It is not unusual in the investment industry to be told that something is different.
Gatekeepers hear this from portfolio managers all the time. Editors of the leading (and only) publication for said gatekeepers hear it a lot too when interviewing both professional buyers and investors.
More often than not though, that thing – whether it’s a product, a process or a philosophy – is not quite as unique as the storyteller might like to think.
But every now and then, even a cynical hack has to admit that something is genuinely new or a bit different. Such was the case when I met up with Stifel’s manager of traditional product research, Michael Belloli.
You see, Belloli and his team really do things differently at their St. Louis headquarters.
While everyone likes to emphasize their team-based approach, few can lay claim to the one taken at the $272.6 billion broker-dealer, where Belloli has eschewed the traditional structure of research analysts covering specific assets classes, categories or vehicles – instead opting to split up coverage by firm.
‘I don’t just want [analysts] to get to know the small-cap value manager at a firm. I want them to get to know everything: the analyst team, the executive team, everything,’ he says.
‘Most [due diligence] teams are set up where an analyst is given an asset class or a couple of asset classes and that is all they are going to do. No one else on the team is going to do it. To me, that is going to build a lot of one-man investment committees.’
Belloli has experience of such a set-up, having been a ‘one-man investment committee’ himself at Stifel for a while. As a company veteran of 21 years, he has watched the firm grow from 200 advisors to 2,300, and his manager research team has grown with this.
Today, he is assisted by senior analyst Scott Froidl, along with Dylan Gray, Mark Webster, Tyler Miller and recent recruit Rick Bettger.
Together they build the broker-dealer’s mutual fund recommended list, which consists of 191 funds, and an ETF list of 129 funds.
These lists are widely used by the firm’s advisors, and the funds in which the team has the highest conviction also populate two discretionary model portfolio propositions, with a combined $3.9 billion in assets under management.
Balancing out bias
Belloli believes his structure helps to reduce any inherent biases that analysts may have toward a certain manager or style. Each team member will contribute candidates for a search in a given asset class and these are then debated and voted on by the whole team.
‘The goal is to have a team that can feel really comfortable with disagreeing with each other and having hour-long debates, and in the end we get rid of all those biases. If you can get an idea through that [debate], it’s better than if it just gets through one person,’ he says.
He adds that the more generalist approach taken by his analysts means that they are better prepared for meetings with advisors, which often throw up questions that are broader than a specific asset class. A generalist outlook also gives his staff a better footing for their later careers.
‘I don’t want them to leave, but if they do, they can say they worked on these two product universes [ETFs and mutual funds] and across all these assets classes. That’s a better experience than someone who has just been focused on a small portion of the investment world,’ he says.
He is aware that his structure means analysts may not have as deep an understanding of an asset class as a specialist from another firm, but he believes the wider benefits negate this.
‘There are negatives to what we do,’ he says. ‘I think probably the small-cap person at Edward Jones or Wells Fargo probably knows that space better than any of us do.’
On the hunt
When I visited Belloli, he and the team were in the middle of a search for a mid-cap value manager. Between them they had brought 24 candidates to the table.
‘We will go through every single one of those and everyone will have a chance to say why it is something we should or shouldn’t consider, and then we’ll vote on every single fund,’ he explains.
Team members get voting rights once the rest of the team decides that they are ready. Once an analyst has a vote, it counts as much as anyone else’s, Belloli says.
‘They have the same impact that I have,’ he adds. ‘Again the goal is that nobody individually can force something through.’
The team has been given a week to review the 24 mid-cap value managers, and after further meetings this number will be whittled down to around 15 who will receive requests for proposal. These are then read by the whole team to narrow the list down to around eight remaining managers, who are then subjected to further due diligence.
Belloli puts a great deal of emphasis on the qualitative element of this due diligence, urging his team to meet as many managers as they can.
‘We are trying to not spend too much time behind a computer doing quant work,’ he says. ‘I see too many analysts too focused on the quant side and I think we are losing some of the qualitative side. We spend an awful lot of time sitting across the table from portfolio managers having those question-and-answer sessions.’
Running the numbers
Even so, there are still some significant quantitative hurdles that managers must overcome before being considered for a place on the recommended list.
There are no hard minimums for assets or track records that a manager needs to hit, but funds are run through Stifel’s 100-point quant scorecard, which assesses them based on manager tenure, expense ratios and risk-adjusted performance, among other criteria. Funds in a given category will then be split into five quintiles.
The team is currently in the middle of revamping this process, trialling new criteria and different score weightings to see how they affect outcomes. By the end of 2018, a new scorecard will be in place.
This process is not only used for due diligence on new funds under consideration for the recommended list, but also as part of a quarterly review of every fund already on the list. Those funds in the bottom two quintiles are then subjected to further investigation by the team.
‘By the end of the process we either have to kick them off the rec list or keep them on the rec list, but we have to have real definitive reasons for why, with that quantitative number, this is still something we should be recommending,’ Belloli says.
Pulling together
Perhaps it is because he used to be an investment team of one, but Belloli is clearly a big believer in teamwork. Even when he was by himself, he leaned on the experience and expertise of others to help build his process. He is a long-time attendee of the National Analyst Roundtable, an annual get-together for due diligence professionals – an event he says has helped him hugely.
‘A lot of my career I was a research committee of one and saw positives and negatives related to that,’ he says. ‘I didn’t think it made a whole lot of sense for a number of reasons. So as we built out the team I started talking to a lot of my peers in the industry about their teams and they really became my mentors. You think about the National Roundtable – I’ve got Tom Thornton and the guys at Raymond James, the guys from Wells Fargo and Edward Jones here in town, and there’s Kevin McDevitt up at RBC. All those guys really became my mentors. I was able to see a lot of what they were doing, what I agreed with and what I didn’t agree with.’
Belloli is also learning from the team he has now, evolving his selection based on their ideas. A recent example is the Baron Asset fund. Historically, he has not been a huge fan of boutiques, particularly those that are potentially dependent on a few key individuals. Without his team around him, a firm such as New York-based Baron Funds might not have shown up on Belloli’s radar.
‘When the newer guys said we have identified a manager there that we think is worthwhile, I went back and took another look,’ he says. The fund has now been added to the firm’s recommended list and model portfolios.
While clearly open to new ideas and a fan of evolving his process, Belloli is wary of one development within due diligence – what he sees as an overreliance on quantitative analysis.
‘Today we are doing much better quantitative scoring and it takes us an hour. That’s an amazing information flow change. The challenge now is not getting the information – we’ve all got it. It’s about who knows what to do with it,’ he says.
‘What I see in a lot of firms, as I talk to them about their philosophy, is leaning too much on the quant side. That’s great for telling you what has happened, but I don’t think it has done a great job of telling you why it has happened or if it’s going to happen again. And that’s what you need the qualitative, sit-across-the-table, human interaction for. Our team spends a lot of time on that and I think a lot of our competition is spending very little time on that.’
Who’s in? Recent recommendations
Fund:
Managers:
Robert Lanphier and Daniel Crowe
AUM:
$2.2bn
3-year total return category rank:
8/94
Stifel says:
‘Unlike other competitors within the Smid-cap space that outgrew small-cap status, this portfolio was constructed specifically to fill the Smid-cap niche.’
Fund:
Shenkman Short Duration High Income
Managers:
Nicholas Sarchese, Mark R. Shenkman,
Justin W. Slatky, Jordan N. Barrow and Steven N. Schweitzer
AUM:
$549m
3-year total return category rank:
144/153
Stifel says:
‘It’s a very old-style New York boutique, but they have a really interesting fixed income approach.’
