The admiration of one’s peers is among the highest compliments a person can receive.
Financial Advisor magazine recently asked its readers to nominate the research managers they think are doing the best job. Based on those nominations, the following people made the cut for FA’s 2013 All-Star Research Managers team. They will be honored at the Fiduciary Gatekeeper Research Manager Summit, which is sponsored by Financial Advisor and Private Wealth magazines and will be held at the Hyatt Regency in Boston October 24-25.
Center for Financial Planning
Southfield, Mich.
Melissa Joy, Partner
Although Melissa Joy is interested in the numbers that show how investments are doing, she is becoming increasingly interested in behavioral finance as a way to help herself, her firm and her clients make the right decisions.
Joy, the director of investments at the Center for Financial Planning, where she has been since 1999, says the dramatic ups and downs of the market in recent years have made some investors their own worst enemies.
“The roller coaster of the last decade has unfortunately provided plenty of examples where emotion trumped discipline. I’ve seen advisors lose real money for investors who let fear shake them out of the market at the wrong time. Others have become obsessed with outlandish scenarios for market Armageddon and put their money into doomsday investments that haven’t paid off.”
Knowing behavior, as well as return on investment, should help that. “People often think that investing is about numbers alone—returns, valuations, metrics, etc.,” she explains. “Investing within a financial planning construct means you must keep an eye on the X’s and O’s of the portfolio and also the goals and purpose of the assets in the clients’ lives. This means evaluation of risk is always critical. It’s important to keep things as simple as possible to accomplish objectives.”
The Center for Financial Planning sometimes goes against industry trends. In 2008, for example, it expanded its research team when other firms were scaling back theirs. The team now includes Angela Palacios, a portfolio manager with a background in economics and finance. She handles the discretionary management program and acts as the investment committee’s economic guru. Jaclyn Jackson serves as an analyst and monitors the investments.
“The team has been in place for five years now and our continuity and collaboration has been a critical component of our portfolio management as it exists today,” says Joy.
At the same time, the firm pared down its investment committee to just four members in 2009 (whereas all the firm’s planners were members before). Joy, as a committee member, focuses on fund research and the pragmatic aspects of making the portfolios work for the clients.
When looking to add a fund to its portfolios, the team requires the fund to have a minimum of $50 million in assets and wants it to have been in existence through a full market cycle. The team requires a due diligence questionnaire and annual updates to be completed on every fund, and it monitors any changes and watches for anomalies.
“You have to be extraordinarily selective and disciplined when choosing investments,” she says. “There are unlimited options when you invest today—it seems like there’s a new ETF or wave of the future strategy available every day. Staying apprised of ever-changing options, while staying focused on the long term, can be challenging.”
Wescott Financial Advisory Group LLC
Philadelphia
Lydia Sheckels, CIO
Lydia Sheckels, CIO of Wescott Financial Advisory Group LLC, likes to read, travel and talk to people. She also likes her firm’s fund managers to be able to share their world observations with her. She feels this global view helps her and her team understand a manager’s approach.
“Wescott’s due diligence and investment strategy is rooted in the belief that it is better to spend the necessary resources and time in our fundamental analysis of a manager than to base our decision on quantitative data only,” she explains. “By strategically combining passive and active managers, we get the benefits of both.”
This diligence, she says, allows the firm to have realistic expectations and fewer surprises. “During periods of underperformance, we are able to maintain our conviction, understanding that is the outcome of a manager following their own discipline.”
Sheckels says the last decade has been one of the most interesting (and challenging) she can remember. “I have been reminded of how resilient the equity market is, despite the pessimism that prevails,” she says. “During the past five years, the market has confirmed my belief that you need to be politically agnostic when making investment decisions.”
Wescott places less emphasis on large-cap companies and has a higher allocation to non-U.S. equities and to small and mid-cap companies globally. “We have concerns about government policy and how the Fed will be able to exit its QE3 strategy, and this influences our allocations to fixed income,” she adds. “However, for equities, we are investing in the non-government sector. The corporate world is very adaptive to shifting economic cycles and to tax and regulatory changes.”
Sheckels is most proud of her firm’s decision in 1995 to add the passive strategies of Dimensional Fund Advisors (DFA) as a foundation for every client portfolio. Those are complemented by active managers in areas DFA doesn’t cover, particularly growth-style managers.
