The sleepy streets of Berwyn, Pennsylvania may not seem synonymous with adventure, but at Brinker Capital there are some big changes afoot.
The 30-year old investment shop is overhauling its flagship discretionary portfolio service, which it has run for almost a quarter of a century, and is launching its own range of mutual funds.
Citywire first revealed details about funds at the start of April, and now catches up with the firm’s professional buyers Jeff Raupp and Amy Magnotta, who are director of investments and head of discretionary portfolios respectively, to find out more.
The 10 funds will be used to populate the firm’s $9.3 billion Destinations portfolios, a series of risk profile-based discretionary strategies used by some 5,000 advisors across the country.
Rather than these portfolios being filled with up to 30 managers across a range of third-party funds, they will be comprised of Brinker’s own funds, each one subadvised by between one and seven subadvisors. For a full run-down of the chosen managers, see the table on page 19.
Although it is a big step for the firm, Raupp and Magnotta are keen to stress that the end investor will see little change in their actual portfolio holdings.
‘We are doing the same exact thing, just changing the way we deliver it,’ Raupp says.
Magnotta adds: ‘The same managers we used in third-party funds have become the subadvisors in the new structure. Instead of owning five different large-cap equity funds, we are going to own the Destinations Large Cap Equity fund, with those five subadvisors managing the fund.’
So why make the change? Cost and regulation are factors, as is the aim of improving the overall investment proposition by getting access to more tailored manager strategies.
‘This really creates a more efficient structure to do what we do,’ Raupp says. ‘Really being able to work with managers individually and create a product that can deliver a lower cost option to clients is better than being in the market for third-party funds where you don’t have as much ability to leverage your size.’
Costs to clients will on average be reduced by 21 basis points, the firm has estimated. Brinker has also moved to drop the minimum amount needed to access the portfolios to $10,000.
This drop in costs comes in the midst of a regulatory environment that has put great focus on fund fees.
The Department of Labor’s fiduciary rule may be delayed for now but the firm started to plan this a while ago and some of the changes were made to comply with the level fee requirements of the regulation.
‘There is more scrutiny on fees and this gives us more ability to do what we do at a lower cost,’ Raupp says.
In general, they see the trend toward a fiduciary standard within advice as a boon to business, with clients demanding more from their portfolios and advisors increasingly likely to outsource this area to external experts, such as Brinker.
‘We have always been a fiduciary for our clients and moving to an environment where that’s a necessity is a good thing for firms like us,’ Raupp says.
A taste for travel
Raupp has been running the Destination portfolios for 16 years and Magnotta for 10. They share an office, an approach and a friendship.
Despite seeing one another every day for a decade, their families holiday together and have enjoyed trips to London, Amsterdam and Paris, as well as various spots across the States. A double family vacation to a dude ranch is fast approaching. That they get on is evident both in the interview and photoshoot.
When asked how they share the task of selecting managers and running portfolios, Raupp is quick to quip: ‘She does everything.’
The duo’s adventurous spirit does not end with travel or the launch of the new funds, it can also be seen in the managers they select to run these as subadvisors, or who they have previously used in a mutual fund format.
Raupp and Magnotta are willing to back managers early, even if they lack a track record, assets or a big brand name.
‘We always try to add something someone couldn’t find on their own,’ Magnotta says.
Often this can be a team of managers who have broken away from a larger company, or a shop that has run institutional money for years but only recently launched a mutual fund.
Another example could be a manager who has launched an apparently new strategy, but which in fact plays on an approach they have taken in a longer-running offering. Such was the case with Roger Edgley and the Wasatch Frontier Emerging Small Countries fund.
‘Even though that was a new fund, we knew it had experience managing those kinds of stocks and we had confidence in the team, so even with a limited track record we had confidence it would do well. It actually ended up being one of the best funds in that space over the next three or four years,’ Raupp says.
Magnotta adds that this approach is especially useful in capacity-constrained asset classes such as small caps and emerging markets.
‘If you had waited for that team, who we were very familiar with, to have a three-year track record, the fund would have been closed to new investors,’ she says.
Regardless of when they invest, the pair is always looking for one thing in an active manager: the ability to add true alpha.
Raupp gives the example of the RiverNorth Opportunities strategy, which invests in closed-end funds.
