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Welcome to the second annual Citywire Subadvisor Selector Directory. This special report lists and profiles the major players in this hugely influential market. The directory is not an exhaustive list of every selector or firm that picks subadvisors but presents a broad overview of the space. The 15 gatekeepers featured allocate a combined $1.8tn to third-party fund managers. We have asked the selectors in our report to share key facts and statistics about their fund lineups, current searches and priorities, and what they like (and don’t like) to see in prospective managers. There is a wide variety of firms profiled, from giants of the retail space like Vanguard and John Hancock to smaller, specialist shops such as Guidestone Capital Management and Litman Gregory Asset Management. While the size and profile of selectors may vary, some clear commonalities emerge. The vast majority of selectors name ESG – either adding specialist managers or understanding how existing portfolio managers incorporate these considerations – as one of their top priorities. Asked what they wanted to hear from managers in meetings, many selectors’ answers came down to one thing: honesty. Mistakes are fine, as long as they are owned, understood, and learned from, rather than glossed over or spun. Many more insights from some of the country’s most influential manager selectors can be found inside. I hope you find it useful.
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Subadvisor Selector Directory.
INTRODUCTION
ALEX STEGER
EDITOR-in-chief CITYWIRE USA
asteger@citywireusa.com
(+1) 212 3014 906
sponsored content by
carillon tower advisers
nationwide
Disclaimers
American Beacon
assetmark
Edward Jones
john hancock
GuideStone Capital Management
Great-West Investments
Morningstar Investment Management
Litman Gregory Asset Management
Lincoln Investment Advisors
SEI Investments
russell investments
Pacific Life Fund Advisors
voya
vanguard
Touchstone Investments
AssetMark.
edward jones.
great-west.
guidestone.
john hancock.
pacific life.
russell investments.
sei.
touchstone.
VANGUARD.
VOYA.
litman gregory.
LINCOLN.
brinker capital.
American beacon.
nationwide.
brinker capital investments
pictet asset management
morningstar.
Nationwide Investment Management Group
Inflation isn’t going away, but at least it’s sticking to the script
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The 10-year US Treasury yield has risen significantly in 2021. As of 1 July, the yield stood at 1.46% which is more than 50bps higher than the 0.92% yield at the start of the year. A consensus is emerging the Federal Reserve (Fed) will eventually respond to higher inflation through a combination of tapering and higher interest rates. Led by the Fed’s new policy of average inflation targeting (AIT), global central banks have become more inflation tolerant. This trend, combined with high levels of public debt and more than $5 trillion in COVID-19-related fiscal stimulus, lends credibility to the prospect of tapering its purchase of debt and higher rates. While we must acknowledge that inflationary pressures are present in the near term, the Mellon multi-asset team’s models suggest that inflation is likely to remain contained over the next several years. Competing inflation views Below are the most commonly cited arguments for and against higher inflation. In addition to the recent steepening of the yield curve, proponents of higher inflation point to the bloat in government debt and rising inflation expectations. Central bank assets have grown considerably since quantitative easing programs were initiated during the global financial crisis and then reinvigorated due to COVID-19. The Fed’s balance sheet has increased eightfold since 2006, with other developed market central banks close behind. The converse opinion is that, while the rebound in growth is promising, it does not signify a recovery to previous levels of GDP. COVID-19 has caused significant economic damage and the recovery to pre-pandemic levels will not occur overnight. The big wins in the US were scored early as people returned to work and resumed a path towards normalcy.
Morningstar Global Sustainable Fund Flows - Q2 2020
The Mellon multi-asset team’s models suggest that inflation is likely to remain contained over the next several years
Jason Lejonvarn, managing director and global investment strategist at BNY Mellon, shares his thoughts on inflation.