“We highly value DFA’s academic research and the evolution of their strategies when new factors or trends are identified,” she says. “Our early allocations to globally diversified value style managers [during all market cycles] and to small and micro-cap companies, another decision of which I am proud, also came as a result of the extensive research conducted by DFA over the years.”
The firm’s emphasis on liquidity enabled clients to weather the extreme market conditions of 2008 and 2009 without being forced to sell equities. Nor did the clients have to make any adjustments to their goals during this period.
Sheckels says the team is optimistic about equities in the long term and is also worried about bonds. “I am very concerned that the majority of those who have sought safety in bonds will be devastated by losses incurred from rising interest rates and inflation during the decades ahead,” she says. “We remain very defensive in fixed income, keeping durations short and quality high.
“This bull market has room to run, based on the amount of under-appreciated innovation that has occurred during the past decade,” she predicts. “The crisis mentality has kept many from recognizing how much we have advanced in areas of health care, technology, agriculture, etc., all of which will be a springboard for the future. I am most encouraged by the prospects for globally positioned businesses, particularly the more nimble small and mid-cap companies around the world. Within this group are the innovators.”
Although the non-U.S. markets have underperformed the U.S. recently, historically, Wescott’s allocation to non-U.S. equities has been a strong contributor to the firm’s outperformance. Sheckels believes in a long-term global perspective.
“Our relationship with DFA has convinced us of the contributions that small and micro-cap companies make over time, and we also believe in a dedicated allocation to midcap companies,” she says.
Covenant Multifamily Offices
San Antonio, Texas
• Justin Pawl, CIO
• Thomas Villalta, Director of Investment Research
Justin Pawl took an unusual route to a career in finance, which may help explain why he looks to the quality of the people involved in a fund as much as he looks at the fund statistics to make decisions. Pawl earned a master’s degree in biogeochemistry at about the same time he discovered a love of finance.
“In my opinion, the key [to choosing funds to invest in] is assessing whether the people involved in the management of a fund can manage portfolio risk and generate acceptable returns in the future that complement other portfolio positions,” says Pawl, who is partner, managing director and chief investment officer at Covenant Multifamily Offices. (Thomas Villalta, director of investment research, was also named to the all-star team.) Pawl says he looks for individuals with a combination of natural curiosity and passion for the markets to be on his investment team. And one of their common beliefs is that there is more to a fund than numbers.
“The most important lesson most financial professionals have learned [in recent years] is that the concept of a statistical normal distribution, or a bell curve, does not apply to financial markets,” Pawl says. “As a result, statistics, while helpful in painting a picture of an expected risk/return distribution, are not a guarantee of what one should expect. You cannot rely on statistical analysis alone in determining the potential risks of a strategy. That is not to say that quantitative tools are not useful, but one needs to understand their limitations.”
Pawl and Villalta are currently concerned that investors will expect the recent high investment returns to continue. That will end in disappointment and poor planning. They note that the market has incurred losses of approximately 50% twice in the past 13 years, and they don’t think the volatility has magically disappeared. Instead, with an expected increase in volatility, they think returns may fall short of the long-run average for domestic equities.
At the same time, fixed-income investments might have seen the end of a 30-year bull run. The 10-year U.S. Treasury bond is currently trading at slightly less than 3%, so it’s hard to imagine bonds seeing the same returns they did in the last decade. Thus, clients should anticipate lower returns in their planning.
“This all sounds very bearish, but it is not intended to be so,” Pawl adds. “Rather, we view it as a healthy dose of reality.”
No asset classes are off limits to the team—not equities, fixed income, hard assets or alternative investment strategies. However, the team does shift weights to the different asset classes over time seeking better risk-adjusted returns.
“Some might classify this approach as value investing,” Pawl says, “and I would not argue with that, though we are not simply looking for deeply oversold assets, as that can lead to long periods of subpar returns as one is forced to wait for the market to ‘discover’ the value of your holdings. Instead, we seek to strike a balance between asset classes that have low correlation to each other and short-to-intermediate prospects for appreciation.”
Altfest Personal Wealth Management
New York, N.Y.
• Lew Altfest, CEO and CIO
• Andrew Altfest, Executive Vice President
• Ekta Patel, Managing Advisor
• Peter Jun, Investment Analyst
Lew Altfest credits his years of experience “in the trenches” with shaping his and his team’s view of the markets today. His firm often goes against established thinking and stresses value.
