On the list of unlikely pastimes for professional buyers, lead singer for a Christian rock band is pretty near the top.
Sure, we’ve featured a bacon-eating champion and a black belt in tae kwon do before, and although at least one of those is an impressive achievement, neither quite takes the crown from Lisa Kopp, senior vice-president and head of traditional investments for US Bank Wealth Management.
Kopp’s involvement in the band reflects both her musical talent and her devout Christian faith. But it was not her first foray into music.
‘I was always a kid who loved to have an impact, so I always ended up doing things where I could lead things or really move things, whether it was being a drum major for our marching band or vice-president of the student body.’
Nowadays, Kopp is a senior vice-president at US Bank, where she leads a team of four analysts responsible for portfolio manager selection and due diligence of the traditional investments on the firm’s $142 billion wealth management platform.
This platform is then used by the bank’s 200 ‘portfolio managers,’ essentially high-net-worth advisors in the private bank, and 400 advisors from its broker-dealer unit.
Kopp’s team is responsible for selecting investments on the platform alongside Kurt Silberstein, head of alternatives. Silberstein has a team of seven analysts who are involved in manager selection and due diligence for all alternative investments. Both teams report directly to chief investment officer Eric Freedman.
The wealth management platform consists of 200 active mutual funds, 80 exchange-traded funds (ETFs) and 40 municipal money market strategies.
To find managers Kopp and her team initially use a quantitative screening process that makes use of third-party data to identify a pool of portfolio managers and ETFs that fit certain criteria.
For portfolio managers, they must surpass a number of minimum bars, including outperformance relative to the benchmark, experience and a minimum of $100 million in assets at firm level before they can even be considered.
For ETFs, the process is mainly quantitative. Kopp and her team start by looking at tracking error, liquidity, fees and size of assets. However, according to Kopp there is a qualitative component to ETF analysis as well.
‘Even for a straight passive there is a qualitative component that’s focused on making sure we understand the actual underlying process that’s being used. For example, is it full replication or stratified sampling, and if they do stratified then how stratified is it, does it make sense?’ she says.
‘We also do qualitative analysis at a firm-wide level to make sure the parent has commitment and an understanding of the ETF space. So there is a qualitative aspect and that does grow as the underlying strategy becomes more active and more complex.’
Kopp says the firm’s passive options do include smart beta funds, both in US and international equities, and that she is continuing to keep an eye on this growing market.
‘We’ll be looking at that more closely again in the next year or two as we try to get a sense, across product types, for where it makes the most sense to use fully active or passive versus smart beta,’ she says.
On the active front, Kopp and her team take the pool of managers who make it through the initial quantitative hurdle and meet with them to take a deeper dive into their process.
Kopp believes this is the most important part of the process, where she and her team can get a real feel for how well thought-out a particular strategy is.
‘We don’t have a formula of one kind of portfolio manager that we are looking for,’ she says. ‘It’s more about what their philosophy is, how they might add excess returns, and whether that is consistent with what we understand of markets and what we’ve seen work historically among managers and markets.’
She says these meetings allow her to dig deeper into a manager’s real driver of performance.
‘If they say a very deep fundamental research effort underpins their ability to identify outperforming securities, then to drill down we would ask what the objective of that is,’ she says. ‘Are you trying to identify things just before they inflect on earnings and turn up on a two-year horizon?
‘In other words, what are you trying to accomplish with that research? We’re trying to understand how they are trying to identify that excess return.’
She then looks further into the management team’s actual research process.
‘If they say, we’re trying to identify things beyond the turn, we want to know who at the company they are talking to and what kind of questions they are focusing on,’ she says.
‘Given what they say about that, a follow-up would be for them to give me examples and to walk through stocks in the portfolio to get a sense of what they’re doing.’
Show your workings
Kopp says she is often put off managers who struggle to explain their edge.
‘They don’t have to be the most polished presenter, because we try to work beyond who is articulate or not, but... as we press into why they should have an advantage, they really... [should] come up with a clear explanation.’
Another possible faux pas for managers facing the US Bank team is to turn too quickly to their past performance, although Kopp says is not an irreparable error.
‘We wouldn’t necessarily discount a manager because they are a performance pusher. It may just be that they are less articulate and they were trained to pursue it that way.
‘As we poke around at why they should have an advantage and then try to understand that in more detail through the process, if they can’t go in that direction that is when we become concerned.’
The US Bank platform has a turnover of around 8% a year, which Kopp says is largely driven by personnel changes at asset management firms rather than a loss of conviction in a strategy by her and her team.
‘People change is the biggest reason why a portfolio manager may be taken off of the platform,’ she says. ‘Also, over time if we see issues with security selection that wasn’t apparent in the initial meeting, that may be cause for concern.’
If a portfolio manager is removed from the wealth management platform, it doesn’t always mean that they are dismissed indefinitely. ‘We try to reassure managers that while they may not be a good fit now, things can change down the road.’
When asked about her standout selections, Kopp gives the example of an international equity manager who ticked all the boxes in terms of explaining their strategy and process.
‘Not only did they explain their competitive advantage and give a lot of great validation on how they went about executing that, but as we went further into the organization we saw that they truly had some unique items that set them apart from most other managers that we’ve ever seen.
‘When they measure their portfolio manager success, they look at not just common performance metrics but they actually have a service that measures by trade so [they know] if there are behavioral biases – do they tend to buy up or down – and identify adverse patterns.’
She also mentions a small municipal bond manager who had a strategy that was equally impressive.
‘We thought, wow, even though it’s straightforward it really makes sense. There’s a good theoretical case for why it should add value, and then when we looked into how they executed, they had built all the right systems and they had their staff structured appropriately to pursue it.
‘We really canvassed the industry and no one else was doing it. We just thought that it was a great find that we recently added to the platform.’