Jason Lejonvarn Managing Director, Global Investment Strategist BNY Mellon
However, as the size of the economy rises over time, increments to economic activity add less to the overall growth rate. While employment figures have recovered from the depths of March 2020, the damage done by the pandemic shock combined with slack in the workforce and technology innovation should keep inflation in check. Ultimately, real GDP will need to grow for several years just to return to 2019 levels. In our view, inflation fears are overdone and core inflation (particularly in the US) is likely to remain range bound. Base effects from COVID-19-suppressed prices will drop out in 2021, which could mean higher inflation in the short-term, but we believe this would not be sustained over the long-term. Detecting inflation and rising rates Though our base case is for a mild inflation environment over the next few years, if higher inflation does persist, the knock-on effect could be unpleasant. Any inflation shock may compel central banks to tighten monetary policy sooner, which could cause both stocks and bonds to sell-off simultaneously. We have developed and implemented several models designed to detect the risk of falling bond prices and the possible lack of diversification of bonds versus growth-exposed assets such as equities. Specifically, we rely on two proprietary models: The Dynamic Model Averaging (DMA) and the Bond Downside Risk Model (BDR). The suite of DMA models is utilized to forecast a host of macro variables, including US inflation. The DMA forecast of inflation is used as an input to the BDR model, along with other market and macro variables, to estimate the probability of bond yields rising. Dynamic Model Averaging (DMA) The DMA model employs a proprietary methodology for forecasting economic variables such as GDP and inflation (US CPI). The inputs include a wide array of variables classified into three categories: inflation expectations, macroeconomic data and market data. Through a proprietary regression-based methodology, our DMA model generates not just point forecasts of major economic and financial variables but also produces a distribution around the point estimates. Over the past several quarters, our models have forecast a rise in inflation (US CPI). Improvement in employment, new housing starts/permits, and increases in commodity prices have contributed to this uptick in inflation. Capacity utilization, well below pre-COVID-19 levels, remains deflationary. Again, in our view, much of this increase is related to base price effects and is not likely to persist long-term. Bond Downside Risk Model (BDR) From a portfolio management view, the inflation estimates from the DMA model have a trickle-down effect. Higher inflation expectations will lead to higher terminal cash rates, which would serve to lower bond term premia. Thus, bonds become less attractive and our model, all else equal, would move to reduce its bond allocation. We also use the BDR indicator to forecast the likelihood of bonds selling off due to expectations of tighter monetary policy and/or improving macro fundamentals that presage tighter labor markets, strong growth or inflation surprises. This model aggregates dynamics from the following key drivers: Forward overnight index swap (OIS) to capture monetary policy expectations Short-term stock/bond correlation to detect possible regime shifts Growth dynamics (LEI, PMI etc.) to evaluate economic conditions Unemployment to assess labor market conditions Mellon DMA CPI forecast to capture inflation surprises These variables are standardized and combined - based on proprietary weighting scheme - to produce an aggregate BDR score in the range of 0.0 to 1.0. The output of the model seeks to determine the probability of lower bond prices.
A score of 0.5 suggests that the average score is showing a mild indication of rising rates. Any reading above 0.75 is a strong indication that bonds are likely to underperform in the short term (3-6 months). In multi-asset portfolios, BDR impacts our asset allocation decisions by adjusting the stock/bond (S/B) correlation to reflect bonds’ reduced hedging benefits. A less negative S/B correlation would typically lead to a lower bond allocation in multi-asset portfolios along with more modest leverage if permitted.
We first start with an historical estimate of the S/B correlation based on an exponentially-weighted moving average (EWMA) estimator. From that starting point, and to be a bit more conservative, we apply a constant shrinkage that moves the correlation closer towards zero. We then apply the BDR signal for further correlation adjustment to reflect the expected lack of diversification in environments when bonds are likely to underperform. The correlation shrinkage can be categorized as above. The output of the model seeks to determine the probability of lower bond prices. Inflation expectations The structural story for inflation is one of stability: in the US, core inflation is anchored at around 2%. The chart below plots the five-year breakeven inflation rate (a measure of near-term inflation) and five-year/five-year forward inflation rate (a measure of long-term inflation expectations). The trends from these two measures validate our view. The five-year breakeven rate has gone up over the past several years and currently is hovering around 2.6%. This is, in our view, a reflection of the base-price effects as well as the expected impact of stimulus injected into the economy. However, the inflation impact from both is finite and will not contribute to higher inflation as we head into the second half of 2021. Consistent with that view, the five-year/five-year forward inflation expectation currently stands at 2.1%, suggesting that long-term inflation should remain anchored. As a result, we believe that investors should not focus on runaway inflation in 2021, even though there is enough evidence to remain vigilant in the event that inflation does go significantly above the Fed’s 2% target.
