Being part of a fund research team in a way is a little bit like being part of a cult. Every firm has its own world view. Its own culture. Its own vernacular. Its own anthropology. Benjamin Graham acolytes might worship at the font of intrinsic value. Macro economists might be looking at the butterfly effect-what a Chinese cell phone owner's behavior means for the United States. Accountants might be obsessed with the dilutive quality of stock options. Trend traders might feel at home on the range-on range-bound stocks, that is.

"You drill down enough, most of the time the people involved [on a research manager team] have a similar worldview, because otherwise the second person would have never been hired," says Chris Cordaro the CIO and CEO of RegentAtlantic in Morristown, N.J.

To bring these teams out into the light, Financial Advisor has gone on an annual hunt for the all-star research manager team, a cross-section of professionals, nominated by their peers, who help shape the makeup of client portfolios. The all-star team will be recognized at the 2nd Annual Fiduciary Gatekeeper Research Summit, sponsored by FA and Private Wealth magazines, October 11-12 at the Hyatt Regency Boston.

Everybody wants to buy stuff cheap and sell dear. Most managers would describe their styles as value oriented, or say they manage risk. Most would say they have due diligence bona fides or that they meet with managers three times a week. Most of them are trying to find out whether it's skill or luck driving a successful stock or fund. But at the end of the day, the view is subjective and intuitive. You've got to have good feelings about the way markets work-and the way people work, too.  

Raymond James Financial
St. Petersburg, Fla.
Tarek Helal, Vice President,
Product Research and Development
Take Tarek Helal, co-head of the alternative investments group at Raymond James. "I view research as more art than science," he says. He took the position after winning a role as assistant to chairman Thomas James in 2009, a special program that allowed him to focus on analysis and learn a philosophy about investments, including a general level of conservatism about them.

He recalls that in the depths of the financial crisis, James was fond of a REIT with a high dividend, something like 18% that everybody else was dumping on. James' attitude: "So what?" Even if it was cut to 9%, it would still be a yield that was easy to cover.

Given that his focus is on alternatives, Helal is jousting in a rockier tiltyard, yet he says that most of that conservative outlook still applies and that simplicity rules the thought process in his alternatives team. "I would probably class myself as a value investor," he says. "At the end of the day, your investment return is a function of what you paid for the asset."

Given that alternative investments can be opaque, that they can freeze up clients' money or meanwhile grind it up in tax-inefficient trades, Helal says it's important to search for risk-adjusted return profiles that make up for these "structural shortcomings." He is currently fond of long-short equity funds. "A lot of that is a function of being constructive on the equity markets generally. If you look at the way long-short funds generate their returns, it's a dispersion-based strategy. So you buy good companies, sell short bad ones and eventually their return stream will disperse and you will theoretically gain on both sides." That view has been dampened a bit by the high correlations in the market, a likely result of the Fed-induced cash flood, but Helal is optimistic that the chorus will disperse, correlations will decline, consonance will become dissonance, and that good bets will, once again, be good bets.

Altfest Personal Wealth Management
New York, N.Y.
Lew Altfest, CEO and CIO
Andrew Altfest, Executive Vice President of Strategy and Investments
Ekta Patel, Managing Advisor
The team members at Lewis J. Altfest & Co. are always curious about companies that have been flagellated by the media. After all, negative headlines can sometimes cover up clean metrics, at least as far as this deep value, contrarian firm is concerned.
Take banks, which have gotten slugged by investors for not being the champions they were in the halcyon days of 2007. Altfest likes a sector out of favor. And the banking community, still roiling from JP Morgan's notorious multi-billion-dollar loss on trading derivatives in June, looks like the pretty girl in the John Hughes movie that nobody notices because of her glasses.

People don't want to own them "even though a lot of them are attractively priced and are as safe as they've been as far as you can remember," says Andrew Altfest, a member of the firm's portfolio action group along with his father, founder Lew Altfest, and a third member, Ekta Patel.

The firm not only seeks pockets of value around the world in inefficient markets that aren't well covered, but also pays particular attention to monitoring new funds and breakaway portfolio managers with smaller amounts of money to play with.
"Basically, it's our belief that in some cases with new mutual funds it's almost like you're getting a hedge fund at the cost of a mutual fund," says Andrew Altfest, "and that can be very good in areas in which how much money you manage is important-like small cap and international small cap."

The team at Altfest, which has $850 million in assets under management, is currently looking at new opportunities in emerging markets and international small cap. "Everything is valuation conscious," says Andrew.

If an investment is so popular that clients are asking for it, that's not a good sign, he says. Take the Facebook IPO, which the firm discouraged its clients from participating in. "The valuations were just incredible. You could see that people would be cashing out once they were able to."

Aurum Wealth Management Group
Cleveland, Ohio
Michael T. McKeown, Director of Research
Some jazz musicians like to play in two keys at the same time. Michael McKeown and his partners at Aurum Wealth Management Group also like mixing up modes, specifically using different investment styles to come up with something it calls "ultra modern portfolio theory." His five-person research team's approach is to assemble multi-asset, multi-manager portfolios and diversify portfolios by risk.