Fundamental research keeps the firm out of trouble. For instance, the team was advised during the late 1990s that tech stocks were overpriced. Acting on that advice kept them out of the soup when the tech market collapsed. Later, when emerging markets were high, the firm stayed out, buying in only when the stocks tumbled 50% to 75% in 2008. The move allowed the firm to double its money in a year.
“Our research people know that they have to back up their thinking with hard facts, not just headlines, if they want to add a position to our portfolio,” says Altfest.
The firm looks for people from diverse backgrounds for the research team, people who think independently so they have access to a variety of perspectives. This results in some different kinds of investments.
“We are investing where we are finding value, and it comes as no surprise these are in some of the currently ‘uncool’ areas,” says Altfest. For instance, the firm likes European value (as valuations have improved), municipal bonds—particularly kicker bonds—and private investments, such as oil and gas properties, distressed real estate and international timber. The firm also looks for talented managers who manage long/short funds.
“Muni bonds have higher yields than taxable bonds, and we are getting ‘AA’ bonds with excellent pretax equivalent yields, with the added flexibility to manage interest rate risks through muni call structures,” Altfest says. “The private markets have not risen as much as the public markets, and there is the opportunity to buy inflation hedges and play the boom in energy production in the U.S.”
Altfest has a contrarian view even when selecting particular funds. He likes it when fund managers or teams with great track records at a firm break off to start their own companies. Such managers are usually hungry and have something to prove.
“To thy own self be true—we feel we’re a good judge of talent and we are very comfortable helping to seed a new fund after extensive due diligence,” Altfest says.
Success at a fund can also breed problems, though, he says. “People can lose their motivation, they can bring in analysts and delegate decisions, and they spend more of their time pitching new business. They get removed from the investment process and become more portfolio reviewers than hands-on analysts.”
Bureaucracy hampers success, he thinks. So as more mature investment teams see their performance turn mediocre, the pool is replenished with new talent. He likens it to a bathtub constantly being refilled.
Commonwealth
Boston/San Diego
• Brad McMillan, Chief Investment Officer
• Simon Heslop, Senior Vice President,Asset Management
• Brian Price, Director, Asset Management
• James McAllister, Manager Investment Research
• Meagan Swanson, Senior Fixed Income Analyst
The Commonwealth research team is proud of its ability to judge the world’s markets and to know when to concentrate on different geographies.
“We have been underweight to developed international equity markets for just over five years [since July 2008],” explains Simon Heslop, the senior vice president of asset management. “Since that time, the U.S. equity market is up almost 50% while the MSCI EAFE index is just about flat.
“Prior to July 2008, we had carried an overweight to international equities and we made the decision to lock in some of those gains and ‘de-risk’ client portfolios by cutting our allocation to the asset class,” he continues. “Today, we are actually becoming more constructive on our outlook for international equities. Aside from attractive valuations, we believe that there is a willingness on the part of many foreign governments and central banks to pursue pro-growth policies that should benefit companies that are domiciled in these markets.”
Commonwealth feels there are risks in making extremely concentrated bets in client portfolios. It is important to have conviction in the asset allocation calls and the portfolio managers, but diversification is required because it will provide clients with a superior risk/return profile over time.
When looking for a fund manager, the firm focuses on the qualitative aspects of due diligence. The quantitative research the firm does in analyzing past returns is important, but research team members feel there is risk in only looking at past performance to select managers. The team focuses on the people, philosophy and process of a new fund because they are most interested in how a manager exploits market inefficiencies.
Commonwealth tries not to own more than 10% of a fund in its discretionary mutual fund wrap platform. “We are mindful of other shareholders within a particular fund and we would not want these investors to experience any adverse impact based on our decision to exit our position,” says Heslop. The team also does not mind if a fund is new. “There have been many instances when a team is ‘lifted out’ of one organization to start a new fund at another firm. Generally speaking, we would not be hesitant to recommend buying the fund as long as we had a favorable opinion of the new firm.”
Heslop adds that the team prefers to make asset class changes at the margin. “We are supporters of the notion that rebalancing is the best form of market timing because it forces us to buy assets that have depreciated or underperformed while locking in gains on holdings that have appreciated,” he says. “We are reluctant to move in and out of asset classes as we believe that it is incredibly challenging to time both trades, entry and exit, correctly.”
At this point in time, the firm feels cautiously optimistic about the future. “We are encouraged by the U.S. equity market’s advance thus far in 2013, but we think that there are a few upcoming events, such as QE tapering, German elections and the debt ceiling debate, that might give investors pause as we head into the end of the year.