That’s where the Mellon Dynamic US Core Strategy comes in. The strategy seeks to deliver consistent excess returns with similar volatility to the S&P 500. Allocations are modified, on average, four times annually based on that analysis. The strategy uses a systematic beta approach that allocates across three distinct asset classes and is designed to enhance returns while managing volatility. Hence, the strategy aims for a more efficient allocation than all-equity strategies . It continually evaluates diversification, correlations and market structure, while at the same time trying to exploit the risk/return relationship between stocks, bonds and cash. The target exposure is currently over-weight equities at 110% and long bonds at 10%. With the use of options and adjusting the duration respectively, the implemented positions are approximately 115% equities and 7% bonds. Portfolio Construction and Risk Management S&P 500 Index: +50% to +150% Bloomberg Barclays Long U.S. Treasury Index: -50% to 100% Cash: -50% to 100% Optimize portfolio based on forward looking estimates of returns, risk and correlations Modest leverage permitted: up to 50% gross leverage Calibrate to equity market risk after risk managment Risk Management – Volatility management – Macro environment – Tail-risk hedging – Stress testing
American Beacon Advisors
01.
Subadvised funds
28
31
Subadvisors
28.2
AUM*
bn
$
11
Research team members
Paul Cavazos
Questions answered by
Chief investment officer
What’s the worst thing a manager can say or do in a meeting? ‘We decided to change our investment process.’ Inconsistent application of the investment process is a definite red flag to us. One of the key aspects we focus on during our quarterly due diligence meetings is the investment process and style consistency. We want to make sure our subadvisors are staying true to their process and not drifting or cheating. One investment decision you and your team got right? In early 2020, after careful deliberation, we decided to remove a subadvisor from our multi-managed American Beacon Large Cap Value fund, going from four subadvisors to three. This created an equal-weighted offering of different and diversified styles of value (core, deeper and relative), which has served the fund well since the change was made. And one that could have gone better? In hindsight, we would have diversified the lineup of American Beacon funds sooner. While we have developed a more balanced fund lineup over the years, our assets do not yet fully reflect that balance. Our funds continue to be more heavily weighted to value-style investing and a bit smaller capitalization than the industry. Those characteristics have been extremely challenging over the past few years. Over time, this is not the norm – value-style investing tops growth, and small beats large. One factor we are watching closely is monetary policy in the US and around the world. We believe that when monetary policies begin to shift to something more normalized, it could change the course for us.
What is top of your to-do list right now? Given the volatility over the past two years, we’ve spent a lot of time testing our expectations on existing subadvisors. In terms of asset classes, we’ve been spending more time on mid-cap equity and alternatives. What’s the best thing a manager can say in a meeting? ‘We continued to manage the mandate consistent with our investment process through times when our investment style was out of favor, and we are pleased to report that our absolute and relative performance has improved as we adhered to our defined process.’
Any recent changes to your subadvisor lineup? Historically, the American Beacon funds were multi-managed value products. Over the past several years, we have purposely worked to develop a more balanced fund lineup and have selected subadvisors to achieve that goal. To that end, we’ve added subadvisors that specialize in growth and income-driven investing within equities, as well as subadvisors focused on fixed income and alternative asset classes. The best thing you have read in the past year? Leading in Tough Times by John Maxwell. What one possession (not a family member – they are all OK!) would you save from a fire? My late father’s US burial flag commemorating his service in the navy. When the world fully reopens, where would you most like to go? A family trip to Europe! It was postponed during the pandemic.
