Burt White is complicated. He is obsessed with meeting people, talking to people, finding out who they really are. But he also swears he’s an introvert.
As chief investment officer for LPL Financial, the largest independent broker-dealer in the country, he has made a career out of getting to know the biggest and best investors in the US on a very personal level. He is a regular commentator on CNBC and he speaks at conferences of more than 7,000 advisors.
It hardly seems like the obvious job for a ‘shy kid from the small town of Radford, Virginia’ who grew up expecting to work on a farm.
But he believes this apparent contradiction is the key to his success.
‘I’m a firm believer that your greatest strengths are your greatest weaknesses,’ he says.
‘Investing is about relationships. It is about people. [My introversion] made me focus on relationships. It made me focus on getting to know people. It has allowed me to have such different relationships and to be able to learn to connect to individuals in a very intimate and real way.’
Stellar stratergies that have short-term blips in their records are wonderful spots for us
These are not empty words. White and his team of 26 investment analysts place huge value on getting to know portfolio managers.
By his own admission their due diligence process is somewhere between ‘a job interview and an FBI profile.’
He aims to lift the mask of portfolio managers to work out whether they should get a slice of the $486 billion under his influence.
‘For us, diligence is a people business,’ he says. ‘You see the world defining managers by their numbers. But for us, managers and their funds are living and breathing organizations. They are emotional organizations. They are real people and because of that you really have to understand them.’
This means all-too human factors will influence investment decisions.
‘If you’ve gotten to know people like Bill Miller [at LMM] or Chuck Royce [of Royce Funds] then you know their favorite sports teams. You know with Richie Freeman at ClearBridge, if the New York Mets lost he is probably going to have a very different day looking at the Bloomberg terminal than if the Mets won.’
If White gets to know a manager and likes what he finds, then the manager could make their way onto LPL Financial’s recommended fund list. This consists of 350 mutual funds, separately managed accounts and exchange-traded funds.
While LPL advisors can in theory choose from 6,000 funds, White’s list is widely used. From this 350, White and his team select their top pick across 50 asset classes.
These picks are often – but not always – used to populate the various centrally managed portfolios that the team builds and makes available to the 14,000 advisors in the brokerage.
The company has around $20 billion in these portfolios across two platforms. Each portfolio consists of between eight and 15 managers, of whom 90% come from the recommended list.
White stresses that asset allocation and diversification are only the start of portfolio construction, not the end.
‘People spend so much time creating a Nobel Prize-winning pie chart and once they get it they throw their hands up, say “whoopee, let’s just put some funds in there and see what happens.” But things don’t work that way. How strategies work together is one of the biggest decisions of investing.
‘That’s why we spend a lot of time trying to understand the DNA of the money managers. Once you know that DNA you are almost like a matchmaker and you can combine managers to create optimum portfolios.’
So what kind of managers make the cut?
‘People who have a level of conviction,’ he says. ‘What wins is passion and patience. It's staying with an investment strategy regardless of what the benchmark is telling you.’
He says these managers are often hiding in plain sight: big-name managers who may be out of favor after a bout of short-term underperformance, but who have a clear and effective process and philosophy.
‘Portfolio managers don’t just wake up one day and suddenly don’t know what they are doing,’ White says. ‘Stellar strategies that have short-term blips in their records are wonderful spots for us to take a look at.’
These include Bill Miller, who manages the Legg Mason Opportunity Trust, despite recently splitting from the asset management company after 35 years.
Miller continues to run the fund through his firm LMM LLC.
‘I have been a long-time investor in Bill Miller's strategies and have been attracted and impressed by his unique thought-leadership and outside-in thinking,’ White says.
‘Despite his performance hiccups in 2007-2008, no process or team aspect has changed, and I focus on the true reasons why performance materialized. We benefited from significant rebounds in the strategy in 2012-2015.’
He also names the Pimco All Asset All Authority fund, which is managed on a subadvised basis by Rob Arnott of Research Affiliates.
He says it suffered a dip in 2014 and 2015, but maintained its management and processes and rebounded this year.
Although new talent can be hard to spot and takes time to nurture, White says emerging managers who offer something different from the rest of the market appeal to his philosophy.
‘While Columbus Circle Investors and Peregrine Capital Management are not new firms, they don't get the credit they deserve for strong performance, stellar cultures and an investment process poised for success,’ he says.
Another less well-known name he likes is Edgewood Management, a New York-based boutique that runs the US large cap-focused Edgewood Growth fund.
‘They run a very concentrated portfolio, usually 22 stocks or so, and that takes great conviction,’ he says. ‘What we really like about them is that they are a small boutique firm that only does one thing – large-cap growth. That’s it. That is all they do. They know who they are, who they want to be, and they have this really deep tight-knit group, who have been together for a long time,’ he says.
Bumps in the road
The turnover of managers on White’s list is around 20% per year, but he says three-quarters of this is reactive to changes in personnel or a shift in style.
Funds falling in this category in recent years include the Columbia Marsico 21st Century fund, now called the Columbia Large Cap Growth fund, the Pimco Unconstrained Bond fund and the Hartford Capital Appreciation fund.
In all instances White’s decision to drop these funds was due to changes in management, which he felt significantly shifted the DNA of the strategy.
The other reason for cutting a fund is when it turns out different from how White thought it would.
‘There are times when we mis-profile,’ White says. ‘The fund just behaves differently to how you thought it was going to behave. That happens.
‘As good as we are at profiling, sometimes you don’t get it right.’
Minor hiccups aside, it is clear White enjoys what he does for a living and has arrived at a truly personal style of manager selection.
‘I feel blessed,’ he says. ‘I don’t think anyone has more fun than me. I get to interact with some of the coolest cats in the world for a living. I was a shy kid from a small town. I thought I would be doing farming or construction or working with my hands. I never had any idea this would be where I’d end up.’