other firms about a partnership as they looked to break the US.
‘We never lose those type of bake-offs,’ Needles says. ‘It’s memorable because we’re attracting looks from overseas and the very high quality of investment management that TwentyFour represents.
‘It ticked all of our boxes in terms of enduring value, institutional quality and certainly underappreciated investment excellence because it wasn’t in a US mutual fund wrapper until recently.’
Another asset manager Needles considers a success story is quantitative shop Numeric Investors.
The firm is based in Boston and prior to its deal with American Beacon focused on running money for institutional investors. In 2014 it was acquired by London-based hedge fund firm Man GLG, then led by current Pimco chief executive Manny Roman.
In November last year Needles unveiled the American Beacon Numeric Integrated Alpha fund, which is managed by Bing Cheng Yan and Paul Pflugfelder.
The fund aims to identify long and short positions in global equities through the use of quantitative signals coupled with fundamental strategies.
Needles says the decision spawned from a partnership that spanned four years ago and discussions going back a further two. It was the third product the firm had partnered with the Man Group on.
‘Numeric has very strong quantitative investment management across the board,’ he says. ‘This is a very stable return product so as we looked at things, we said, do we have products that would fare well if the market sold off and when we see something like that, it’s of strong interest to us.’
Using the same logic he deploys for finding subadvisors, Needles has also made several acquisitions during his time as chief executive of American Beacon and its parent company Resolute Investment Managers.
‘We acquire firms we believe we can grow significantly. That is hard to do, especially in an environment where active managers are suffering outflows,’ he says.
‘It requires patience but once you build momentum, it can be spectacular. It’s what attracts great subadvisors to us and great affiliates in terms of acquisition. We are much more attracted to high-quality affiliates that are earlier in their growth phase than other firms might look at acquiring.’
One of the firm’s more recent acquisitions was quantitative shop Crest Investment Partners in October 2016.
Earlier that year it bought a minority stake in disruption-focused specialist Ark Investment Managers.
After the deal, Crest changed its name to Alpha Quant Advisors and launched four funds with American Beacon: Alpha Quant Core, Dividend, Quality and Value.
All four funds are managed by Massimo Santicchia and Katherine Gallagher and employ fundamentally driven quantitative investment processes.
‘We saw a really small firm that needed help growing,’ Needles says.
Crest had two investment professionals and about $80 million in assets under management, at the time of acquisition, with around seven separate accounts and no mutual funds, according to Needles.
‘Here’s a case where no one else got the opportunity to talk to this firm because we are known in the marketplace for our ability to help firms grow. That’s a competitive advantage – if no one else talks to it, you don’t have a whole lot of competition in terms of acquisition.’
Small but mighty
The small size of some firms Needles sees, whether as acquisition or subadvisor targets, does not put him off.
He made the decision to adopt the Bridgeway Large-Cap Value fund, which had $28 million after a nine-year track record. It now has $4.3 billion, which Needles says is larger than the rest of the shop combined.
The American Beacon Bridgeway Large-Cap Value fund, which is managed by John Montgomery, Elena Khoziaeva and Michael Whipple, has enjoyed relatively good performance, returning 29.8% over a three-year period in comparison with the average manager in the sector, who returned 20.8% over the same period.
‘I had a very strong opinion of the quality in the firm,’ he says. ‘It was a tremendous cultural fit. It gives half of its profits to charity and is investing in humanitarian relief and conflicts around the globe.
‘It takes an approach similar to ESG but more involved. Most ESG firms don’t give away half of their profits. They may invest other people’s money in that but not their actual profits, so that’s the differentiator.’
The firm was also a referral to American Beacon, which today makes up roughly 95% of Bridgeway’s assets, according to Needles.
Needles believes if there are any hidden gem managers out there, he and his team are already in talks with them.
‘If we think there is an extraordinary manager, even though they may not be ready to subadvise a product, have us adopt their product or be acquired by us, we will have ongoing discussions with them and it’s not unusual for a firm like that to come to us five years later and say it is ready.’