‘Where they find their alpha is in finding closed-end funds, which have a wider discount,’ he says. ‘When you look at that marketplace, a lot of the owners are retail investors, they are somewhat predictable in terms of their reaction to certain market events. They are operating against a lot of people who really don’t have the resources they have.’
Another market with similar dynamics is micro-cap stocks, where the firm uses offerings from Driehaus Capital Management on the domestic side and Wasatch Advisors for international exposure.
‘There are not a lot of institutional investors who are going to focus on micro cap, so if you do have really good investors who can focus on that asset class, in a lot of cases they are doing it without as much competition as you would face, say, buying Apple or some large-cap securities,’ Raupp says.
Although these examples may suggest a bent toward smaller more boutique names, the firm also uses powerhouses such as T. Rowe Price, BlackRock, JPMorgan and DoubleLine.
Magnotta says as long as the firms or specific teams within those firms have a strong investment culture, Brinker will use them.
Raupp explains. ‘One of the things we identify is: “what is the firm’s investment culture? Is it investment driven or a sales culture?” You can get good strategies in both, but if it’s a sales-driven culture you have to be leery of the strategies it is putting out there for marketing reasons, and not because the investment teams really believe it is a good strategy.’
They also want to see managers who really believe in the fund they are running.
‘When we talk to portfolio managers we really want to see that they are passionate about the way they invest and in some regards think their way of investing is the best,’ Raupp says.
Magnotta says this approach led them to be cautious of certain bond managers in 2011 when firms started to prepare for a rising rate environment.
‘When people first thought rates were going to rise, all the fixed income managers suddenly became long/short fixed income managers and unconstrained. It was the same managers who had traditionally been long only,’ she says. ‘Just because they can raise a lot of money running an unconstrained bond fund and the product team has gone for that, we would only want them to do that because it is the right thing to do.’
In terms of the portfolio construction and asset allocation the firm takes a strategic approach, typically making three to five changes a year, with a view to what is happening in another three or five years rather than the next month.
They will express macro themes within these, such a recent overweight to emerging markets, which they are now beginning to sell down. This is not to say they won’t make more opportunistic calls when they can, such as a recent play on the high yield recovery last year.
Still, Raupp is keen to point out that the firm aims to offer more than just returns.
‘Our objective is good investor returns, not good investment returns, and that’s a combination of good investments and communications,’ he says. ‘It’s not just about managing portfolios and good investment returns, but also about making sure clients and advisors really know what we are doing and why we are doing it, and if we do that, in our opinion, they end up with a much better outcome than if they don’t know what we are doing.
‘Destinations has been around for 22 years. We have clients who have been with us that whole time and it’s awesome to look at and say: “Hey, for these clients we really did build well”.’
|Fund name||Subadvisors at launch|
|Destinations Large Cap Equity||T. Rowe Price Growth Stock, Columbia Focused Large Cap Growth, Delaware Value, TCW Relative Value Dividend Appreciation, Fort Washington Focused Large Cap|
|Destinations Small-Mid Cap Equity||Ceredex Mid Cap Value, Driehaus Micro Cap Growth, LMCG Small Cap Value|
|Destinations Equity Income||Federated Strategic Value Dividend, Columbia Dividend Opportunity|
|Destinations International Equity||T. Rowe Price International Growth, MFS International Value, Baron Emerging Markets, Wasatch International Microcap|
|Destinations Multi Strategy Alternatives||Driehaus Active Income, Driehaus Event Driven, Avenue Credit Strategies, RiverNorth Opportunities, JPMorgan Strategic Income Opportunities, Legg Mason Brandywine Absolute Return|
|Destinations Core Fixed Income||BlackRock US Aggregate Index, DoubleLine Total Return Tactical|
|Destinations Low Duration Fixed Income||CrossingBridge (Cohanzick) Low Duration High Yield, DoubleLine Low Duration|
|Destinations Global Fixed Income Opportunities||CrossingBridge (Cohanzick) Corporate Credit, Nuveen Preferred Securities, DoubleLine Low Duration Emerging Markets|
|Destinations Real Assets||SailingStone Global Natural Resources|
|Destinations Municipal Fixed Income||Northern Trust Intermediate Municipal|