*in subadvised funds
disclaimers
carillon
pictet
01. american beacon
02. assetmark
03. brinker capital
04. edward jones
05. great-west
06. guidestone
07. john hancock
08. lincoln
09. litman gregory
10. morningstar
11. pacific life
12. russell investments
13. sei
14. touchstone
15. vanguard
16. voya
AssetMark
02.
6
3
1.4
Zoë Brunson
Chief investment strategist
What’s the worst thing a manager can say or do in a meeting? Focus solely on performance and industry ranking. We are looking for more depth and consistency than performance and rankings – we all know that one good year can highly influence a five- or 10-year history. We want to understand what makes a strategy unique and enduring. One investment decision you and your team got right? We had one manager that after being acquired was ‘enhancing its process’ and wanted to include its new proprietary funds that would allow it to be more tactical in its decisions. It was not in line with the original investment strategy. We terminated the investment manager and found out a couple of years later that the firm shut down and the Securities and Exchange Commission filed an administrative order regarding its failure to disclose material conflicts of interest. We followed our disciplined process and our north star of doing the right thing for clients, and it paid off. And one that could have gone better? Any performance-driven decision – the decision to remove a manager due to trailing performance over a sustained period of time only to see the manager’s performance turn around shortly after you’ve fired them. The best thing you have read in the past year? Leading From the Front: No-Excuse Leadership Tactics for Women by Angie Morgan and Courtney Lynch. What one possession (not a family member – they are all OK!) would you save from a fire? If the dog is not considered a family member, then our dog, otherwise, a box of photo albums of pictures that are not in electronic form. They are priceless memories.
When the world fully reopens, where would you most like to go? Back home to England to see my mum, followed by a world tour so I can say I’ve visited all continents and fulfill one of my bucket-list items.
What is top of your to-do list right now? We are preparing for the launch of our curated list of model-based SMAs so we are continually searching for manager talent to add to the menu. What’s the best thing a manager can say or do in a meeting? Be clear and transparent: Explain what makes the strategy unique and the expectations for the strategy in different market environments.
03.
9
22
15
5
amy magnotta
Head of discretionary portfolios
What’s the best thing a manager can do in a meeting? We look for consistency in the description and application of the investment process over time. We want to ensure all members of the team – portfolio managers and analysts – have bought in to, and will execute on, the same investment philosophy and process. What’s the worst thing a manager can do in a meeting? A manager that cannot answer questions simply and directly is frustrating, whether when it’s describing the investment process or explaining a period of underperformance. One investment decision you and your team got right? We always seek out unique strategies with a competitive edge, and a good example would be our micro-cap growth manager. And one that could have gone better? We employ a multi-manager approach in all of our funds but had been more concentrated in a single manger within core fixed income. At the end of 2020, we further diversified that fund, adding two subadvisors and eliminating passive exposure.
What is top of your to-do list right now? We’re constantly seeking out strategies that can deliver alpha and complement our existing manager lineup.
Any recent changes to your subadvisor lineup? We replaced a large-cap value strategy in June with a strategy that was a better fit with the other subadvisors within our large-cap equity fund. The best book you have read in the past year? The Price You Pay For College by Ron Lieber. I have one daughter in high school and one in middle school so we’re preparing! What one possession (not a family member – they are all OK!) would you save from a fire? My iPhone. When the world fully reopens, where would you most like to go? Italy.
04.
32
140
19
Michael Christiansen
Investment manager research team leader
What’s the worst thing a manager can say or do in a meeting? Give misaligned responses about their processes. One investment decision you and your team got right? Subadvisor selection has generally been strong. I also like to see that we have had a number of different styles working at different times leading to good performance for our funds overall. And one that could have gone better? We hired a manager for a strategy that was not their core competency, and ultimately, it did not go well. After working with them in trying to identify the root of the problem and allowing them time to take steps to address those issues, we had to make the tough call that a manager more suited to running that particular style would be better in the long run. The best thing you have read in the past year? The Hundred-Year Marathon: China’s Secret Strategy to Replace America as the Global Superpower by Michael Pillsbury. What one possession (not a family member – they are all OK!) would you save from a fire? Something special to me and very difficult to replace is a framed picture of my grandfather who has since passed and the championship basketball team that he coached in the 60s.