He and the firm's two principals, Eric Wulff and Chris Bart, hail from Morgan Stanley, which they left in 2006 to pursue their more holistic approach. When it came to investments, McKeown says, "at Morgan Stanley, we generally had the pre-approved box. They had shut down the third-party channel that we had been using previously. As we left, we actually gained more tools to analyze investment managers and frankly better access to the managers, the products, the portfolio specialists and the portfolio managers as well."

He says Aurum tries to take a margin-of-safety approach like Benjamin Graham or Seth Klarman. "While some managers might take that to the individual stock level, we really try to apply that to see: Is there a margin of safety in certain asset classes? ... So we'll have target allocations that we want to be at over the long term. But we will tactically allocate and underweight. For example, right now we're underweight in [REITs]. We just feel like there's not a margin of safety within that sector."

One pet fund the firm likes is the newly launched Wells Fargo Advantage Absolute Return Fund, which invests in GMO's Benchmark Free Portfolio. "It's an unconstrained portfolio that has an institutional track record that goes back about 10 years. We like that approach: taking the shackles off a manager and really allowing their research to drive them toward the best portfolios without giving them an arbitrary benchmark to try to beat." Such a striving for risk-adjusted performance and the ability to go anywhere is important when there "isn't a huge fat pitch for equities or fixed income," he says.

Aspiriant
Los Angeles
Jason T. Thomas, Chief Investment Officer
Jason Thomas, the CIO of both Aspiriant and its predecessor, Kochis Fitz, sees the world through the lenses of a economist, unlike those who learned the ropes as traders, accountants or bankers. He also spent time consulting with institutions at Wilshire Associates, developing a covetous eye for the lush investment fields that pensions and endowments got to poach, stuff unavailable even to the wealthy.

He says those twin experiences have helped him put his own stamp on the Aspiriant research team. The process there, very different from other firms, is to first take a 20-year macro-economic view of the world.

"I believe that all returns in the end are going to come from economic activity and that's what we should look at first. Whereas most people go out and say, 'Let's find great managers and they'll tell us what to do.'"

The 20-year view helps the firm determine what the allocations are going to be and how the firm wants to participate, and then deploy the particular strategies in equities and fixed income. By the time the team starts talking to asset managers, they have a very specific idea of what they want to do, and that allows them to narrow the choices.

For example, in 2009, the firm started thinking about distressed debt. Notwithstanding the overhang of earlier deals, most of the new plays in that space were going to be fundamentally different in their covenants and restrictions, he says. "So it was going to be a very different kind of distressed debt cycle, very prolonged, and it was very important for distressed debt investors to be able to guide [the target companies] along through the bankruptcy process." Which meant the space was going to look more like private equity, in his view. His logic was that there were a hundred firms that could trade distressed bonds, but few with the expertise to actually go in and manage the distressed companies. That made the weeding process easier. "You're down to two or three, and as far as I'm concerned, they're all good."

Commonwealth
Boston/San Diego
Brad McMillan, Chief Investment Officer
Fred DeBaets, Senior Fixed Income Analyst
Jim McAllister, Senior Investment
Research Analyst
Brian Price, Director, Asset Management
Simon Heslop, Vice President,
Asset Management
Brad McMillan restructured the team at independent broker-dealer Commonwealth five years ago to integrate the research department and alternative investments departments, reforming them into groups of core strategies, alternative financial strategies and real assets.

In a world of risk-on/risk-off investing where even the price of agricultural commodities and the S&P 500 can move the same way, when volatility is influencing people's perceptions, McMillan says there's a greater place for alternative investments.
"You are seeing an increase in correlations driven by this enormous tidal wave of cash flowing back and forth," he says. "The problem has gotten worse as different retail-level vehicles have been created to allow retail investors access to asset classes that previously they couldn't get access to. Some of the ETFs for commodities, for example. That's led to an enormous influx of cash into these markets."

In this kind of environment, McMillan says he's generally pessimistic about stocks and he believes bonds haven't played out yet (rumors about their demise being highly exaggerated). He says it's important to be aware of the environment, something his team is trying to make advisor clients aware of, though it doesn't impose any strategy on them. He also says the concept of diversification needs to mature.

"Before, diversification meant you had several different growth stocks and maybe some bonds you were diversified from A to B. That's not really how it works anymore; you now have to diversify not just among asset classes, but also strategies within those asset classes. And you need to understand where diversification will be coming from going forward." It used to be that you could look back in the past and say that two different securities behaved different, but that's not the case anymore. And that means there's a need to incorporate more alternative strategies within a wider range of portfolios. "I was actually brought in six years ago as director of alternative investments specifically to start doing that," he says.

Morgan Stanley
Purchase, N.Y.
Sukru Saman, Head of Due Diligence, Investment Products, Mutual Fund and ETF
"Primarily we evaluate mutual funds and ETFs," Sukru Saman says of Morgan Stanley Smith Barney's team. "Basically we look at two different angles before we get comfortable. First thing, we're looking at the track record and the tenure of the PM team, as well as the total assets under management. We do look at the investment strategy and we make sure there is a clear and viable investment process behind the product where the investment objective of the fund is clearly achieved by the investment process."

