Let’s be honest, some parts of manager research are more exciting than others. Onsite visits with star names are enjoyable. Discovering hidden gems is a highlight. Building a brand new set of portfolios has its thrills.
Ongoing oversight, it’s safe to say, is at the less sexy end of the spectrum. Even its alliteration can’t rescue it from sounding dull.
But, every now and then, this is where the action is.
Just ask Bill Harding, chief investment officer at Jackson National Asset Management, who pulled out of a liquid alternative fund months before scandal hit the asset manager behind it thanks to his robust ongoing due diligence.
For compliance reasons he cannot name the firm or fund, which Harding was using in one of the multi-asset funds of funds offered to Jackson Life’s variable annuity customers.
The company running the fund would go on to be hit by allegations of insider trading and become the subject of a federal investigation.
Although the fund Jackson used was not caught up in any of this, Harding’s process meant his firm was out well before the scandal broke and he avoided any contagion.
'We hit a red flag, because as part of our overall monitoring we send out periodic questionnaires and had difficulty in this case receiving answers to some of our questions,'
Harding says. ‘This caused concerns for us, so we moved money out of the sleeve they were managing initially and eventually replaced them with a new manager. Subsequently, news hit regarding the firm that confirmed there were some serious issues there.
‘Our Proof process worked there. It identified a risk that came to fruition and we got out before a lot of other investors.’
The Proof process he refers to is Jackson’s five-step methodology for approving and monitoring funds on its $207 billion variable annuity platform.
P is for performance, R for repeatability, O for operational review, O for ongoing oversight and F for fit.
‘If you are looking just at past performance [you don’t know if there is]... persistence and repeatability,’ says Harding. ‘The other factors help identify competitive advantages and strengths.’
To read more about the Proof process, see the bottom of the page.
The platform consists of 149 mutual funds, the majority of which are subadvised by 61 external asset managers.
Nine are managed by Jackson affiliate PPM America, and there is a host of single- and multi-asset fund of funds on which Harding and his colleagues Sean Hynes and Mark Pliska are named managers.
The latter funds invest in third-party mutual funds and exchange-traded funds (ETFs) and account for around $31.9 billion of assets.
Investors can gain access to the fund platform through Jackson’s two main variable annuity products, its flagship Perspective offering, which has a choice of 100 funds and guaranteed income, and its more recent investment-only
Elite Access product, where again 100 funds are available. There is some overlap between the funds available to each.
Harding and his team tend to add funds every six months, in the spring and the fall. This September will see them add one of their largest batches, with 21 new funds set to be added to the platform. Harding cannot talk about the funds as they are not yet launched, but they have been registered with the Securities and Exchange Commission.
According to regulatory filings, there are 10 funds on which Vanguard is a subadvisor, seven with Mellon Capital and the four below:
- JNL/Pimco Income fund
- JNL/GQG Emerging Markets fund
- JNL/ClearBridge Large Cap Growth fund
- JNL/Invesco Diversified Dividend fund
Harding says the move to add more Vanguard funds to the platform reflects the wider industry trend towards passive investing.
‘We want the products to be attractive to advisors and their clients, so as much as I have high conviction in our line-up of actively managed funds, we need to have passive offerings if the advisor and their client want that or they value a relatively lower cost solution and passive implementation,’ he says.
‘We have been making sure the passive portion of the platform is diversified so there have been some gaps we have filled there recently.’
Harding’s knowledge of the mutual fund universe is vast, a skillset he owes in part to previous employer Morningstar, which he joined as a research analyst before going on to head up its managed portfolio team.
Not only did he bring his knowledge with him to Jackson, but some of his colleagues too. Hynes worked there, as did Kerry O’ Boyle.
These two, alongside Pliska, make up his team of senior strategists. Each of these three has three direct reports, making up a 13-strong research team that covers the investment universe, typically with each member specializing in two or three different asset classes or types of fund.
Harding says he likes his analysts to have more than one area of expertise as it makes them better-rounded researchers and means the team is not left light in a given asset class when there are departures.
Getting with the plan
He joined Morningstar having first started out as a financial analyst for Leprino Foods, in Denver, near to his alma mater, the University of Colorado Boulder, where he had studied in part due to his love of skiing.
The firm supplied mozzarella to fast food giants Dominos and Pizza Hut, but Harding gained a taste for analysing the funds held in the company’s 401(k) plan. This led him to use Morningstar products, and eventually to pursue a career with the research business despite never having been to Chicago. He has since made the city his home.
