If Scott Lavelle ever quit manager research, he could make a handsome living defusing bombs.
Sure, he has no military training to speak of, or indeed a scientific background, but there is no question about his temperament: he could not be calmer.
As his three children, all aged under 10, run around PNC’s executive boardroom, posing equal threats to antique furniture, portraits of past directors and their own skulls, Lavelle remains unflustered.
As Citywire’s photographer asks him to lie down in increasingly odd poses, with aforementioned children climbing over him, this time posing a threat to him ever adding to their ranks, he only smiles.
With 10 seconds to go this is the kind of guy you to want to have with pliers in hand choosing between red or blue.
Although his current day job, as PNC Asset Management’s director of investment advisor research, does not force him to make such binary decisions, it does result in him making hundreds of choices every year about which managers make it onto the group’s fund platform and into client portfolios.
The platform is made up of 200 mutual funds, 99 separately managed accounts, 114 passive funds and 27 limited partnerships.
Each one is chosen by Lavelle and his team of 23 manager analysts.
These are then used by various business divisions. These are:
- Hawthorn, the firm’s family office catering for clients with $30 million or more, which has $31 billion in assets under management
- PNC Wealth Management
- PNC’s institutional outsourced OCIO service
- PNC Retirement Services, its defined contribution service
Lavelle and his team also provide some support to PNC Investments, the firm’s advisor business.
In total the group has $111 billion in assets under management. The platform has 140 different asset management firms on it and 230 different strategies, with some available in a variety of vehicles.
Over the past two years Lavelle has been instigating something of revamp of his team and platform. The number of analysts is up massively from the seven it had in 2011, and while the number of strategies has not changed much, the names have, with turnover between 15% and 20% over the past two years, although this will come down to more normal levels in 2017.
‘The team has grown. That enabled us to do deeper work. As our processes became more robust, it made sense to evaluate the platform,’ he says.
Funds that had failed to resonate with advisors and those that were too similar to others were cut. Smart beta offerings, factor exchange-traded funds (ETFs), and liquid alternatives have been added, while funds of hedge funds have been reduced.
Today, managers looking to make it onto the list must clear three hurdles in order to be considered:
- The strategy must be diversified by style and approach to what is already on there
- It must have a purpose in terms of portfolio construction for PNC’s wealth managers and advisors
- An analyst within Lavelle’s team must select the strategy as a high-conviction pick
The team has a six-step qualitative process, which is then followed by quantitative work to see if the thesis is supported by numbers. The six qualitative factors are:
- Risk management
The firm does not have minimums, either in terms of asset size or manager track record in order to be considered on the platform.
‘The key thing we are trying to do with the quant analysis is, if we are looking for an active manager, to make sure they are truly active,’ Lavelle says. ‘We look at active share, but also at factor exposure over time because we want to avoid someone who looks like a benchmark but also someone who constantly tilts to certain factors who we could replicate with a smart beta ETF.
‘The end goal of the quant analysis is to understand what drove performance in the past. You then try to tie that to what they say they do and build a picture.’
In terms of what managers say and do, Lavelle is looking for one key thing: passion.
‘We like to see managers who really are passionate about what they do; who have really put thought into all the details of their process,’ he says.
‘There are some managers we have who have put a great deal of thought into position sizing and even run analysis on their portfolios to see when they have trimmed or added to their positions, if that really helped them. For us to see a manager do that type of analysis and always look to improve is a good thing.’
He also wants to see this kind of approach from his team and fosters this spirit by having analysts present to one another on their high-conviction selections. Lavelle believes this results in more rigorous analysis and shared knowledge.
‘It helps to make better decisions,’ he says. ‘You know you have to present to the team and they are going to be the most knowledgeable, so you have to be prepared and ask questions to make each other better. It is a positive peer pressure.
‘People may be familiar with firms that might fit the criteria but didn’t show up. So [they might say] “hey you should look at this.”
‘Or maybe other members of the team might be familiar with someone who did [show up] and [they might say] “hey look you really don’t want to spend time on this.” It helps the team. They are specialists but it helps everyone to learn about other areas of the platform. So if you are focused on large-cap growth but you hear the fixed income analyst on what he was looking for, it helps you learn about areas outside your own.’
Two areas of the platform that have been receiving particular attention as of late are domestic equity funds and environmental, social and governance (ESG) strategies.
‘Organizationally PNC believes ESG is not a fad, it is real,’ Lavelle says. ‘Our clients, in what they are asking for, they reflect that, so that is an area of focus.’
Currently the firm offers some ESG equity funds as well as an external manager who provides overlays on indexes.
‘If someone wanted to have a portfolio that was customized to pursuing no tobacco or gambling we could do that in a couple of different ways,’ Lavelle explains. ‘The index overlays let us say your entire equity portfolio can be invested according to your guidelines. [Also] we have the ability in-house, where we are receiving models, to customize active strategies and we do have some dedicated active equity strategies with specific ESG mandates.’
He is looking to add fixed income ESG offerings and says that while impact investing is not available currently, it may be added to the platform down the road.
‘At some point in the future that will likely be driven by client needs and preferences,’ he says.
Before entering the world of manager due diligence, Lavelle was a trader, a job that seems unsuitably frantic given his more relaxed character, but for which a cool head is probably invaluable.
It was during his time on the trading floor that he began to take an interest in how individuals might be following the same strategy but with a huge variety of outcomes. This interest ultimately led him to pursue a career in manager research.
‘I didn’t know this job existed,’ he laughs. ‘But I thought it would be a great job, to talk to these really smart investors. It reminded me of talking to people when I was a trader. I started looking for a job to do that and I was fortunate that PNC said come on in.'
Lavelle has no plans to quit to become a bomb defuser, or indeed a yoga instructor. When asked what he would do if not in his current job, he says ‘Mr Mom,’ a shorthand for house husband. Seeing him with his kids, he would clearly be pretty great at this.
But for now, he plans to spend more time back on the road meeting managers.
‘That’s one of the focuses for me for the next year or so,’ he says. ‘The past few years have been about rebuilding the team and reassessing our processes, but I want to get back to going with analysts on site or on calls so I can see the different approaches analysts take. That is my end goal.’