If looks could kill a career, Stephen Beinhacker might not have got far.
Today, he is managing director of the manager research team at SEI, having enjoyed successful spells on Wall Street and London, but it could have all been so different had the famous trader Laszlo Birinyi not seen beyond Beinhacker’s questionable dress sense and given him an early break.
It was 1986 and a 21-year-old Beinhacker responded to a job advert from Salomon Brothers. Taking a break from his MBA studies at NYU, he called the number from a pay phone, only to be asked if he could come in that afternoon. Fine he said, thinking nothing of the fact he was wearing a sweat suit.
‘This is 1986. This is Salomon Brothers. They are basically the king of the hill at that point. You have these wood-panelled offices and these Persian rugs. You name it. I go in there in my sweat suit. I had gone to school that day, not thinking I was going to do anything. I didn’t know to dress up or anything,’ he says.
‘So I’m waltzing into Salomon Brothers in sweatpants and a sweatshirt. The guy comes out to get me for the interview, looks me up and down and thinks, “I don’t know about this guy”. But the long and short of it is, I guess, I impressed them with my intellect not my sartorial powers and they ended up hiring me and I worked there part time.’
Part time at Salomon Brother in the 1980s meant 40-hour weeks, and while Beinhacker went on to complete his MBA, he had been well and truly bitten by the Wall Street bug.
‘It was far more interesting doing this stuff than being in school,’ he says.
He began researching investment theory in the university library, and, using his math and computer skills garnered as an undergraduate, began building quantitative models to pick stocks.
‘This was not so common in 1987,’ he says.
This eventually led to a role at Lehman Brothers where he continued to build global stock selection and asset allocation models, a trajectory which eventually saw him become a portfolio manager running global equity strategies.
A CAPITAL MISTAKE
Today, he sits on the other side of the fence, analyzing his former peers to see if their strategies are suitable to sit inside any of SEI’s multi-manager strategies or to be used in some way by one of the firm’s institutional clients.
In total, $130 billion of assets sit within 350 strategies recommended by Beinhacker and his team. These offerings come from 134 firms. There are 207 equity strategies, from 94 firms, accounting for $65 billion. On the fixed income side there are 129 strategies from 49 firms holding $61 billion. The remaining $4 billion is in multi-asset.
SEI has separate asset allocation and portfolio management teams that decide weightings and the direction of the multi-manager funds. They then come to Beinhacker and his team for managers to fill their gaps.
His search process is methodical and thorough, but perhaps surprising given his early quantitative background, Beinhacker does not start with the numbers. He starts with qualitative factors and looks at the figures much later to see if the empirical evidence matches his hypothesis about a manager.
‘One of the worst behaviors we have as human beings is to look at something in the past and craft a narrative around it. This is why if you do quantitative work first and see something that looks attractive numerically, you are biased to create a good story to support those numbers from the past. Sherlock Holmes was brilliant on this,’ he says.
‘Once we have that hypothesis, we then have to try and find points of validation. But if you go ahead and have data, you craft a hypothesis to fit the data.’
He says past performance in particular is a bad place to start, as the numbers themselves say little.
‘The one thing everybody can observe is the performance of the past,’ he says. ‘You don’t know what necessarily drove that. Whether it was even attributable to the manager you are talking to. The average tenure of a mutual fund manager is less than seven years. If they show you a 10-year track record, there is a pretty good chance they weren’t responsible for the whole thing.’
KNOW MY METHODS
The team’s qualitative work sees them define their universe of managers in line with the internal portfolio manager’s or external client’s requirements, such as the fee level, type of investment group or manager style.
They then begin collecting information from the managers, such as their pitch book and due diligence questionnaires.
Finally, they will set up calls with the firm. For equity managers, they focus on process, philosophy and people. For fixed income, they place a stronger emphasis on people and portfolio construction.
‘There are only so many ways to play a fixed income game,’ Beinhacker says. ‘The notion of having a deep-seated philosophy does not ooze out of the fixed income community. If you find someone who has a really astute one, that is great because it really is the exception to the rule.
‘There is less rope to play with. You are playing with nickels instead of quarters. So construction really matters. Which is why we lean a little differently.’
He and his team will only do site visits after the quant side of the analysis has been completed and it is worth both parties’ time.
Beinhacker may put the qualitative first, but he has not abandoned his quant roots and a focus on factors plays a big part in the next stage of the due diligence process.
The aim of the quantitative analysis is to ensure the empirical evidence aligns with the team’s qualitative impression of the philosophy and the process, and it has a factor-based approach looking at value, momentum and quality.
‘We have always had a factor-oriented approach to manager selection at SEI, but over the years we have enhanced and refined both our understanding and taxonomy,’ he says. ‘This is even more imperative today when smart beta, factor-based strategies and exchange-traded funds (ETFs) are disintermediating active manager philosophies.’
The team has written what it refers to a as play book. It groups every manager in its universe by philosophy and then defines key pitfalls, challenges and critical decisions aligned to the way they generate alpha.
Essentially, they want managers who still add alpha beyond factor attribution.
‘We think every manager is completely guilty until proven innocent,’ Beinhacker says. ‘In this business it is probably not too bad to be suspicious of everything you see until you know more. So at the end of our process, when we have done empirics and our hypothesis has all been born out, then I think they have been proven innocent and we can feel confident.’
Like all manager research teams, SEI’s is keen to find those less well-known names, which may not be on rivals’ radars. And when he likes managers, he is prepared to follow them when they up sticks.
So he was an investor in Arrowpoint Partners’ Brian Schaub and Chad Meade when they joined from Janus Capital, and an early backer of RWC Partners, which spun out from Everest Capital.
Beinhacker’s past as a long/short equity manager also means he is aware of hedge fund managers who want to offer something in the long-only space.
One such as example here was Brigade Capital Management.
‘Today, they have more than $3 billion in a long-only strategy that we started with them. We were their first clients,’ he says.
Beinhacker’s previous career as a portfolio manager, first at what is now called AB and then with his own shop Congruent Equity, gives him an edge in assessing as well finding managers.
‘It’s really hard to abstract what it is actually like to manage money if you have never done it,’ he says. ‘So I can sit down and engage at their level. I can talk about the same stocks because I probably owned some of these stocks. I know how to do stock research, I know about the psychology. It is interesting to ask what they call the inside baseball questions, which they normally wouldn’t get from other people.’
He is also aided by the mathematical mind that got him a job on Wall Street in the first place.
‘People give me numbers or spreadsheets to work with and I always find the mistake,’ he says. ‘I’ve been doing it my entire my life. If you know what you are looking for generally, if something doesn’t look right, your intuition and common sense points you there.’
Luckily for him this maxim applies to numbers, not sweatpants.