As director of external manager research at Fifth Third Bank, Ted Finlay has made a lot of investments in his time. The best so far, though, has been the $90 he pays each year to improve his public speaking and leadership skills.
While the impact of Finlay’s annual subscription to the educational nonprofit organization Toastmasters International cannot be measured in numbers, he is confident that it has more than paid for itself.
‘The return on investment for that $90 a year is astronomical, because it has done so much to help my career,’ he says.
Finlay joined Toastmasters 14 years ago in downtown Boston, where he is originally from. Since then, his discomfort when speaking publicly has transformed into a passion for effective communication, giving him the kind of confidence needed to ask portfolio managers tough questions, to listen to their responses and to offer constructive and thoughtful feedback.
Having started his career in the finance department of a small start-up firm, followed by a brief stint as a salesman hawking copiers during the recession of the early 1990s, Finlay now heads a team of two analysts and an associate analyst at Cincinnati-based Fifth Third Bank.
The team is responsible for the selection and due diligence of traditional strategies and liquid alternatives for the bank’s select list, which consists of 150 mutual funds, 75 ETFs and 35 separately managed accounts. The team’s research is used by the 100 portfolio managers that work with Fifth Third’s wealth management, private bank and institutional clients.
In addition to conducting due diligence, Finlay's team also manages $1.5 billion in discretionary model portfolios, which are mostly hybrid strategies of active and passive products. The exception is one all-passive ETF model for clients who specifically request that option.
‘The managers and ETFs are all from our list and we get the strategic allocation from our strategies team, so they take care of all the allocations and we don’t have to worry about that,’ Finlay says. ‘We pick the vehicles that are populated, we have the strategy team to tell us how we want to allocate the different asset classes, and my group oversees those models.’
On the lookout
While Finlay and his team always try to limit the turnover in those model portfolios, they have a different philosophy when it comes to searching for managers. ‘What I like to say is that we always have a search going. We don’t set it and forget it,’ he says. ‘We always are on a search for compelling investment managers to add to our list – whether that’s in US equities, international, liquid alts or emerging markets. We don’t just set it with one asset class and then move on to another.’
To look for high-quality managers, Finlay and his team cast a wide net, and when assessing managers’ qualifications, they leave no stone unturned.
After an initial screen using external databases such as Morningstar Direct, the team conducts quantitative analysis that looks at a number of different risk and return components over multiple market cycles, versus both the benchmarks and the peer groups.
Going into the qualitative part of the analysis, the team then wears its ‘investigative reporter hat,’ focusing primarily on what they refer to as the three Ps: people (leadership, key decision makers and a firm’s ownership structure), process (investment philosophy, buy and sell disciplines, and risk management) and product (concentrated or diversified, tracking error, active share and expense ratio).
‘We need to be familiar with their investment teams,’ Finlay says. ‘We need to be looking at the whole firm, the whole philosophy of the firm and the strategy – really focusing on the people, the process and the product.’
Finlay likes a manager with passion, conviction and intellectual curiosity, but he also has a particular penchant for what he calls ‘breakaway PMs’ – those who were successful portfolio managers at their previous firms but decided to launch their own shops, where they are free to manage money however they see fit.
‘They have that kind of entrepreneurial feel even though they might have 15 years of experience when they start their own firm. It’s like you are investing in an entrepreneur,’ he says. ‘They have a lot of skin in the game because they have to worry about not only managing investment strategies, but they have to worry about their own firm and employees too. It’s really like you are
investing with them.’
Finlay’s understanding of breakaway PMs perhaps stems from his own experience more than a decade ago, when he moved his family more than 700 miles from Boston to Cincinnati to take over Fifth Third Bank’s manager research group. It certainly felt like an entrepreneurial venture to him.
‘Now I get to shape what I feel would be the best way to do things in manager research, so it’s really almost starting from scratch,’ Finlay says. ‘I get to do things that I learned in my previous job doing manager research. From that experience, it was almost like a start-up – a start-up manager research group.’
While building up the manager research team, Finlay also boosted the qualitative side of the team’s process. ‘I think a lot of the decisions were being made on “Well, the numbers look good so that must be a good strategy – let’s just add it to our list,”’ he explains. ‘What I brought in was more of “You need to go beyond just the numbers.”’
The whole package
Finlay recalls a meeting with one particularly impressive manager, who fitted the bill by having both good numbers and the three qualities that the team values the most.
‘He had a successful career at his previous firm, but there were some philosophical differences. He was passionate about what he does and felt that he could do it on his own. He had conviction in the way that he runs his strategy,’ Finlay says.
‘Our curiosity came from the way that he had dissected the benchmark that he was up against, his competition. Basically, he had done a lot of work dissecting the benchmark, looking for weaknesses in the benchmark and how could he exploit those weaknesses.
‘It was enlightening to see all that packaged together. I don’t know if I’ve ever seen a manager that had dissected their competition so much. He had factual examples of the weaknesses in the benchmark and how he thought his actively managed strategy could outperform that,’ Finlay recalls.
While managers who ooze confidence and conviction boost their chances of making it onto the list, those who lack that clear self-belief almost always get a ‘no’ from the team. Finlay remembers meeting one manager who was already on his watch list and had been struggling.
‘When we talked to him, you could tell he had lost confidence in himself and when we were done with the call, the fund representative called us back and said “What did you think about that meeting?” We said “He really sounded like he did not have confidence in his philosophy, in his process and what he was doing. I think we are going to remove him from our list.”’ The team ended up letting the manager go. Even the fund representative agreed with the decision.
While Finlay has not had many bad meetings, there have been plenty of ‘in-between’ meetings, which can be both surprising and frustrating, he says.
‘I’ve had in-between meetings where some managers kind of jump to performance first. I’ve had meetings where the fund representatives will be there in the meetings as well and he or she will be looking at their phones while the manager is describing the process or philosophy,’ he says. ‘They should be acting like a team, instead of one being on the phone while the other is talking. I was kind of surprised by that. [They should] show some conviction in the person that they brought to this meeting by listening and taking notes.’
But Finlay and the team are willing to give managers a second chance. If a strategy is removed due to a manager change and the team then gets to vet the replacement manager, it is very likely that the strategy will be brought back onto the list.
However, one fund that never got added back onto the platform was Pimco Total Return after Bill Gross’s infamous exit.
‘Leading up to his departure, we were monitoring the situation very closely. There were things going on, rumblings that there were some cultural issues. We kind of didn’t feel comfortable with that,’ Finlay says. ‘So we put it on watch. Then when the day came that it was announced, there was no question. We had to remove it.’
Looking forward, Finlay puts the integration of ESG criteria at the top of the team’s to-do list.
‘We are starting to really educate ourselves, starting to look at potential products and figuring out a way to educate our field and then to have our field educate our clients,’ he says.
‘We think it’s an industry trend. It’s really exciting and it’s definitely going to stick, so we just want to be prepared and have it already in place, as opposed to playing catch-up down the road. That’s probably top of our list.’