Aaron Gilman approaches portfolio manager interviews just as he would a basketball match: always looking for gaps.
Usually he finds one between the story an investor is telling and the reality of their performance or holdings.
‘I am very skeptical,’ he says. ‘I start out really not believing anything. That’s my default setting. I am not pessimistic but I just always assume everyone is trying to pull one over on you.’
It is clearly an approach that has served him well. Within a decade of graduating college Gilman is chief investment officer at Tampa, Florida-based Independent Financial Partners (IFP), a network of 500 advisors across 38 states with around $5 billion of assets under management and $30 billion in assets under advice.
Around 70% of the firm’s assets are fee-based with the remainder in commission.
Gilman sets asset allocation and picks managers for a wide variety of model portfolios offered by IFP as well as working more closely with advisors to help build bespoke strategies for high-net-worth clients and recommend investments for retirement plans.
The models are based on six risk profiles, with hundreds of variations, including income, tactical and pure passive. Across the models the firm will typically use around 20 exchange-traded funds (ETFs) and 15 actively managed mutual funds, plus some separately managed accounts and closed-end funds.
It will use a wider variety of strategies, including alternatives and individual stocks, when constructing bespoke portfolios.
Being the bad guy
Although he may be younger than many in his position and those working in the wider industry, Gilman is not intimidated by this or overly deferential to what has come before.
‘I’m not afraid of asking questions,’ he says. ‘A lot of wholesalers say they hear other wholesalers are afraid to come in and pitch products in front of me. I don’t care if you buy me lunch. That stuff means nothing to me. What matters to me is being successful in what I’m doing here and for our advisors.
‘I have a pretty good detector and can see when someone is just reading from a book their marketing team made up.’
One of the bigger gaps he spotted when quizzing a manager was with ETF shop F-Squared Investments, which went on to be fined $35 million by the Securities and Exchange Commission (SEC) for fabricating a seven-year track record from 2001 to 2008, despite only launching in 2009.
The firm’s flagship AlphaSector strategy claimed to be a rules-based way for investors to avoid downturns by trading in and out of series of sector ETFs. The firm would license buy and sell signals as part of the strategy.
It had flows of around $30 billion until 2014 when the wheels began to fall off.
Gilman, though, was unimpressed much earlier than that. He was approached by an advisor within IFP in 2011 who was working with a university endowment and wanted to use F-Squared’s tactical approach to protect against another financial crisis.
‘I actually turned them down,’ he says. ‘It was 2011 or 2012.
Everyone was fighting the last war.
‘They [F-Squared] said: “You can buy weekly or monthly signals from us,”’ he says. ‘I said: “OK, what’s the difference in performance.” They said: “1,000% cumulative since inception.” I said: “What are most other guys buying: monthly or weekly?”
‘The weekly were 70 basis points, so I’m thinking everyone must be buying the monthly but there’s this huge disparity in performance. So I go and look at the ADVs of all these companies [offering the strategy]. There was one in Boca Raton [Florida]. So I went and looked at their ADVs and they did not mention one iota about weekly or monthly signals, and I said: “I’m not interested guys.”
‘That advisor didn’t like me for a while. I ruined his day, but quite honestly I have to be the bad guy sometimes, which I don’t mind being as long as it’s not for selfish reasons.’
Stars in the shadows
Such skepticism and detailed due diligence is no t reserved for esoteric or new investment strategies. It has also meant he has moved away from some of the more established names in asset management.
‘When I started out in this industry everyone was saying: “Bill Gross is a star,”’ Gilman says. ‘Well, I went and peeled back the layers and looked at the actual positions. A lot of people were using Pimco Total Return as a corporate bond fund but it was all derivatives and credit default swaps.
‘I realized being with a star manager where a ton of assets flow in, to the point where they can’t really do much with their strategy, there is some sort of disconnect there. The more I saw that, the more I started to look for managers who were more like stars in the shadows.’
This approach, Gilman says, leads him to seek out managers who have slipped under the radar, often due to a break in their track record, or once popular portfolio managers now running smaller pools of money due to starting afresh.
He set up Strategic Income Management in 2010 and resurfaced in 2011 when the firm began subadvising the American Beacon SiM High Yield Opportunities fund.
‘When he [Pokrzywinski] left Principal he took some time off for a little bit so there wasn’t any continuity in the track record, no one really picked up on it,’ Gilman says. ‘When I came on board [at IFP] they were still using the Principal fund because they didn’t know where he went, so we found him and we put money there and he absolutely hit the lights out. Since inception it has been phenomenal for us.’
Over five years it is up 44%, ranking eighth out of 134 funds in the Citywire High Yield Bonds category.
Strategies and managers currently on his radar include deep value investors Tobias Carlisle and Colin McIntosh, who run Santa Monica, California-based Carbon Beach Asset Management.
He says he has not yet been able to persuade LPL Financial to onboard the strategy to its platform, which IFP use, as Carbon is well shy of the broker-dealer’s $500 million in assets.
Gilman says LPL’s caution also led him to miss out investing in Stone Ridge Asset Management’s reinsurance strategies in 2012.
‘Now it is soup du jour, but before it was in vogue we met with them and they had a phenomenal strategy,’ he says.
Finding managers early is clearly important for Gilman who is a big believer in research that suggests managers experience outperformance in their first nine to 12 months of running a strategy.
‘[They are] hyper-focused on performance, dedicating all their time to the portfolio and are operating a smaller pool of money as well,’ he says. ‘There has got to be something there and every bit of empirical research I have done shows that. There is no safety in being with these massive fund companies. People confuse it with a bank, but the size of a fund is not [security].’
Gilman himself began investing early, first while at school with poor results, and then in college in a move that would ultimately kick-start his career in manager research.
His father worked for Hewlett-Packard and Gilman followed him by investing in technology in the late 1990s and early 2000s.
‘I used to sit and watch him and actually saved up a bit of money myself and invested,’ he says. ‘Everything went out of business actually. I didn’t look at it for a couple of years and did in 2004 and it was worthless.
‘But it’s interesting. You see other people’s behaviors and how they get caught up in manias. My dad got caught up in that [tech boom and bust]. He worked in that space. He got a little over overexcited and in 2000 he actually passed away when he was fully invested and the dotcom bubble literally left his portfolio stricken. I tried to glean as much as insight as I could from that. That’s where I first got interested in investing and the behavior.’
At college, in 2005, Gilman had another go and this time things went well enough that he used his gains to pay for his first Chartered Financial Analyst (CFA) exam. He has not looked back since.
‘I was in my dorm room investing in stocks,’ he says. ‘I was doing well, because everyone was doing well, but I attributed that to my own skill, being an arrogant 20-year-old kid. Then I cashed out and used that to pay for my first level of the CFA. When I took that, I saw how everything was interconnected and from there I have not spent a waking moment not thinking about investing.’