As a pair of New Yorkers living and working in Boston, John Tennaro and Scott Burg know a thing or two about standing out from the crowd.
While colleagues and neighbors cheer on the Celtics, back the Bruins, root for the Red Socks, or – worst of all – applaud the Patriots, these two stand out by staying quiet.
They take no pleasure in the sporting success of their adopted home town, instead preferring their childhood teams, the Giants and the Mets.
But aside from a few awkward game days, being different is no bad thing in their book. In fact, when it comes to their day job – overseeing traditional manager research for CIBC Atlantic Trust Private Wealth Management – it is something they positively encourage.
Tennaro and Burg pick and monitor every one of the 60 strategies on their platform. It is a deliberately small list and there is no room for managers who don’t differentiate themselves.
This not only excludes closet index trackers, but also prospective portfolio managers who pitch by likening themselves to others.
‘If you’re a mid-cap manager and you’re saying, “We saw that you also work with XYZ mid-cap manager and this is why we’re better than them”, you’ve made some large assumptions that you don’t know a lot about,’ Tennaro says. ‘It sets the tone of them telling us that we’re not doing a good job.’
‘Managers that are on the platform are managers that we have high conviction in,’ Burg adds. ‘We don’t add a manager just to have a manager in a certain asset class.’
Their list of 60 strategies, run by 45 asset management firms, is used by around 200 advisors and accounts for approximately $12.5 billion in assets under management. Of the 60 strategies, around 10 are passives – either ETFs or index mutual funds – with the rest either active mutual funds or separately managed accounts.
Advisors also have access to alternatives, with due diligence conducted by Tennaro and Burg’s colleagues Jigar Patel and Ohm Srinivasan, who oversee $1.4 billion in hedge funds, and Daniel Criscuolo and Lester Duke, who oversee $1.1 billion in private equity funds.
In total, 10 research analysts are responsible for building and maintaining the roster of external managers that make up the combined traditional and alternative platforms.
Tennaro and Burg, who report to the firm’s chief investment officer David Donabedian, also manage a range of risk-rated model portfolios populated by both their manager picks and some proprietary strategies. These strategies are run by the firm's investment management division and account for $26 billion of assets.
While Tennaro and Burg don’t hire or fire many managers – there are only around three or four changes on their platform each year – they are always on the lookout.
They start with an initial quantitative screen that looks at risk/return metrics over the short and long term, with the latter counting for more.
‘We just use that as a tool to organize the various asset classes and peer groups and then from there we layer in some other aspects, including the size of the fund, track record and fees,’ Burg says.
For passives, the process is solely quantitative, using criteria such as tracking error, beta, excess return and fees to make sure the funds are fulfilling what they set out to do in terms of index replication.
Tennaro says that only a handful of major passive players fulfil most of their platform requirements at the moment, adding that their preference is for firms with an index fund that is also accessible as an ETF.
But it is on the qualitative side that they believe their due diligence skills really count. ‘Our process is a healthy mix of quantitative and qualitative analysis, but qualitative is really the driving force that allows us to distinguish ourselves,’ Tennaro says.
‘The amount of time that Scott and I have done this and done this together, we both agree that we tend to be a little more effective when we’re with each other.’
Tennaro and Burg want to see portfolio managers who respect and utilize their analysts, as well as analysts who admire and want to work with their portfolio managers.
One group that ticks this box for Burg is PGIM’s high yield bond team. ‘When we go to their headquarters in Newark, they make the lead managers, analysts and client portfolio managers all accessible and they tell the truth about what they’re seeing in the marketplace and what they’re doing in the fund,’ he says.
‘It’s refreshing for a firm that size, because it’s very easy for a firm like that just to trot out their junior analyst or client PMs. We’ve been working with them for a number of years and they know what level of access we expect and have no problem providing it.’
Burg adds that the $6.8 billion Prudential High Yield fund was the first fund he approved when he joined Atlantic Trust. The fund is managed by Terrence Wheat, Robert Spano, Ryan Kelly, Brian Clapp, Robert Cignarella and Daniel Thorogood.
Meanwhile, Tennaro highlights Denver, Colorado-based Versus Capital. The firm offers two closed-end interval funds, Versus Capital Real Estate Income and Versus Capital Real Assets, which Tennaro says are different to anything else on the market.
‘They gave us unbelievable insight and transparency into what they’re doing and how they’re doing it. They gave us access from the CIO to the chief executive, and they’re consistently communicating with us,’ Tennaro says. ‘The information that they give us on an ongoing basis is really second to none.’
The real estate fund was added to Tennaro and Burg’s platform two years ago, and the real assets fund was added shortly after it launched in September 2017.
‘Those are two asset classes where Scott and I haven’t really found a lot of superior opportunities in the mutual fund space,’ Tennaro says.
KEEP THE FAITH
The pair runs a quantitative screen on all their picks every quarter to assess whether they are performing as expected. This can lead to a manager being put on a watch list, but would never be enough for a strategy to be removed. That is a more qualitative exercise.
The same is true of a lead manager leaving a fund: That alone would not trigger a change from Tennaro and Burg, but would prompt them to dig deeper. For example, they stuck with the $9 billion Virtus Vontobel Emerging Markets Opportunity fund despite the departure of manager Rajiv Jain in 2016.
‘[Vontobel] had a succession plan with Matt Benkendorf, who was an analyst under Rajiv, and they kind of developed the process and philosophy together and [Benkendorf] was really a right-hand man,’ Burg says.
‘So when Rajiv left… the week after it was announced, we had a call with Matt and we found out what his plan was and he was really open and honest.’
Burg highlights how Vontobel offered new contracts to the rest of that team to help keep it together. The fund was on watch for six to eight months – not in response to Benkendorf’s appointment, but due to some minor performance blips – and the figures soon rebounded, he says.
While they are largely happy with their emerging market managers, Tennaro and Burg are currently eyeing up more international equity strategies. ‘Right now, we’re looking at some international strategies because we have a manager that’s struggling. We also increased allocation to the international developed asset class, so we want to make sure we have enough manager diversification,’ Burg says.
Their other big aim for 2018? Keeping open minds. ‘[We should] look forward not backward – a trait that the industry has a habit of overdoing,’ Tennaro says.
‘The world is ever-changing, more so now than ever. If we only focus on our path to today and not enough on the path of where we might go, we will likely be left behind.’