Those numbers excited Tim Mullaney, founder and president of Melius Investments, who believes EAM offers a new way to invest.

“EAM combines the best of active management, but with insights and tools from the world of A.I. and machine learning,” he said. “I believe this is the next generation of active management.”

He posited that active management in its present form is fundamentally flawed because only a certain percentage of a particular fund’s portfolio is designed to generate returns. The other part, he said, is designed for risk management, and having too much in that bucket can drag down a fund’s performance.

The base case for passive management is that active managers aren’t good at consistently generating excess returns against their benchmark. Mullaney stated that’s an inaccurate perception.

“The research finds that active managers are very good in the portion of the portfolio designed to generate alpha, and that entails their high-conviction stocks,” he said. “Those managers are really good with that part of their funds, which we’ll call the alpha engine.”

He said Melius’ EAM portfolios are designed to be high-octane baskets containing only the high-conviction stocks from select traditional asset managers. The portfolios hold up to 50 positions gleaned from a dozen active managers who’ve demonstrated their ability to beat their benchmarks.

“We have the ability to replicate an actively managed portfolio, and our A.I. lets us dissect those portfolios and grab only their alpha engines and then employ ensemble methods to create a diversified portfolio at the security and investment-process level,” said Mullaney, who officially launched Melius (Latin for “better”) earlier this year as a registered investment advisor based in Laguna Niguel, Calif.

He formerly was a senior managing director at the boutique investment bank CastleOak Securities LP and is currently a registered representative at CAVU Securities LLC, a privately owned boutique broker-dealer.

Nuts-N-Bolts
Melius is responsible for six of the 10 model portfolios on its platform; the other four are licensed from Pegassets, a firm founded by Robert Tull, an ETF industry pioneer and named inventor on multiple ETF patents. 

The 10 equity portfolios cover traditional assets classes, some specialty portfolios and four flavors of ESG (environmental, social and governance). The two firms have slightly different approaches to constructing EAM portfolios. Pegassets, for example, bases its portfolios on managers from 15 different funds versus 12 for Melius.