For Matt Forester, chief investment officer at Pennsylvania-based Lockwood Advisors, having a penchant for the past means more than simply enjoying documentaries on the History Channel.
‘Years after I bought a historical home at Valley Forge, I learned that one of my ancestors was a senior surgeon in the Continental Army,’ says Forester, who is based at the firm’s headquarters in the town of King of Prussia. Just a short drive away is the historic encampment of Valley Forge, where George Washington stayed with his 12,000-strong army after the British captured Philadelphia in September 1777.
‘History is important to me – not only in terms of family but also in terms of investment research,’ he says. ‘I like to understand things from a longer-term perspective and where they’ve come from, not just what it is today.’
At Lockwood, Forester and chief operating officer Joel Hempel carry on the vision of the firm’s namesake, Jim Lockwood, who made his own piece of history when he pioneered the first wrap account in 1975.
Founded in 1995, Lockwood Advisors originally started with just a separate account platform. It has since expanded and now features three main offerings: asset management, a turnkey asset management solution and investment research.
In 2002, the firm was acquired by the Bank of New York (BNY), which purchased Pershing a year later. Today, Lockwood is a subsidiary of BNY Mellon following the merger of Mellon Financial Corporation and BNY in 2007.
The firm oversees $8 billion in assets via a range of managed account offerings on the Pershing platform and outsourced consulting arrangements with six broker-dealers.
The investment team, led by Forester, is made up of eight people who pick strategies, make asset allocation calls and handle portfolio construction using research provided by BNY Mellon’s wider manager research group.
The outsourced consulting deals are a relatively new initiative, which both Forester and Hempel are excited about. They believe it could change the way Lockwood operates.
‘It looks and feels similar to what’s being done in the institutional outsourced CIO world. It’s a significant play in our evolution, as we take pieces of that asset management tool box and tailor it to our clients,’ Hempel says.
While the outsourced deals are new and exciting, the bulk the team’s time is spent working on product selection for managed accounts available on the Pershing platform. Their manager picks go into the $2.5 billion Lockwood-sponsored managed accounts program, Managed 360, where they are available for individual use as well as within model portfolios. The team’s picks also go toward Pershing’s no-transaction-fee mutual fund program, FundVest 200.
Managed 360, which is used by more than 250 broker-dealers and RIAs, is a program offering a range of separately managed accounts (SMAs) and model portfolios. The models can be mutual fund and ETF portfolios, unified managed account portfolios (UMAs) and third-party strategist portfolios from managers such as BlackRock, Vanguard and Russell Investments. The SMA roster is made up of 531 strategies from 164 managers. There is then a trimmed-down list that the group calls ‘research covered.’ That includes 80 strategies from 41 portfolio managers.
FundVest 200 is a subset of mutual funds from Pershing’s broader FundVest platform, which holds roughly 6,000 funds.
‘We took our research process, applied it to these funds and came out with 210, which make up FundVest 200,’ Hempel says. ‘Of those 210 mutual funds on FundVest 200, some of them have naturally made their way into portfolios that our team manages because we have already vetted them and concluded that we like them.’
Building the right team
For Forester and Hempel, manager searches could be driven by a number of factors, including capital markets assumptions, client demand or the need to replace an underperforming manager.
Among the team’s guidelines are that a strategy must have a minimum of $50 million in assets, a three-year track record and a Securities and Exchange Commission-registered entity behind it. The team also measures strategies against their peers on the basis of costs, factor exposure and risk management capabilities.
‘It’s kind of like baseball,’ Forester says. ‘You want a player who’s good on offence and good on defense, and I think that’s also true in portfolio construction. You want a portfolio that’s going to be good in up markets but also in down markets, so it’s about how all the components will work together as a team.
‘Some advisors tend to focus on that one member on the team who’s not hitting, but he might be there because he gobbles up every ball at shortstop, so there could be another role he’s playing in the overall perspective of how the portfolio is going to perform.’
The team uses a quantitative system that combines various lenses, scenario testing and traditional risk metrics to analyze portfolios comprehensively.
‘These metrics come from different systems, risk models and databases, allowing us not only to get a better handle on how model portfolios differ from each other, but also to understand how they’ll perform in various capital markets conditions,’ Forester says.
Finding the edge
When meeting with a manager, Forester says any signs of arrogance or attempts to mislead him are automatic red flags.
‘The biggest turnoff for me is probably excessive manager arrogance,’ Forester says.
He recalls one meeting with a manager who set all of his internal alarm bells ringing.
‘Several years ago, we had an equity manager who seemed to be constructing calls that were coming in as a means to display his importance,’ Forester says. The manager’s phone would be ringing almost every two minutes, he explains. ‘It was our suspicion that some of the people he was taking the calls from were invented… They seemed almost fictional.’
That meeting did not end well, but plenty of other encounters have been far more pleasant. Forester recalls interviewing a small-cap equity manager who had a unique big data approach, giving them an edge over their peers.
‘Their data was more around the behavior of analysts, rather than the typical data about fundamentals or technicals that a lot of other managers base their decisions on,’ Forester says. ‘They had done a very deep dive into how analysts are behaving around the earnings estimates that they are generating and why you would want to be exposed to certain companies as opposed to others.’
Forester was impressed with the manager’s unique way of looking at data and said that their distinct approach is now reflected in their performance. Lockwood still uses this manager today within its portfolios and on the platform.
On the fixed income side, Forester reflects on a time when he met with an unconstrained bond manager who had a superior set of risk management tools, especially when it came to scenario testing.
‘I had some comfort that they were examining a set of risks that I don’t think other managers were looking that deeply into. For example, they were looking across the types of currency exposures that they had,’ Forester says. ‘They were doing a much better job in terms of understanding what risks they’re taking and what risks they want to take relative to what they’re trying to accomplish.’
Forester believes that a lot of bond managers get whipsawed by the market, but says this one had much clearer guidelines on how they would manage the portfolio.
‘This was again a big data exercise where they had a wealth of specific information on the way they thought their portfolio was going to behave in different circumstances. They had taken scenario testing to a whole new level that I had never seen from a fixed income manager before.’
Time to fire?
About four managers are terminated by Lockwood per year, signaling relatively low turnover. Even so, there are a few reasons why a manager might be taken off – for instance, style drift, a significant manager departure or regulatory issues.
‘Any kind of regulatory or compliance issue is going to be a very serious red flag for other parts of the due diligence operation. We’re typically concerned about either significant asset losses in the strategy as a whole or losses of assets in the strategy on our platform,’ Forester says.
However, underperformance versus the index is not necessarily enough to earn a strategy a termination. Instead, prolonged peer group underperformance could precede a strategy being put on watch because it would spur Forester and his team to look for similar managers who may be navigating a difficult period better than others.
For Forester and Hempel, the job is as much about making history as it is about building an investment team that’s always looking ahead.