The relationships he formed at Morningstar have also helped Harding arrive at some of his most successful fund picks, including the well-known DoubleLine Shiller Enhanced Cape fund, and the less famous WCM Focused International Growth and Champlain Mid Cap funds.
‘At the time the DoubleLine mutual fund was only two years old and had not yet earned its
Morningstar star ratings,’ says Harding. ‘But we were attracted to it for a couple of reasons. Sean and I had exposure to DoubleLine as a fixed income manager back at Morningstar Managed Portfolios so knew them well and what we liked about this strategy was the portable alpha approach. It really had the potential to add alpha in two ways with the sector rotation strategy on the equity side... and then with the active fixed income portfolio, and we had a lot of confidence in DoubleLine as an active fixed income manager.
‘It’s been a home run for us. Its performance has exceeded our expectations with how strong it has been since we launched it.’
The firm has had the WCM strategy on the platform since September 2013 as the concentrated international equity sleeve of a fund of fund. Harding first met the team behind the fund back in 2001 when the firm was a 100% employee-owned boutique in Laguna Beach with a little over $1 billion.
‘The first time I met with them, I had never heard of them, they were a small shop,’ he says.
‘But I took the meeting, partially, because one of the portfolio managers, Mike Trigg, used to be an equity analyst at Morningstar. So I wanted to see what he was up to. I knew he had a pretty good pedigree knowing how the Morningstar analysts evaluated stocks, akin to the Warren Buffett approach, so it made sense.’
Today the firm has $15 billion of assets. The international growth fund is ranked fourth out of 108 in the Citywire International Multi-Cap Growth sector for its three-year total returns, and Trigg and his co-managers, Paul Black, Peter Hunkel and Kurt Winrich, are all AAA rated for their risk-adjusted performance. Champlain Investment Partners, a small-cap specialist started by Scott Brayman and other managers who had previously worked at Sentinel Asset Management, is a similar story.
‘We hired them to run a sleeve of our multi-manager mid cap fund that we launched in September 2016, but my experience with them goes back to 2005 when I was at Morningstar,’ says Harding. ‘It’s an “old wine in a new bottle” story.’
Culture of success
Although the Proof process is vital to Harding’s work, he admits that personal knowledge and personality can play a big part in finding and hiring great managers.
‘We pay a lot of attention to the people and the culture,’ he says. ‘We want to make sure we are finding good stewards of capital, that their interests are aligned with their clients.
‘In our interviews with managers we try to get into the depth of their knowledge, their thought process and that brings out a lot. Some people, [DoubleLine’s] Jeffrey Gundlach especially, rise to the top when you start to have a conversation about portfolio structure and knowledge of the markets.’
Not everyone comes out so well.
‘At times we have seen negative personality traits that may have scared us away,’ he says. ‘If they can’t admit they have made mistakes or don’t give enough credit to the team around them, those are sometimes red flags.’
And sometimes you just can’t beat the personal touch.
‘The organizations and teams we like the most you can get a sense for,’ he says.
‘There is a very collegial environment, there is good collaboration and people seem to enjoy working with each other.
‘You can always run these screens and look at the data, but between myself, Sean and other members of the team we have lots of years of experience,’ he says. ‘We have probably met 1,000s of managers over the years. A lot of times ideas come out that way.’
The team uses its proprietary performance-ranking system to identify managers that have shown some skill in the past. It looks at multiple factors such as excess return, Sharpe ratio, information ratio, up-to-down capture, batting average over multiple time periods. It then averages those scores up and ranks it within its peer group.
Harding says: ‘There’s not a lot of persistency. So repeatability gets into trying to identify a competitive edge or the factors that helped managers do well in the past. That is where we do more of the qualitative due diligence. We make sure their process is sound and look at team turnover rates, culture, and manager ownership.’
‘This is particularly important for a subadvised fund structure,’ says Harding. ‘We want to make sure we are working with partners where we have confidence in the institutional caliber of their process, their integrity, and they have no compliance issue meeting the 40 Act structure.’ This stage includes compliance and operational due diligence.
The team conducts regular calls and onsite visits. It tracks performance versus expectations and sends out quarterly questionnaires.
The team weighs what a given fund may bring compared with the rest of the line-up on the platform. It examines correlations and holdings overlap. This step is of particular importance when selecting funds for funds of funds.