Matt Embleton is about as dedicated to fund selection as it is possible to be. He bought his first funds while in high school, decided on his chosen career during college and has since battled snow storms to meet managers.
Such dedication landed Embleton the role of principal for mutual fund research at broker-dealer Edward Jones, a position he has held since 2009.
In this job he manages a team of 25 investment researchers, who build and maintain a recommended list of 700 investment strategies used by 14,000 advisors managing $541 billion of mutual fund assets. Given the size of his influence, it’s lucky he’s dedicated.
When you are playing a hole, you are not just thinking about your current shot. You are thinking: "how I am going to make it to the green and make a good score"
When not picking funds for a living, Embleton can be found on the Forest Hills Country Club golf course picking his spot on the green. But even here his mind returns to investment selection.
‘In golf, there is strategy,’ he says. ‘When you are playing a hole, you are not just thinking about your current shot. You are thinking: “how I am going to make it to the green and make a good score?” So you evaluate.
‘[It’s the same way] I think about investing. We take a longer-term approach. There are certain steps and approaches we need to take to lead to client success. It’s not just about thinking: “I need to get there as soon as I can.” We need to take the appropriate steps in our due diligence, looking at each manager through our lens. There are steps involved and you have to be strategic about it.’
Strength in numbers
Unlike golf, which is largely an individual game, Embleton’s approach to manager due diligence is distinctly team-based. He does not just rely on a large team himself, but expects portfolio managers to do so as well.
‘We want to invest in teams running strategies where we can invest for the next 10-15 years and we recognize that the current decision-maker may not be there for the next 10-15 years,’ he says.
This leads Embleton and his analysts to place a lot of focus on asset managers’ succession plans.
‘When you have a lead portfolio manager, they are not going to work forever,’ he says. ‘Eventually, they are going to retire or move on to another firm. We like to see continuity of management. A big focus in our due diligence process is to understand succession planning and who the next up-and-comer is for a particular strategy.
‘The face of a fund is recognizable. A lot of times firms put that person in front of you, but we like to dig deeper and understand, if this person was not there, who would this investment firm rely on to take this strategy forward?
‘That is something we have learned over our career and place a lot of emphasis on today.’
Mutual funds dominate Embleton’s list of investments. There are up to 80 separately managed accounts and 60 exchange-traded funds (ETFs). The rest are mutual funds, all run by a combined 200 asset management firms.
Embleton’s preference for teamed-based management and firms with deep research functions means the majority of these asset managers are larger, well-known players. The ETFs available are plainer indices tracking major markets and asset classes rather than more complex smart beta strategies.
I like investment managers who really roll up their sleeves and do the deep fundamental research and are really passionate about that
The fund list is used by Edward Jones’s transactional brokers, who manage around $404 billion in mutual fund assets and the firm’s fee-based advisors who manage $137 billion.
Of the latter figure, 95% is in model portfolios built by Edward Jones. These portfolios, of which there are around 100 variations based off six broad objectives, are managed by a separate team of 10 headed by Embleton’s colleague Brian Luebbert.
All the funds used in these portfolios comes from Embleton’s list. They have grown from nothing just eight years ago to holding $130 billion in assets today.
Embleton’s recommendations also lie behind the firms and funds selected to construct the Bridge Builder series, Edward Jones’s multi-manager mutual fund range.
This consists of eight funds, each with between three and six subadvisors. Since launching one fund in 2013 and a further seven in 2015, the funds have rapidly grown to $29 billion in assets. Although large managers, such as BlackRock and T. Rowe Price, are well represented across the range, more niche names are also included.
Edinburgh-based Baillie Gifford is one of the subadvisors on the Bridge Builder International Equity fund, while Houston, Texas-based Stephens Investment Management Group rubs shoulders with Legg Mason and Eagle Asset Management on the Bridge Builder Small/Mid Cap Growth fund.
Keeping on course
Regardless of whether managers win a place in a portfolio or Bridge Builder fund, Embleton’s process in terms of due diligence is always the same.
‘It starts with quality,’ he says. ‘We look for teams who have an investing advantage – in their behaviors, their level of resources, the quality of their resources and how they structure their teams. We also have a keen focus on risk management and what the culture of the organization is.’
Although Embleton declines to mention any of the managers he admires by name – ‘it’s kind of like asking me which of my kids I favor’ – there are specific qualities he believes they all share.
‘The ones that stand out are the investment managers who are really passionate about what they do. They live and breathe it every day. I like the ones who really roll up their sleeves and do the deep fundamental research and are really passionate about that.’
He is open about the firm’s preference for active management over passive offerings but says this is not an entrenched view.
Just because there is a move toward passives, doesn’t mean you have to follow that herd
‘You need to be aware of the investment environment and how it is evolving, but just because there is a move toward passives, doesn’t mean you have to follow that herd,’ he says. ‘We prefer active and our clients prefer active management, but we think there is benefit to providing both in a portfolio. What you get is greater diversification and an opportunity to have lower fees, which can be good for clients.’
Although turnover on the list is low at around 10-15%, and is often down to changes in the management of funds, Embleton says his team is happy to replace products if a researcher finds a demonstrably better option.
‘We will add something we think has a better chance of being successful in the future than something that is currently on the list,’ he says.
Embleton has been picking funds and building portfolios for almost 20 years, first at A.G. Edwards & Sons and then at Edward Jones. It is perhaps a sign of the strange investment environment we are currently in that he regards today’s equity bull run as more challenging than the aftermath of the financial crisis.
In 2008 the firm shifted portfolios toward value managers and those with a more contrarian approach, which helped boost clients as things recovered.
Eight years on and things are a little different. ‘Some of the biggest challenges are when markets are performing particularly well and some of the diversified portfolios we create for our clients just aren’t keeping up with the US market,’ he says.
Still, such strange circumstances are unlikely to throw this pro off course.
‘Conditions can change and the market can change. You have to adapt,’ he says. ‘If you make a mistake along the way, you can’t let it impact your confidence. You need to learn from it, just as you do in golf, but you must be long-term focused and stick to your game plan.’