Kevin McDevitt is clearly a man of immense patience. Just look at the facts. Fact one: He supports a football team – the Minneapolis Vikings – that has not won the Super Bowl in almost 60 years. Fact two: He likes fishing. Fact three: Perhaps the most telling of all, he agreed to spend two hours being photographed with fishing gear over his suit in the room next door to his new chief executive, because he was too polite to say no.
Despite another season of false dawns, hours spent without a bite at one of Minnesota’s thousand lakes and the increasingly bizarre demands of a photographer, it is hard to see McDevitt ever losing his cool.
The head of manager research at Royal Bank of Canada (RBC) gives things a real chance. He has been at the bank since 2000 and lived his whole life in Minneapolis.
This calm and measured approach fits in nicely with his day job too.
McDevitt runs a team of 11 manager researchers and analysts in Minneapolis. Together they put together a list of top managers and investment strategies, which is used by some 2,000 advisors, managing around $271 billion across the US.
We are long-term focused and want managers who think that way
The list contains 225 mutual and exchange-traded funds, 200 separately managed accounts (SMAs) and 40 alternative investments.
The names on the list undergo a rigorous and team-based due diligence process, but McDevitt’s philosophy of patience is pervasive.
‘We are long-term focused and we want investment professionals who think that way,’ he says.
‘It not only defines me but my team as a whole. We are trying to build a diversified list of different managers and names, but I would say we tend to have a bias toward those managers who are patient and long term.
‘You are going to have investors who tend to be more concentrated, portfolios that tend to be lower turnover, managers who are willing and able to deviate more from their benchmark.’
10 top-selling funds at RBC in 2016
A shared belief in low turnover, means underperforming managers are given time to get back on track rather than be cut loose.
‘We tend to give managers more leeway on performance,’ he says. ‘You are not going to catch a fish with every cast. You have to be patient and focused on the long term. If you cast off a couple times, don’t catch anything and head to shore, you are never going to be eating fish for dinner.’
The key to being relaxed about manager underperformance is understanding why they are underperforming, McDevitt says.
‘We want to thoroughly understand how a manager invests money and what markets they should do well or poorly in. If we do our jobs right we don’t even need to look at the managers’ numbers. As long as we have a grasp of what the market is doing, we should be able to tell which ones are doing well and which are doing poorly.
If a manager outperforms when we think they should underperform, we will think "what the hell is going on?"
‘[But if a manager is] outperforming when we think they should be underperforming we will think “what the hell is going on here?” If we dig in and see they have deviated from what they should have done, then that is where we get concerned.’
For managers to be on the list in the first place they must do more than just match McDevitt’s mindset. First managers must go through HAL, RBC’s quantitative tool named after the evil robot from the film 2001: A Space Odyssey. It actually stands for Heuristically Analyzed List.
These funds are then subjected to the team’s four P qualitative due diligence process. The four Ps are:
- Firm and Product
- Investment Professionals
- Investment Process
To assess these the analysts pore over the fund firms’ documents, regulatory filings, visit hundreds of managers and spend hours on the phone.
For every asset class the team will arrive at one or two high-conviction picks. Within RBC Wealth Management around $60 billion of its assets under management are in mutual funds. Of this, $25 billion are in mutual funds from McDevitt’s list. A further $13 billion are in SMAs he has picked and another $1 billion in his alternative selections.
The high-conviction funds are often used in the firm’s model portfolio business. This has $800 million in mutual fund portfolios and $500 million in their exchange-traded fund equivalents. Plans for hybrid portfolios are in the pipeline.
One particular area of focus for the RBC team is how portfolio managers are incentivized.
‘We think incentive structure is huge,’ McDevitt says. ‘We like structures that are going to reward long-term performance but not just return. We like those that ask how much risk did it take to achieve a certain return. Say a risk-adjusted metric over a rolling three-, five- and seven-year period. That incentivizes those investment professionals not just to consider the risk but also not to take any big bets in any given year just to boost their bonus.
We tend to give managers more leeway on performance. You are not going to catch a fish with every cast
‘We like employee-owned firms. If we see a non-employee-owned firm and it is just rewarding returns on a three-year period, those are ones we don’t favor as highly.’
Despite this focus on long-termism, sometimes McDevitt has to do things in a hurry.
In November last year he was given one year to merge his Minneapolis-based team with other manager research divisions in London and Toronto to create one global unit that will share processes, best ideas, information and ultimately a top manager list.
Previously the three research teams operated independently, working just for advisors in their jurisdictions.
The timeframe may not be to his liking, but the project certainly is.
McDevitt believes this will give RBC’s top manager list an increasingly international flavor. ‘Where I want to go is: one analyst covering a manager, but for benefit for all the businesses and geographies,’ he says.
‘Now we are a global team we are going to be able to introduce more European-based managers to the US market, which we would never have known about before, because we have team mates there. That’s the whole idea with that model.
‘You will still need some big names here in the US and Europe on the list, but now we are able to bring in some of these smaller, more niche names that will significantly differentiate us from the rest of the market.’
Although the list will not reflect its international team for at least three to five years, with that long-term view and love of low turnover, the structure will be in place much sooner.
‘It’s been a busy year and it’s aggressive to give us 12 months to integrate all this,’ McDevitt says. ‘But my aim is that by November 1 this year we will be operating as one truly global manager research team.’