When the world fully reopens, where would you most like to go? Vatican City
What is top of your to-do list right now? Enhancing our sustainable investing and ESG guidance. What’s the best thing a manager can say or do in a meeting? I like to see managers owning, studying, and learning from their mistakes. We all make them and there is a lot to be learned.
05.
24
17
18.5
12
Andrew Corwin
Portfolio manager
What’s the worst thing a manager can say or do in a meeting? Show a lack of engagement or commitment to their process. Their style of investing may or may not be in favor, but if we detect that their portfolio or process is chasing performance, it erodes our confidence in what we can expect from the strategy going forward. One investment decision you and your team got right? We added a deep-value, quantitative subadvisor to complement an existing growth-oriented subadvisor in one of our international equity funds. At the time, it was a difficult choice in that we were reducing our allocation to a successful, existing subadvisor and taking on a style bet that had been out of favor. However, now we have a balanced strategy that features two subadvisors that have both outperformed their respective benchmarks and demonstrated negative excess return correlation between each other, which makes for an improved client experience. And one that could have gone better? We were slow to fire a long-standing subadvisor whose performance had fallen off. Our decision to remain invested relied on their deep resources, contrarian nature, and successful historical track record. Looking back, we held on too long and have since replaced the subadvisor in part to build a more all-weather portfolio.
What is top of your to-do list right now? Given the volatility over the past two years, we’ve spent a lot of time testing our expectations on existing subadvisors. In terms of asset classes, we’ve been spending more time on mid-cap equity and alternatives. What’s the best thing a manager can say or do in a meeting? Go off-script. Display a passion for what they do and demonstrate why their process and team are different to their competitors. We want to see that there is more rigor in the mix than what the pitchbook covers cleanly.
Have there been any recent changes to your subadvisor lineup? We’ve had three removals and additions over the past year, but each change is unique. One was to replace an underperforming subadvisor, the second took a single-subadvisor strategy and converted it into a multi-manager strategy, and the third was aimed at making a mandate more style-pure. The best thing you have read in the past year? Uncomfortable Conversations with a Black Man by Emmanuel Acho. What one possession (not a family member – they are all OK!) would you save from a fire? Stuffed animals to comfort our two kids, Connor, two, and Caroline, three months. If I’m answering selfishly though, I’d grab my skis or golf clubs. When the world fully reopens, where would you most like to go? St. Louis to visit family.
06.
34
17.6
13
Brandon Pizzurro
Director of public investments
What’s the best thing a manager can say or do in a meeting? A manager who is acutely aware of what each team member brings to the investment process, and conveys how they seek those inputs in constructing the portfolio, bolsters our conviction in a strategy’s ability to navigate various market environments over the long term. What’s the worst thing a manager can say or do in a meeting? We would be unlikely to hire a manager that lacks humility or the acknowledgment of the degree to which luck plays a role in this business. We have found that arrogance and an inability to learn from past mistakes can impede a manager’s capacity to implement a sustainable process, which is one of the key factors we look for when evaluating managers. One investment decision you and your team got right? We have been pleased with the outcome related to adding dedicated Treasury inflation-protected securities exposure to our nearer-vintage target-date funds earlier in the year, as the investment has handily outperformed almost every other bond exposure. And one that could have gone better? In hindsight, we could have benefited from more risk-on posturing in a few of the funds as this rally has run largely unabated since last March’s bottom. We underestimated the relentless buy-the-dip mentality that has made all pullbacks since then shallow and short-lived.
What is top of your to-do list right now? As financial markets across the globe have reached dizzying valuations, we are continuously challenging ourselves to dive deeper into the underlying drivers of risk across the fund suite.