Sukru says the team also takes a closer look whenever there are derivatives, shorting or leverage involved in a strategy-"any unusual signs that the investment process is not fully in line with the investment objective, that will be a signal to us to turn off the fund, if there is a significant amount of risk-taking within the fund or any significant amount of leverage, it will definitely be a turning point."

The team will only look at funds with at least $25 million in assets and a six-month track record.  
The team's biggest challenge? "In this market, probably the volatility."

RegentAtlantic Capital
Morristown, N.J.
Chris Cordaro, CEO and CIO
Chris Cordaro was once considering a new mutual fund to add at his firm, RegentAtlantic. The firm uses a rigorous quantitative process to weed unsightly tares out of the vineyard. But then the firm has to have a good feeling about the managers as well. He was interviewing a manager whose fund had passed all the screens with flying colors. "But then when we were interviewing the manager [we] just asked a simple question, 'Where do you get your ideas from?' He said, 'Well, he took his son to the mall and he really liked some specific store.' Well, how is that reproducible? What happens when your son goes to college or no longer likes that Abercrombie & Fitch? Everything else lined up perfectly, but once the investment committee heard that ... next!"

RegentAtlantic is all about the warts and all quantitative data, he says-finding out what's cheap and weeding out things that the rest of the world might be going gaga over.

Cordaro has been with RegentAtlantic for 25 years, starting out doing pure research and analysis, and he says he was in part responsible for bringing the quantitative focus to the firm.

"Being quantitative is gonna force you to look at ugly stuff that you would otherwise not look at," says Cordaro. "And it's going to force you to move pretty stuff out of the portfolio that you might be in love with otherwise." This was a very difficult pitch to make in the '90s, he says, in other words, to argue that an investment was worth the present value of future cash flows. "The argument there was that future cash flows were infinite in high-tech stocks," he says. "And it was hard to keep grounded. It was hard to stick to your knitting."

He says he bought Apple when it was selling for less than $10 a share, before the iPod, simply because "it was an ugly stock. Hell, it was a dying breed. Before Steve Jobs came back it was a very cheap stock. And we bought it because it was a cheap stock. And then we sold it in the 40s because it got really expensive. OK, so we sold it a little early. But I'd rather do that than ride something back down." Or take Dell Computer during the tech boom. "To justify their price-earnings multiple it would have meant that within two or three years they would have had to sell computers to every person on the planet. And you just looked at that and said 'This just doesn't make sense.'"

The Center for Financial Planning
Southfield, Mich.
Melissa Joy, Partner
In a perfect world, investing would always be an objective, scientific endeavor, yet there's a lot of personality in salesmanship that goes into the mutual fund business, just as there is in selling encyclopedias or Girl Scout cookies. That's a lesson Melissa Joy learned early in her 13-year career at the Center for Financial Planning in Southfield, Mich. When she joined in 1999, she says the firm already had a culture of distrusting fads, such as the tech boom, and the highly valued stocks that became its hallmark (and later its downfall).

Joy's perception, like that of so many others, was shaped by that giddy era. "I got the opportunity to [meet] some of the mutual fund managers who were the darlings of the go-go late '90s. I can think of a manager named Ken Corba who was at Eagle [Asset Management], which was the proprietary fund company within Raymond James, and made kind of a higher profile move to Pimco and Allianz. He typified kind of that 'growth at any price' kind of manager and brought a lot of charisma to the group." But ultimately, she says, "the price mattered."

She contrasts him with Jonathan Simon, a value manager with J.P. Morgan who runs J.P. Morgan Mid Cap Value and Value Advantage funds, among others. "I met him in the early 2000s and he didn't bring a lot of dynamism to the room. He was kind of boring. But he had a process that was much more easily articulated. There was a value discipline. And more than that, there was true desire for accountability to his ultimate investors. So I think there was a lesson learned there. Personality isn't everything."

Joy, a former poli-sci major at the University of Michigan, says she "stumbled into the business" after working in a summer job at a mortgage firm, and later becoming an assistant to a financial planner; eventually she got a taste of, and passion for, investment research after joining the center, where she became a research analyst.

She says that one of the lessons she has learned is to continue to think long term, and be careful not to move away from an investment too early just because you're overly cautious. She says she has some sort of contact with managers two to four times a week, either through phone calls or meetings. The firm has six asset-allocation models; the asset-allocation decision comes first and then these are populated with investments. But since Joy's job is to work from the bottom up, she's more focused on investment opportunities on the ground, keeping her eyes open for a time, sometimes years, before she pounces on an opportunity. In those unique cases, the individual securities might drive a client's discussion rather than asset allocation.

For most of the past decade, she says, the firm has had a pretty significant allocation to international investments, but has moved back somewhat to U.S. stocks. Over the last 12 months especially, she says the firm has been underweighting small- and mid-cap stocks and looking at more alternative investments to eschew style boxes.

"We have for the past several years been trying to think about what quality means in terms of stock investments," she says. "Any investor could have a different definition for quality. ... You could point to whatever P/E ratio you use and say that's it. The quality is a little bit more difficult to articulate and it means different things to different people."