It seemed like exactly the wrong time to set up an active shop.
Given the trio of headwinds facing the industry – falling fees, poor performance and the rise of passives – why would anyone leave a successful and popular strategy to strike out alone? Especially when striking out alone meant investing 100% of your liquid wealth in the new business and fund.
But that's exactly what Ryan Caldwell did in June 2014, when he left Waddell & Reed’s flagship Ivy Asset Strategy to build his own boutique, Chiron Investment Management.
In December 2015 Caldwell took another big step, launching a mutual fund – Chiron Capital Allocation. Even with pedigree, past performance and popularity on his side, it was a decision he made with a degree of trepidation.
‘There was a lot of consternation around “What vehicle do you launch?” Do you try to launch an alternative fund, a liquid alts fund, a mutual fund? Do you launch anything at all?’
‘We had those very partner-driven moments about “Is this the right time?”’ Caldwell credits one of those partners, chairman Marc Spilker – a former head of investment management at Goldman Sachs – with being able to see an opportunity amid the challenges facing the wider industry.
‘[He said] “Yes, the world is being disrupted and it’s really ugly right now, but this is an excellent time to build a 21st-century asset management company, because we won’t have any of these legacy issues. We get to wipe the slate clean and start over. It doesn’t mean it’s going to be easy but it does give us the opportunity to be unburdened by those things that are plaguing the rest of the industry.”’
Spilker is one of a number of high-caliber board members at Chiron, alongside fellow Goldman alums chief executive Enrico Gaglioti and vice chairman Scott Prince, and former Waddell & Reed VPs Kirsten Pickens and Kristen Richards, who are head of distribution and chief compliance officer respectively.
Caldwell’s desire to set up a 21st-century shop manifested itself in a number of ways, not least in his so-called ‘quantamental’ process, which sets out to identify investment opportunities using big data research and proprietary techniques alongside more traditional fundamental research. It is not dissimilar – conceptually, at least – to the model that BlackRock announced it would be adopting on a number of equity funds from March.
Caldwell believes that technological changes and asset managers’ need to cut costs will make this an increasingly commonplace model for active shops.
‘We think that is the trend,’ he says. ‘The reason that the trend is toward more quant, big data techniques versus more fundamental bodies is the point that every industry is having to deal with: technology and AI can very quickly replace the grunt work of the industry and can do it more accurately.
‘If you look at what BlackRock said, it wasn’t that they were gutting fundamental analysis and going full quant. It was more “there is a blend and mix here.”
‘And it’s not only an investment point – it's a cost point too,’ he adds. ‘The head count on the buy side has exploded since 2000. You can absolutely use big data techniques to replace a reasonable amount of that headcount, but not all of it.
‘You still need fundamental decision-makers who understand how markets interplay, how management teams work and what investors are rewarding, but you don’t need nearly as many bodies to do the grunt work as the buy side has proliferated.’
An ending and a beginning
All good points, but they don’t explain why Caldwell left Waddell & Reed and the Ivy fund in the first place.
During his time as co-manager alongside veteran investor Michael Avery, the fund went through a period of stellar performance. When Caldwell joined in 2007, it had around $250 million in assets, but by the time he left in 2014, it had amassed a total of $45 billion.
Caldwell clearly has a fondness for the fund and his time managing it. He is not explicit about a specific disagreement, but says that a difference of opinion played a part in his departure.
‘As with all these things there are couple of pillars you run into,’ he says. ‘There were philosophical differences about the category I was competing in, what sort of investment and fund size make sense in a category like that, and ultimately the investment process: does the process of the fund fit the firm?
‘I was at an impasse,’ he adds. ‘I’m very proud of what we built there, but thinking about how that category was going to evolve, which competitors were going to enter, and this notion that size constraint and flexibility make for a really important dynamic... For me it was an opportunity to call time out, reflect on what I had built and ask “if I was going to whiteboard what I was doing, would I do it the same way?”’
He says that the answer is 'yes' from a process perspective – he had been using a version of the quantamental technique for a while, even though the technology and data are now more advanced – but 'no' in other ways. Caldwell believes that successful asset managers must be either large scale players with lots of strategies, or boutiques specializing in one or two.
‘What attracted me to starting over again was being niche and doing one thing well, being focused and keeping small and not being stuck in between being a large asset manager and being a boutique. In the asset management space that seems to be the worst place to be,’ he says.
The Chiron Capital Allocation fund has raced to $1 billion in assets since its launch, but Caldwell has already told investors that it will be softclosed if it gets to around $15 billion.
‘We are only at $1 billion so that sounds ridiculous, but that is the max capacity we are able to run and we have told our clients that,’ he says.
While things are going well for Chiron, Caldwell’s old fund has stumbled. Since he departed, performance has dropped, outflows have spiked and Avery has left. The fund now stands at just $3.8 billion, with three-year numbers near the bottom of its peer group.
His new fund sits in the same Morningstar category as the Ivy fund, and has even taken assets from it, but Caldwell says he takes no pleasure from its troubles.
‘I take no joy or solace from seeing that they have gone through a rough patch, because some of those people [in the fund] were investors of mine when I was portfolio manager,’ he says.
‘In terms of legacy or perception, quite honestly I don’t think about any of that. I just think about “are we doing what we promised our clients we would do?” – whether at the Ivy Asset Strategy fund or at Chiron.’
At Chiron, that means beating a 60/40 index by around 200 basis points over a full market cycle. To achieve that, Caldwell allocates capital across asset classes, countries, market capitalization and factors. Where the fund is bullish, it will act like a value investor; where it is defensive, it buys growth stocks or higher quality credits.
Caldwell now sees the most value in emerging markets. One fifth of the fund, its maximum allowable allocation, is invested in those markets, mainly in China, Korea, Russia and India, although the latter is being reduced.
The fixed income part of the portfolio – which can be up to 50% – currently accounts for just 30% and is predominantly in US five-year treasuries, agency credit and floaters.
The fund is also cautious in its developed equity allocation, which is in growth stocks in technology and consumer cyclicals, with some slightly more value-oriented plays in healthcare and financials.
Caldwell explains that the fund will only get more defensive here. ‘We are much further along in the cycle, and investors are rewarding growth winners. That happens at the end of cycles.
‘The market grabs on to a story it believes, and that story at the moment is the big disruptors globally. Those are really starting to outperform the average stock. That’s a sign for us that we need to be more cautious. Credit spreads continue to grind tighter too, which is another sign that we need to be cautious.’
‘We are eight months into a growth cycle that traditionally lasts 12 to 24 months. The problem is that when they end, they tend to end with a pretty big bang. So it’s a dangerous game to be playing.’
Frank Talbot, head of investment research, Citywire
Caldwell has built an impressive track record and has picked up at Chiron where he left off at Ivy.
However, it’s tough not to look at the contrasting fortunes of the two portfolios and feel that there was no small amount of good fortune in the timing of his departure from Ivy. Either that or he really was the key ingredient to its success. More likely a mix of the two.
His high conviction strategy remains a trademark and with such aggressive moves comes the potential for under as well as outperformance. His team isn't afraid to go against consensus, as can be seen from the recent aversion to Europe and the move out of high yield.