Jayson Bronchetti’s due diligence is watertight. It is process-driven and heavily quantitative. It is conducted by a large and impressively qualified team.
Bronchetti has certainly come a long way since a night playing cards in his youth led to an investment to forget.
‘A long time ago I bought the stock of a company that made electronic card shufflers and my due diligence effort was basically a weekend of blackjack,’ he laughs. ‘Needless to say, that trade did not end well, but it was one I made when I was quite young so I had time to recover.’
It is worth pointing out that this trade was made in his personal account and was not for big money.
The stakes are considerably higher now.
As president of Lincoln Investment Advisors and head of funds management for Lincoln Financial, Bronchetti oversees some $160 billion of assets today.
He and his team are responsible for selecting and monitoring managers for Lincoln’s variable life, variable annuity and retirement services platforms.
This includes selecting the managers for the firm’s line-up of 89 subadvised funds, which account for $95 billion of the $160 billion.
In total they oversee around 1,500 strategies provided by 25 core fund firms and various others too. While the fund list for the retirement platform is by necessity larger, the number of fund firms and strategies available on the variable annuity and variable insurance platforms is much narrower and each pick is specific to the product it sits inside.
On the lookout
Bronchetti has worked in the world of investment for a long time but is a relative latecomer to fund due diligence. This is not to suggest he is unqualified, quite the opposite.
‘An early mentor gave me some great advice, he said: “don’t be afraid to make lateral moves, early and often in your career.” I’ve spent my entire career in the investment world, on the buy side, the sell side, in equity and debt, in public and private, institutional and retail. Making those moves really provided me with the range that I need to be effective in my current role. I think I brought a lot of that to bear over the past year and I am really excited about the changes we have made.’
The changes he refers to are both in terms of personnel at Lincoln, where over the past 18 months he has beefed up his due diligence team with hires from PineBridge, SEI, Morgan Stanley and Nationwide among other, and strategies available to Lincoln clients.
The newly strengthened team has allowed Bronchetti to place a greater focus on quantitative assessment, in particular style drift.
‘[The team] is now in a place where we have the ability to not only look at things in a qualitative way, but also from a quantitative perspective and really challenge quantitatively the ethos and strategies as described by the managers,’ he says.
‘We have really built out our quantitative manager analytics teams, so they work hand-in-hand with our manager research analysts, because what we want to make sure is that the factors contributing to manager performance are consistent with the managers’ stated philosophy.’
This is not to say they neglect the qualitative side of things.
‘We try to balance manager heuristics with empirical performance data. That is really core for us. On the more behavioral side we really look at team dynamics. We really focus on alignment of interest as well as succession planning,’ he adds.
Nor is it to suggest he and his team spend all their time monitoring existing managers.
They had 305 manager meetings in 2016, of which 118 were prospective managers.
‘We are always out and about looking for new managers who we think are going to add value,’ he says. ‘It is a constant evaluation to see if we have the best performing managers in each of the various products.’
Mixing it up
This search has meant last year the firm changed 75% of its managed volatility funds.
‘We went through a very exhaustive review of that line-up,’ Bronchetti says. ‘They are designed to provide downside protection in bear markets, but we wanted to improve the potential upside capture in rising markets. So as part of that we added 20 new subadvised managers to that suite last year. That was a pretty material change for us.
‘Part of what drove those changes was that we wanted to combine complementary style factors, with the goal of improved performance through high active share while also lowering tracking error.’
Another more product-driven change was the recently launched Lincoln Core Income variable annuity, which is aimed at fee-based advisors and uses iShares ETFs and asset allocation management from BlackRock.
‘We see value in having active and passive options on the platform and think that over time that line between active and passive will blur, ultimately to where we have outcome-oriented funds, which use both components. So we have been spending a lot of time on that. There is more to come and we have more funds on the horizon.
‘We did a big research project on the value of active and passive and you can see there is cyclicality to it. It is undeniable there is a trend toward passive and I do think that trend will continue, but there are points in time when active management can really outperform.
‘Ultimately it will be a mix; I am not someone who thinks active is going away.’
Over the coming year Bronchetti and his team are likely to add strategies for the rising rate environment and keep a close eye on managers’ environmental, social and governance (ESG) considerations.
‘Given where rates are, we are constantly on the lookout for strategies that will perform well in a rising rate environment, such as bank loans or stable value strategies, which may be less seen in a 40 Act fund, but we are continuing to build that out and come out with fund-based solutions that leverage asset classes like that,’ he says.
‘For any manager we select, we are really focused on how they mitigate ESG issues in their stock selection and portfolio construction process. We recognize that our customers are thinking about ESG factors in their investments and for that reason we have been expanding our offering of socially responsible investment options around a number of products.’
Communication is key
Bronchetti does not get a break from running a big team or having weighty responsibilities when he leaves the office either.
As a father of four young children, who he bravely brought along for our cover shoot, when Bronchetti is not picking managers he is picking up the kids from school or soccer practice.
‘I have four amazing children and a very accomplished spouse, Erin, who is an economics professor at Swarthmore College. She deserves most of the credit for our children but I do my part as soccer coach and family chauffeur on the weekends. I do occasionally slip away to play a little golf.’
Although there are few crossovers between assessing managers and raising a young family, Bronchetti sees one: unpredictability.
‘Life with four rambunctious kids is unpredictable so we try to keep lines of communication open all the time. We really have a process for keeping track of all the important things in our family,’ he says.
‘Markets can be unpredictable and chaotic too, so ensuring open communication with our managers and a well-defined process for oversight consistently allows us to make thoughtful long-term decisions for our investors.’