As someone who gets up at 4:45am every morning to hit the gym and commute two hours to work, Jeff Sutton knows a thing or two about discipline.
While he may not expect every portfolio manager he invests with to have the same fitness regime, or indeed the same tolerance for public transport, he is definitely looking for the same level of dedication and consistency.
Sutton is managing director of Oppenheimer Asset Management’s consulting group, and if managers want to get onto the firm’s
$12.5 billion platform, buy lists and model portfolios, they will need to prove to him that they have those qualities.
Built for Oppenheimer’s 1,100 financial advisors, the platform is made up of three suites of discretionary multi-manager models with $750 million in assets, a focus list of 130 strategies and what Sutton calls the firm’s secret weapon – a ‘discovered manager’ list of around 30 smaller or less well-known managers, which is a subset of the broader focus list.
The three model ranges are Managed Allocation, which consists of capital preservation, balanced growth and global opportunities in ETF, mutual fund and unified managed account versions; Strategic Allocation, which features long-term strategic mutual fund-only portfolios that are rebalanced annually; and the $250 million all-ETF Market Strategy portfolios, which are the firm’s biggest model in terms of assets.
Sutton, who leads a team of eight analysts, manages these model portfolios and oversees the asset allocation and manager due diligence efforts for the firm.
As proud as he is of the models, Sutton says it is the discovered manager list that not only represents the firm’s belief in active management but also provides a competitive edge for Oppenheimer’s financial advisors, who can then offer differentiated and unique products to their clients.
‘We want to use managers who are what we call “truly active,”’ he says. ‘That means managers who run more concentrated portfolios so their best ideas have a meaningful impact on performance. They also should have flexibility and nimbleness in the markets. So with a lot of our discovered managers, if they are making a trade, it can be fully executed within a day, whereas with the bigger firms that have a lot of assets under management, it can take days if not weeks in some cases to implement a trade.’
Sutton believes these characteristics can be found in small boutiques, particularly with portfolio managers who have broken away from a big firm to launch their own shops.
‘They are typically employee-owned firms, so all the incentives are aligned with their clients,’ Sutton says. ‘Another thing we like about these small boutique firms is that they are typically niche firms and they focus on one disciplined type of investing rather than trying to be all things to all people.’
Finding managers that check all these boxes is not easy. To do so, Sutton and his team use referrals, read industry publications and believe in having an open-door policy.
Sutton recalls that the team was able to find one of its hidden gems – Poplar Forest Capital – by reading an industry publication about former veteran manager J. Dale Harvey’s departure from Capital Group to launch his own shop.
Harvey spent 16 years at Capital Group, at one point managing $20 billion for the firm, but when he first founded Poplar, the boutique had less than $200 million in assets and a track record of less than two years. Even so, Sutton was not put off. Buoyed by confidence in Harvey’s work at Capital Group and by a clear understanding of the approach at the new shop, Sutton has invested $400 million.
‘J. Dale Harvey came out of Capital Group, he put all of his own money into his firm, all his investable assets into his strategy,’ Sutton says. ‘This was his livelihood that was really on the line so it needed to succeed, and that’s the type of incentive we want to see.
‘We want them to be hungry. We want them to really want to prove themselves. We want to see that ambition and hunger – that’s what we see with a lot of these managers when we are meeting with them face-to-face.’
A slew of entrepreneurial managers with these characteristics and their own idiosyncratic talents have since landed themselves a spot on the discovered manager list despite short track records and relatively modest assets.
They include: the Ithaka Group, founded by Bill Johnson, who also co-founded Sands Capital Management; Chautauqua Capital Management, founded by Brian Beitner, who had been a member of the TCW Concentrated Core Equities portfolio management team with responsibility for $27 billion in assets; and Saratoga Research & Investment Management, which was founded by Kevin Tanner, a former senior portfolio manager at Prudential Securities.
Back to cash
However, there is one name on the list that Sutton does not want to disclose just yet, as he believes it is his best find yet. It came to him thanks to a referral from an Oppenheimer advisor based in St. Louis.
The manager stood out to Sutton because they were willing go to cash when attractively valued opportunities were proving more difficult to find.
‘A lot of investors – especially on the institutional side – won’t want to pay management fees to managers that will sit in cash,’ Sutton says. ‘But we see it as an active decision and they are taking more of an absolute return mindset, looking to protect their own capital because they are invested side-by-side with clients. They don’t care about benchmarks; they want to protect and grow.
‘That was a home run for us because the timing of it was great. It was right after the financial crisis and we would have been doing a disservice to our clients by not encouraging them to get into the market,’ he explains.
Perhaps the most unexpected way that Sutton finds managers is his open-door policy.
‘We are willing to do an intro meeting with anyone,’ he says. ‘Almost every day, we have someone coming into the office, and I’m happy to spend 30 minutes hearing the pitch. We’ve been doing this for a long time. In the first 15 or 20 minutes, we will know whether something is interesting or not.
‘What we are looking for is something unique and differentiating, and someone who can tell the story well. If we cannot understand what they are doing, then we don’t want anything to do with it. It’s harder to find a portfolio manager who can effectively communicate their approach,’ he says.
Getting to know you
While most gatekeepers sift through data to find managers and then examine the qualitative aspects, Sutton and his team do it the other way around, looking at the qualitative side first before seeing whether the quantitative case matches their observations. Finally, they dive into the qualitative again through onsite visits.
‘Qualitatively, it’s about sitting down face-to-face with the senior members of the team and the analysts on the team and quizzing them,’ Sutton says. ‘We want to hear a consistent story from all the people that we meet with. Everyone should be on the same page. If we hear inconsistencies in the story, that’s a red flag.’
If Sutton decides that the manager’s story is compelling and unique and that the investment philosophy is high conviction and truly active, the team will dig deeper with quantitative analysis.
‘When it comes to equity and bond managers, we will ask them for historical holdings. We will use Barra and FactSet multi-asset risk models to do the risk analysis,’ Sutton explains.
If the manager is able to jump through all these hoops, the team will conduct a final onsite visit, where the emphasis will once again be on consistency and verifcation.
‘We are meeting with the leadership at the firm, we are meeting with the entire investment team, we are meeting compliance, trading, operations and so on. We’re just verifying everything we’ve learned, having sent them questionnaires and a lot of materials in advance of the onsite visit,’ he says.
The discovered manager list started as an initiative back in 2009 when Sutton first joined Oppenheimer.
Sutton says he took inspiration for the list from his time working at Northern Trust alongside former Citywire cover star Chris Vella, who built that firm’s emerging managers program.
‘All through my career… I really try to learn as much as I can, and I have had some great mentors,’ Sutton says.
Given the smaller size of Oppenheimer relative to other wirehouses, Sutton says the discovered manager list helps to give the firm and its advisors a competitive edge.
‘We can access shops between $200 million and $500 million. A lot of our competitors are too big to access a $200 million firm,’ he explains. ‘And then we feel it gives our financial advisors a competitive advantage because they are presenting unique managers to a client. When they put together a portfolio that features these discovered managers, no one else on the street is going to be able to put together a portfolio like that.’