Nominative determinism is not to be dismissed. Usain Bolt is the world’s fastest man; Donald Trump its biggest gambler. And while far less famous, Brian Price is a math-obsessed analyst who spends his days weighing up the worth of fund managers.
Price is vice-president of investment management and research at broker-dealer Commonwealth Financial Network. His job involves selecting managers and strategies for the high-conviction portion of the firm’s $70 billion advisor platform, PPS, which holds 5,000 funds and caters for 1,700 advisors.
Price and his team of 21 are responsible for putting together the PPS Select program – a $5.9 billion mutual fund wrap platform of 160 mutual funds and 80 exchange-traded funds (ETFs). Together, those funds make up roughly 50 multi-asset model portfolios and are currently used by around 1,100 advisors.
Price’s love of math manifests itself in a robust quantitative process, but woe betide any manager who tries to sell him a fund based on numbers first. ‘You typically don’t want to see performance highlighted within the first few pages of a presentation or in the first few minutes of a meeting,’ he says. 'The best way for a manager to begin a meeting with us is to start off with a clear articulation of their investment philosophy. Then we spend a large portion of the meeting outlining how our process lines up with their stated philosophy.’
Before a manager can start to think about a presentation though, there are a number of other hurdles to jump. To arrive at a manageable number of funds for a given search, Price and his team run an initial screening process over six years of data. They use their own proprietary calculator to identify funds that have consistently beaten their peer group average from a risk and return perspective over that period.
‘Obviously we look at returns relative to benchmarks, but we’re more interested in how they’re performing relative to their peer groups,’ Price says. ‘Take large-cap value as an example. We will segregate out managers in that particular peer group and group them according to their style of investing. We separate equity income, relative value and deep value managers into different peer groups. We really parse the managers out and evaluate them relative to what we deem to be their peer group, not just at the broad asset class level.’
Having segmented the managers and evaluated them based on their peer groups, Price and his team then apply performance metrics to gauge who comes out on top. For ETFs to be considered they go through quantitative and qualitative analysis, examining costs, performance and parent company.
‘What we’re trying to do when evaluating ETFs in our passive models is to evaluate their track record to make sure that they haven’t traded with a large premium or a discount to net asset value. So from a quantitative perspective, it’s about going back and looking through time to make sure that their premium or discounts are as narrow as possible.’
There is no specific asset threshold for a mutual fund or ETF to be considered, but the firm will make sure it does not own more than 10% of a given fund, which can mean smaller funds are a no-go.
When Price gets down to a manageable pool, he is able to start the part of the process that he believes is the crux of choosing a great portfolio manager: qualitative analysis of their philosophy and process. Two managers who measured up here are Mark E. Donovan and David J. Pyle, who run the Boston Partners Disciplined Value strategy, which is available as a mutual fund via the John Hancock Disciplined Value fund.
Price says Donovan and Pyle have been consistent in their messaging and have not resorted to discussing performance to prove themselves. He discovered them a few years ago when on the hunt for a large-cap value manager. ‘We had engaged with Boston Partners, subadvisor to the $14.2 billion John Hancock Disciplined Value fund, and had recommended a few of their strategies prior to selecting them for our portfolios,’ he says. ‘We’ve always been impressed with their clear articulation of their philosophy and their process.
‘We had the opportunity to go in and analyze their portfolio, looking at past holdings and past returns to see how that philosophy and process translated into performance. That consistency in messaging around the articulation of their process and philosophy and how it translated into performance in a variety of different market environments is why we selected the fund for our portfolios.’
The fund was launched in 1997 and has enjoyed strong performance, returning 94.5% over the past five years, versus the average large cap value fund, which has only returned 88.1% over the same period.
On the fixed income side, Price describes how his team were impressed by the $29.4 billion Fidelity Total Bond fund, which they used as a replacement for an intermediate-term core bond strategy. ‘At the time, we were really trying to target a “Core Plus” manager,’ he says. ‘So we needed a manager that had a significant investment in investment grade debt but also showed a skill-set in investing in non-investment grade fixed income.
‘We have a lot of familiarity with the Fidelity fixed income group up in Merrimack, New Hampshire. We had recommended and used some of their municipal bond funds in our model portfolios, so there was already an understanding of how they manage portfolios. That familiarity was an initial catalyst for taking a look at the Fidelity Total Bond fund, which we ultimately selected as the Core Plus mandate for our model portfolios.’
The Fidelity Total Bond fund is managed by Citywire A-rated Jeffrey Moore and Fred O’Neil, Citywire + rated Matthew Conti, and Michael Foggin. With a Citywire ranking of fifth out of 110 funds in its category, it has returned 10% over the past three years, beating the average fund in its sector, which only returned 7.5% over the same period.
Nice and steady
Price is also a big fan of the $3.7 billion Harding Loevner Emerging Markets fund, which he and his team decided to add in 2006. ‘When we were looking for a replacement for our previous emerging markets manager for what has historically been a volatile asset class, we really wanted to target our search to a high quality emerging markets growth strategy. Harding Loevner was a manager that had screened extremely well from a quantitative and qualitative perspective,’ Price says.
‘They were a model of consistency within that particular peer group, which was what initially attracted us to the strategy. Evaluating the stated philosophy and process and seeing how it translated into performance over time made it an easy decision for inclusion in our models. We’re over 10 years into our holding of the fund in our portfolios and we have a pretty good sense for when their strategy is going to perform well and when it might lag.’
The Harding Loevner Emerging Markets fund is managed by Citywire + rated Craig Shaw and G. Rusty Johnson, Richard Schmidt, Scott Crawshaw and Pradipta Chakrabortty. It returned 7.6% over the past three years, with the average fund in the sector returning just 3.7% over the same period.
Looking forwards, Price is interested in the real asset space and will be taking a deeper look into those strategies in the coming months. ‘In June of last year, we sold real estate investment trusts (Reit) completely out of our portfolios because we were concerned about valuations and rising interest rates and the sensitivity of the asset class in that type of environment. We’re now at the point where Reits have lagged significantly over 12 months and we’re starting to get interested again.
'If we’re going to re-enter the position, we’re considering a real assets fund because we believe it’s a more diversified way to play a possible rebound and because the fund would also most likely include master limited partnerships (MLPs), which have also underperformed significantly as of late.’
Price adds that the play would be smart to use as an inflation hedge and diversification relative to traditional asset classes, and believes that staying diversified is the most important point for investors to remember moving forward. ‘If you have been committed to active management over the last few years, then don’t abandon it now,’ he says. ‘I know it can be frustrating to look at the S&P 500 relative to a lot of active managers as of late but I’m not sure that now is the time to make the switch to passive.
‘There have been several headwinds for active managers over the past few years. Volatility has been low, small cap and international equities have broadly underperformed domestic large cap stocks and cash has been a drag on fund returns in what has been a massive equity rally over the past eight years. If we get a reversal in any or all of those dynamics then I think that investors are going to be happy that they stuck with active management over time.’