As a keen gardener, Chris Vella enjoys watching small seeds grow into something bigger. He plants them, nurtures them and then harvests the produce.
He takes a similar approach to manager selection, focusing on unheralded, often smaller shops, seeding them in another way, in the hope of reaping the rewards in the future.
‘A lot of the time, [managers] won’t pop into the screens because their track records are too small, but we love smaller boutique shops,’ he says.
‘Every small boutique manager who raises their hand, we’ll go see them or they will come see us.’
One boutique he backed when it was it still just a sapling was small- and mid-cap specialist Monarch Partners. Having started life as a breakaway from a larger shop, today it has $1.2 billion in assets under management. Vella was there at the beginning to help it take shape.
‘Monarch Partners, which spun out of BlackRock years ago, had $50 million in assets and I was up there in Boston to sit down and meet with them,’ Vella says.
While gardening shapes how he thinks about managers today, it could have taken him down a very different path. Vella spent his high school and college summers working on golf courses.
‘I was cutting the grass, so I was up at the crack of dawn, out there raking sand traps and doing all of the maintenance on the golf courses,’ he says.
‘For a while there, I wanted to do golf course design and be an architect, and now that has translated to gardening.’
For the moment, his career designing golf courses is on hold. Instead, Vella is chief investment officer of Northern Trust MultiManager Solutions, where he is responsible for manager research and portfolio construction. In this role he oversees the firm’s manager research platform, which has around $113.2 billion in assets under management across 240 strategies.
Five teams report to Vella. These are global equity manager research, global fixed income manager research, specialized strategies manager research, multi-manager investment products and the middle office team. Each team leader has an average of 21 years’ experience and 13 years with Northern Trust.
These individuals oversee the investment menu on the firm’s global manager research platform, which is used by Northern Trust’s institutional and private wealth business. The latter pulls from 80 different options.
The platform has 97 third-party mutual funds, 53 collective investment trusts, 103 institutional SMAs, 37 wealth management SMAs and 24 private placement vehicles. It also includes seven multi-manager funds, for which Vella selects subadvisors. The average turnover of the manager research platform is between 10% and 15% per year.
In looking for managers Vella wants his team to consume as much data as they can get their hands on. Searches start with data on managers from providers such as eVestment and Wilshire Associates, but the team quickly gets out and about, seeing thousands of managers each year.
The team runs return-based screens, using factor analysis to whittle down the initial pool of managers to the 20 or 30 who look the most interesting within any given style of investing.
Vella's team does not use benchmarks and instead dissects returns against groups of managers to understand how they generate their performance.
He explains that for global real estate investment trust (Reit) managers, the team looks at fixed income factors too – even though it's an equity allocation – because some Reit portfolios have a higher correlation to fixed income factors.
‘We’re not trying to design hundreds of fancy factors but we look at using a very broad-based factor set to understand if there are tilts that the managers may not recognize themselves,’ he says. ‘The combination of experienced people interviewing managers and looking at the output of the attribution across quantitative tools helps so much in terms of being able to make good decisions around hiring managers.’
Although Vella and his team use quantitative measures for factor analysis and performance attribution, they do not screen based on asset size or a three-year track record in order to avoid limiting their pool of potential strategies.
Vella and his team have face-to-face meetings with every manager before they hire them for the general platform or a multi-manager fund. According to Vella, the best portfolio managers can easily communicate their processes.
‘The best thing that they can do is think about their process and philosophy and weave it through the entire [meeting],’ he says.
‘If you are able to get that from someone who is really sharp, knows what they’re doing, is disciplined about the process, and is able to explain all of that, and we can then confirm it with our own quantitative analysis, that’s the home run.’
He adds that the perfect pitch features an explanation of the firm, the investment team’s formation, the investment process and philosophy, why they do well and reasons for possible underperformance.
He offers the example of when he was looking for a highly concentrated equity portfolio back in 2013. He ultimately settled on Polen Capital. At the time, the firm only offered a US large-cap growth strategy, where you might not expect a lot of alpha, and had just $5 billion in assets under management.
‘We met with the portfolio manager, Dan Davidowitz, and the guy just lit up. He knew his stocks inside out,’ Vella says.
‘He knew every stock in the portfolio like the back of his hand and knew when he would do badly and not do badly. We walked out of there like “Wow this is actually really something special.”’
Vella says the Polen Growth fund has since racked up almost 500 basis points of annualized outperformance versus the benchmark, and the firm has reached $15 billion in assets.
Getting your hands dirty
While Vella relishes seeding smaller shops and watching them blossom, he concedes that it is only a small part of his day-to-day work. The majority of his time is spent on less glamorous due diligence work and monitoring Northern Trust’s existing roster of managers.
‘80% of the job is making sure what you got is doing what you expect and 20% of the job is that fun stuff,’ he says.
‘The goal is to really understand that process and to make sure that they’re sticking to that.’
When it comes to due diligence, the team checks in with managers six times a year and carries out at least one onsite visit. Vella personally does at least 25 visits per year.
Although Vella can opt to terminate a manager immediately, a period of underperformance or a significant change of investment process typically sees a manager being placed on watch for 60 days.
Even though the team does not announce when a manager has been put on watch, the number of meetings increases. The team’s concern can be inferred from the heightened level of contact.
After the watch period is over, the team grades the manager, which either results in them being kept on or terminated. ‘We’re all big boys and girls. We don’t have to call up and say “Hey, guess what – you’re on watch and I’m sorry to tell you that.” They will be able to figure that out if they’re working with us,’ Vella says.
One manager that Vella has never had to worry about is Massachusetts-based high yield shop DDJ Capital Management. The group runs the DDJ Opportunistic High Yield fund, which is managed by John Sherman, Benjamin Santonelli and David Breazzano.
The fund was only launched in July 2015, so its track record is short, but it is one of the top performers in its sector, ranked second out of 173 Citywire-tracked High Yield funds for one-year total returns to the end of August. Over that period it is up 13.3%, compared with the average high yield fund, which is up 7.5%.
What has distinguished it from some of its peers is that around one third of the portfolio is in bank loans. ‘Their bond selection capabilities in the bank loan segment were off the charts and that was the alpha driver for that high yield strategy,’ Vella says. ‘Their ability to sit in a meeting and demonstrate that skill for bond selection in that bank loan segment was great.’
Clean and green
Over the past year, Vella has been trying to make an impact by selecting managers that are either environmental, social and governance (ESG) focused or minority-owned. To this end, he recently added the ClearBridge International Equity ESG strategy to the firm’s wealth management model platform.
Within the firm’s model-based solutions, he has also added strategies from firms with minority individual ownership, such as Ariel Investments and Mar Vista Investment Partners.
‘That’s part of this diversity inclusion effort that we’re making. We’re doing something about it,’ he says. ‘These are firms that we’ve worked with for years on other platforms, but for the wealth side, they’re new opportunities.’
He hopes they will flourish in this new ground.