Appearances can be deceptive.
A 19th-century farmhouse in rural Pennsylvania is perhaps the last place you’d expect to find a $15.2 billion multi-family office, but if you pick the right one you will stumble upon Veritable LP.
Things don’t get any less confusing when you go inside. There are no minimally furnished workspaces or oak-paneled boardrooms, as you might find at a typical family office. Instead, it’s a lot like a, err… farmhouse.
But this modest appearance belies a firm that is anything but backward. Where it matters, Veritable is an aggressively early adopter.
‘In my 17 years at Veritable, about two thirds of the investments that we’ve made have been at day one with the managers or at the very early stages,’ says Jared Weiner, the firm’s director of research.
‘What I mean by that is that these are people who have a lot of investment experience but they go out to start their own firms, and at either day one or within three, six or 12 months after they start, we’ve invested.’
One such day-one manager was Robert Gardiner, who had been a successful portfolio manager at Wasatch Funds for 16 years before spinning out to form his own firm, Grandeur Peak Global Advisors, in 2011. The shop specializes in global micro- to mid-cap equities.
‘He has an encyclopedic memory and he and his team are just constantly traveling around the globe meeting small companies. They have a great eye for finding these smaller growth companies,’ Weiner says.
‘Their performance has been unbelievable since they started in 2011 and fortunately our clients have benefited. We are [still invested with them] and most of their funds are closed, so nobody can get money in them at this point. Those seats our clients have are very valuable.’
A helping hand
Another way that Weiner has been able to harness the firm’s penchant for being an early-stage investor is Veritable’s joint venture with Moelis Asset Management – establishing private market investment platform Archean Capital Partners. The platform provides new portfolio managers with advice, infrastructure support and initial capital of between $75 million and $100 million to launch their own private equity or credit funds.
‘Our clients benefit in two ways in that they get an investment with a really talented manager that we want to invest with anyway. They also get a revenue share so they participate in the success of this money manager’s business as well,’ Weiner says.
He adds that the venture’s first investment – to the tune of $100 million – was in a group called Petrichor Healthcare Capital Management. Weiner and his team are now looking at a number of other candidates and hope to announce a second investment in the near future.
Still, being early into a fund doesn’t mean that due diligence is rushed.
‘We often do 20 or more reference calls on managers,’ Weiner says. ‘We usually hear from them that we are the most informed investor they have and nobody has gone to the lengths we have to understand them and what they do. And that is our goal: We want to be the most informed investor in any fund in which our clients have money.’
Weiner and his team meet with between 800 and 1,000 managers each year, but they only end up recommending a very limited number of strategies.
So what does it take to get on the platform? Weiner says there is no magic formula. Having met with about 5,000 managers over the course of his career, he knows talent when he sees it. While it is not easy for him to define what exact characteristics distinguish a good manager from a bad one, there are some must-have factors and qualities that could make or break an investment decision from the team.
The first is a mantra that Weiner and his team live by: ‘We can live with disappointment but we can never live with surprise.
‘What I mean by that is we can find very talented people that check all of our boxes and yet sometimes the performance is disappointing. Sometimes we will make mistakes, and they don’t do as well as we hoped. It’s disappointing, but we can live with it.
‘What we can never live with as a research person is saying, “Wow, I had no idea that they would do that with the portfolio, I’m really surprised.” That is an absolute failure of our research and that’s unacceptable.’
While he is undoubtedly looking for managers with passion, conviction and talent, Weiner says that there is one quality that must be in place before his team can go on to examine other criteria.
‘If I can only have one thing, it has to be integrity, absolute integrity. Number one by a mile,’ he says. ‘Someone without integrity and a lot of passion can do a lot of damage, so everything that we do in our process is a case of “trust but verify”.’
Once that trust is in place, Weiner and his team start their checklist. ‘We want to make sure that the team’s background applies to the strategy that they are running, that they have the right pedigree. We look for people who are trained by investors and organizations that we respect,’ he explains. ‘We want alignment of interests, so we like to see that our managers are invested alongside our clients.
‘We want to have a strategy that we can understand, that’s explainable and we want to see a research process that is unique and repeatable. We also care about the team structure of these organizations.’
Hiring and firing
Even if a portfolio manager has passed all these rounds of screenings, meetings and reference calls, it is still not the end of the process.
Before the team decides to make an investment with a manager, they put an analysis together called the ‘hire-fire sheet,’ which boils down their research to two pages of ‘key reasons to hire’ and ‘key reasons to fire.’
‘It’s memorialized and saved in a central place. It’s updated over time as things change and evolve, but that is our gold standard that we hold ourselves to,’ Weiner says.
The fire side of the sheet is likely to include red flags such as:
- A large marketing team: Veritable believes that large assets are the enemy of good performance. One indicator of that is the number of marketing professionals and salespeople at the firm.
- A lot of team turnover, which Veritable sees as a sign of internal issues within an organization.
- Style drift from the manager, such as investing in geographies or market caps where the manager lacks expertise.
- Changes in risk level, to either too high or too low.
‘For example, there was a very talented stock picker we were invested with for over a decade who suddenly decided he wanted to go to cash,’ Weiner says.
‘He’s a brilliant guy at picking stocks, but we did not want to invest with him to time the market. After a series of meetings, it became clear that he was going to be switching on and off between 100% invested and 0% invested, so the strategy was no longer a fit for why we hired the manager.’
Weiner adds that although it was traumatic to watch how the manager had been affected by the financial crisis, he appreciated the integrity and transparency.
‘What I give him credit for is that he was transparent with us the whole way about what he was doing. And so we never found out about it after the fact or were surprised,’ he says. ‘His transparency was one of the attributes I liked about him, but the strategy was no longer a fit for how we were using him in portfolios.’
While Weiner has no hesitation in firing a manager who triggers all the red flags, he says the team is open-minded about giving talented managers a second chance too.
At the moment, the team is looking for strategies that can provide downside protection, which has historically been important to the firm given its work with 220 high-net-worth US families.
‘Our minimums are fairly high for the families – $20 million. When people come to us, they want to participate in the upside of markets, but downside protection is really important to them, so that’s one of the key areas of focus for us,’ he says.
One of Weiner’s hidden gems for downside protection is the $123.7 million Prospector Opportunity fund, run by veteran portfolio manager John Gillespie, who founded Prospector Partners in 1997 after leaving T. Rowe Price.
‘They are really strong in down markets. That is kind of their core,’ he says, adding that this could be more important than ever in the current economic climate. ‘They’ve done a great job of that historically and now we are later in the cycle.’
With a 17-year tenure at Veritable and 5,000 manager meetings under his belt, Weiner admits that he did not know what manager research was back in college. He attributes finding his career path to a natural aptitude for numbers, curiosity about the stock market and – most importantly for him – discovering Veritable at a young age.
‘I did a Fulbright scholarship in Canada after college and they held the job for me, which was incredible. I’ve been here ever since. I give a lot of credit to our CEO Michael Stolper and the special culture that he has built here. It’s why we have such a low turnover of senior personnel,’ he says.
It seems to have been another early investment that paid off.