Manager research can be a very complex business. But it doesn’t have to be. For Wilshire Associates’ Rob Noe, it can be as simple as the board game Monopoly.
‘When you play Monopoly, everyone wants either Boardwalk or Park Place, and a lot of people forget about the other properties around the board. But typically you win that game by investing in some of those other properties that may be unloved,’ he says.
‘I look at manager research as trying to find those properties before anyone else notices them, and if you’re able to get in early and enjoy that good performance before everyone piles in, that’s typically when you can add value for clients.’
Noe is head of the manager research group at Wilshire Associates, leading the 15-person team responsible for all manager selection and due diligence at the firm.
This team puts together a focus list of 250 strategies that all offer either separate accounts or commingled funds for institutional investors. Of the 250, 168 strategies are mutual funds and approximately 45 are UMA/SMA vehicles. The team also puts together a separate ETF focus list, which features 130 funds.
The strategy focus list is used by the firm’s three business lines: Wilshire Funds Management Group, which handles discretionary portfolio management for financial intermediaries and has $46.2 billion in assets under management (AUM); Wilshire Consulting, which offers consulting services to institutional clients and has assets of $8.5 billion; and Wilshire Private Markets, which provides a combination of these two offerings with a focus on private debt and equity and handles $2.7 billion in client money.
The focus list is narrowed down from the team’s wider coverage universe of around 1,200 strategies, plus any managers that clients may have in portfolios sitting outside Wilshire’s original scope.
The team works closely with Wilshire’s six-person portfolio management group, led by Nathan Palmer. This group oversees asset allocation and the construction and discretionary management of the firm’s various model portfolios.
Wilshire offers many different types of models, including glide path portfolios used in college savings plans and retirement portfolios, as well as regular risk-based models tailored to clients’ needs.
Noe and Palmer’s teams also work together to fill subadvisory slots on the firm’s seven multi-manager mutual funds, which account for $1.6 billion in AUM.
Getting in early
Noe estimates that the focus list has a turnover of about 10% or 15% per year. He says that his desire to spot underappreciated funds before others means there is no minimum criteria that every strategy needs to meet before being added.
‘We don’t have any hard and fast rules in terms of track records or AUM,’ Noe says. ‘That said, when we take something to the committee that has a short track record or very low AUM, there is pretty fierce debate about its inclusion.
‘But if we find something really good earlier in its life cycle, that’s typically when you can add more value for your clients. So the more you have to wait in terms of track record or assets, the more you’re giving up in terms of alpha.’
Noe adds that he is still mindful of the risks involved in backing a strategy with a very short track record or low assets, because clients may not want to hold 50% of the assets in a given strategy.
Time to get personal
All strategies are run through quantitative screens, looking at traditional performance, risk-adjusted performance and performance attribution, among other criteria. The team uses its own internal database, Wilshire Compass, which is self-populated by portfolio managers. Managers are asked by Noe and his team to report to the database, where they enter holdings information, allowing Wilshire’s manager research team to dive deeper.
While the whole quant process is essential, Noe says his team really adds value when it meets with portfolio managers. He explains that the team conducts roughly 1,200 manager conversations per year, via calls and on-site manager visits around the US and beyond.
He says the first engagement is typically a conference call, in which he and his colleagues avoid digging too deep and instead aim to get a feel for the asset management firm, the strategy’s process and the people behind it. The face-to-face meetings that follow are when the real work begins. This is when Noe and his team find out whether a manager is worth backing or sacking.
Noe recalls one standout meeting with Laguna Beach-based growth shop WCM Investment Management, which was added to the Wilshire International Equity fund as a subadvisor in 2013.
He explains that the firm had less than $2 billion in AUM when he first started meeting the managers. ‘They were talking about things such as tailwinds and moats, and that was very different to what we were hearing from other managers, so we definitely thought they were unique,’ Noe says.
‘It just seemed as though, meeting after meeting as we got a little more [familiar], the depth of their process came through and the more people we met with... we would just continue to be impressed with what they were doing. It was a really unique process.’
Noe says that due to its size back then, WCM would not have checked all of the boxes right away, but it has been a home run ever since.
WCM’s AUM has since grown to $29 billion, and earlier this year Natixis acquired a minority stake in the business. The firm’s flagship $6.3 billion WCM Focused International Growth fund ranks ninth out of 117 in its Citywire peer group and is run by Paul Black, Peter Hunkel, Mike Trigg and Kurt Winrich, all of whom are Citywire AA-rated for their risk-adjusted numbers.
Of course, not all meetings are that impressive or yield such stellar results. Noe and his team have learned to spot certain red flags over the years. These include a manager’s inability to speak about specific names in the portfolio, a lack of risk awareness and diversification, and managers who stick rigidly to a pitch book. All these can be strong indicators that a manager may not be as good as they are cracked up to be, Noe says.
‘Five years ago, there was a strategy we were doing some work on. It was a manager who had left a big firm and opened up a new shop, so we were looking at potentially recommending them in a client search,’ he recalls.
‘My colleagues asked him about how he stored his research and his notes, with the expectation that he had a system on the server or a software for sharing notes, but he went to a filing cabinet and started pulling out paper copies.
‘If that’s the notes, then you worry about things like compliance,’ he adds.
While this particular manager was a write-off, Noe has had a decent amount of success backing well-established managers who might fly under the radar at a large shop and then move somewhere smaller.
He says that knowing about these managers cannot be taught but comes from years of experience. Going back to his Monopoly analogy, these are the kinds of properties that he believes can win him the game.
‘It’s good to have the quant screens to identify some new managers who we haven’t followed in the past, but this is an industry where people are moving around. The more you have experience in your space, the more you know the players,’ Noe says.
One example of a strong management team leaving a big shop to work solo – and one that Noe backed early – is Citywire AA-rated Brian Schaub and Chad Meade, who left Janus in 2013 to join Denver, Colorado-based ArrowMark Partners. The firm had been founded in 2007 by fellow Janus alumni David Corkins, Karen Reidy and Minyoung Sohn.
After some success at Janus, Schaub and Meade were already on Noe’s radar before their exit, having managed the $11.3 billion Janus Henderson Triton fund. The duo currently manages ArrowMark’s $1.9 billion Meridian Small Cap Growth fund, which is ranked 23rd out of 142 Small-Cap Growth funds tracked by Citywire for three-year total returns to the end of July. That’s eight positions ahead of the Janus fund, which ranks 31st over the same period.
‘We’d always been big fans of that strategy and so when they came up, we did some work fairly quickly. This is an example of a manager where we didn’t need a three-year track record at the new asset manager,’ Noe says.
‘We basically knew the two portfolio managers coming over, and as soon as they moved over, we wrote up that strategy and brought that one forward to our focus list.’