Matt Harris doesn’t mind being called a nerd.
In fact, as the head of investment strategy for the wealth management division of RIA roll-up HighTower Advisors, he even uses the word to describe himself. He readily admits that he overanalyzes many aspects of his daily life.
Luckily, this disposition for detail means that he has found his professional calling in the field of manager research and due diligence. ‘I realized that I am not a client-oriented person. I am just a nerd, so put me in a room with a computer and I’ll be happy,’ he says.
Harris started off in the industry as an advisor at Morgan Stanley, and in 2008 he moved to the advisor team at Lyon Wealth Management. The firm then went on to become the fourth group to join HighTower Advisors.
Matthias Kuhlmey and his advisor team at Kuhlmey Wealth Management followed suit in 2009. When Kuhlmey decided to set up HighTower’s wealth management division two years later, Harris seized the opportunity to pursue what he had enjoyed doing the most as an advisor – manager and asset allocation research. The rest is history.
Today, Harris works alongside director of fixed income and capital markets Lee Majkrzak and investment analyst Joseph Klein to conduct research and due diligence within that division. Together, they work with the firm’s 92 advisor teams to serve as what amounts to an internal outsourced CIO.
As part of this, they build and monitor a recommended list of 29 strategies – five ETFs, six SMAs and 18 mutual funds. They also carry out portfolio construction research for advisor teams.
Go your own way
Harris emphasizes that the recommended list is intended as a resource for the firm’s advisors and does not constitute a house view. This means that advisor teams can still do their own research while also accessing the wealth management division’s due diligence and portfolio ideas as and when they see fit.
This works both ways too, as Harris can tap the network for its members’ best ideas and specialist know-how, or what he calls the ‘collective wisdom’ of HighTower’s 207 advisors.
For Harris, this is particularly helpful when it comes to idea generation. ‘I talk to the other analysts a lot. Because of the geography, they might have met managers in LA much more often than those in DC,’ he says.
He also consults friends and former colleagues in the industry. It’s a collaborative approach that he says helps him to spot inconsistencies in a manager’s message.
‘What is one person saying versus another, and then versus the rest of the deck? Does it all makes sense, or is there an area that doesn't quite jive? That’s usually where we can find issues before there are issues,’ he says.
‘Even just simple things like whether the benchmark is different in a particular pitch book or whether it differs from the rest of the universe that they are selecting from,’ he explains. ‘It’s not necessarily somebody trying to be deceitful, but it just tells me that they are not as consistent or as thoughtful as they could be.’
In this regard, Harris likes the $171 million O'Shaughnessy Market Leaders Value fund, run by Chris Meredith and Jim O’Shaughnessy at O’Shaughnessy Asset Management. The quantitative investing firm is led by father-and-son duo Jim and Patrick O’Shaughnessy, who are chief investment officer and chief executive respectively.
Harris says that although the fund is different from what his team typically invests in, the O’Shaughnessys’ consistent track record has persuaded him to be more open-minded about different risk profiles and factor-based approaches.
‘They fit all the other criteria. They’re a slightly smaller firm, but they’re incredibly research-focused and innovative,’ he says. ‘Some of the things they’re doing are really fascinating, and it’s not traditional research.’
Trust the numbers
Harris admits that he might be biased toward quantitative strategies because of their consistent, data-driven nature. ‘They may not act the same in every single market, but because it’s quantitative, I know what to expect in different environments. I know that it’s going to be a little more certain than a PM picking stocks based on how they feel that day.’
However, Harris’s conviction in the O’Shaughnessy strategy extends beyond its quantitative nature. It’s also about how the firm is run and how it goes about exploring ideas.
‘Patrick is challenging the status quo,’ Harris says. ‘They’re thinking outside the box and talking about how to think about things outside of finance – not just what they’ve seen successful financial people or portfolio managers do, but what the most successful people in all industries have done.’
Harris is also a fan of Patrick’s podcast Invest Like The Best and Jim’s original books on quantitative investing.
‘A lot of people will criticize a manager for changing their process over time, but as long as it’s explainable, I want people to evolve and change,’ Harris says. ‘Market dynamics change, and Jim’s world view has changed over the many years that he has been doing this. Making Patrick CEO, that was him saying that we need to continue to be innovative in adapting to the new world. They’re embracing change in the right way.’
As a data-driven and analytical researcher, Harris is naturally drawn to quantitative strategies. However, he also applies that lens to the world of fundamental bottom-up investing, where he aims to identify managers with a differentiated edge.
‘We started using them right when I got to HighTower in 2008, and the fund has been phenomenal since then,’ Harris explains. ‘Even though they’ve had some big underperformance and big outperformance, they have been consistent in when they do well and when they don’t. That gives us comfort that things haven’t changed. It’s the same process that they have had for more than 25 years.’
He adds that Davidowitz and Ficklin’s strategy strikes him as particularly thoughtful because it includes different types of growth companies. ‘Typically, we have seen growth managers either buy defensive growth or really aggressive high growth. Both can work, but it’s hard to be just a high growth manager because you are subject to very big drawdowns,’ Harris says.
‘Polen has three different tranches – the slow consistent growth, the moderate growth and the high growth – so it gives you a balanced profile.’
Thinking it over
While consistency is key for Harris, thoughtful managers often leave a good impression too.
That was certainly the case with Scott Moore, president and chief investment officer of Kansas City, Missouri-based value boutique Nuance Investments.
‘He is a student of companies, more of a research analyst than a portfolio manager almost, but he knows his companies better than almost anybody else,’ Harris says. ‘He is incredibly thoughtful about how they put portfolios together, and he is really different because of the detail and granularity that he goes into.’
The Nuance Mid Cap Value fund is co-managed by Moore and Citywire + rated Chad Baumler. Launched at the end of 2013, the fund is ranked third out of 39 Mid-Cap Value funds tracked by Citywire for three-year total returns to the end of October. Over that period, it has returned 31.9% compared with the average fund in the category’s 21% and the Russell Mid Cap Value index’s 26.5%.
In addition to smaller boutiques, Harris says that his team also appreciates strategies from larger asset managers, such as the $111.4 billion Pimco Income fund, co-managed by Dan Ivascyn, Alfred Murata and Joshua Anderson. In this asset class, he believes that scale is an advantage.
‘Their size is an advantage in the income space, where it’s almost unconstrained. They can go across different sectors and segments,’ he says. ‘Even with that size, trading in those markets, it’s important to extract value from trading. So we use that within our portfolios, and it has done really well for us.’
Harris may be a big fan of these funds, but it doesn’t mean he’ll hold on to them forever. They have to keep earning their place on his list.
‘There are plenty of managers that I feel have achieved success in the past and then they start going back to the “buy undervalued companies at cheap prices” mentality or relying on their “smart people,”’ he says.
‘Having very smart people is not an edge. That doesn’t give me confidence, as it’s not perpetual. As soon as somebody leaves your team, the next company has the smartest people.’
And if performance dips or there’s a change in process, you can count on this nerd to notice.