Have there been any recent changes to your subadvisor lineup? Over the past several years, we have made a concerted effort to undergird our investment process with a ‘winning more by losing less’ approach. This has meant re-positioning multiple funds to provide the more risk-aware, positive asymmetry that we are seeking to capture over the long term. One such example is our recent re-tooling of the GuideStone Funds Strategic Alternatives fund. Three of the fund’s five managers were turned over in favor of strategies that we believe will enhance the fund by increasing absolute return potential, improving risk-adjusted returns, expanding upside market participation, and reducing drawdowns during periods of market stress. The best thing you have read in the past year? Capital Allocators: How the World’s Elite Money Managers Lead and Invest by Ted Seides. What one possession (not a family member – they are all OK!) would you save from a fire? Printed pictures of my family because those that are printed but not saved electronically cannot be replaced. They serve as a tangible reminder of my ancestors. When the world fully reopens, where would you most like to go? We look forward to resuming in-person due diligence visits and returning to the offices of all of the managers we have been unable to physically see for the past 18 months.
Extracting Alpha from fixed income volatility
07.
86
25
106.2
14
Phil Fontana
Head of investment products, US
What’s the worst thing a manager can say or do in a meeting? Give inconsistent responses to our due diligence questions. We meet with all members of the investment team. If the analysts are providing different responses to our questions than the portfolio managers, there is clearly a communication problem that can lead to inconsistent performance. One investment decision you and your team got right? Prior to the announcement of the first Covid-19 vaccine at the end of last year, the outperformance of growth stocks versus value stocks was at an all-time high. We spent a lot of time with our value-style managers discussing this dynamic and educating our clients that this would not continue forever, encouraging them to continue to allocate to value managers, despite performance not looking pretty. The continued allocation to value managers has significantly benefited our clients this year. And one that could have gone better? It’s clear that market cycles are shortening, the Covid-19 crash and then the fast recovery being the latest example of this trend. As a result of this, we have noticed some alternative styles of investing have not protected or subsequently recovered given these shortened market cycles. Some of our funds of funds were investing in an alternative risk premia strategy during March 2020. Ultimately, that strategy did not provide enough relative protection versus equities or any benefit during the following recovery. Our funds of funds no longer invest in this strategy
What is top of your to-do list right now? We are focused on providing clarity on how our investment products utilize and incorporate ESG research, as well as diversity, equity and inclusion efforts within the investment teams and at their firms. We want to help our clients understand how these elements are being incorporated into our products. What’s the best thing a manager can say or do in a meeting? It may sound simple but be honest and admit mistakes. Even the best portfolio managers do not bat 100%. We like portfolio managers who can diligently explain their expected investment rationale versus what actually happened and be humble enough to admit when and why they were wrong.
Any recent changes to your subadvisor lineup? One of our most recent changes is the launch of the JH Global Environmental Opportunities fund, subadvised by Pictet Asset Management. Our clients are increasingly aware of the environmental trends that will shape future business models across industries. We want to make sure we have product offerings to ensure we are satisfying the needs of all our clients. What one possession (not a family member – they are all OK!) would you save from a fire? My phone! I can’t go anywhere without it. When the world fully reopens, where would you most like to go? I wish I could make that decision, but as the father of three girls all under 12, I’m going to Disney World!
How megatrends power thematic investing
The increasing digitisation, urbanisation and environmental degradation are just some of the structural forces that are going to shape the world. Thematic equity strategies capitalize on the changes to come and serve as an alternative to traditional regional and global stock portfolios. Pictet Asset Management (Pictet AM) pioneered the investment approach in the 1990s when it set out to transform technological, environmental and societal megatrends into investment opportunities. By looking beyond short-term shifts, Pictet AM is searching for returns off the beaten path. The firm’s investment process incorporates input from external experts like the Copenhagen Institute for Futures Studies (CIFS) and aims to determine the most dynamic areas of the global economy. Identifying megatrends, however, is easier said than done. To qualify as megatrend-worthy, developments must be pervasive, disruptive, and self-sustaining - in other words, represent nothing less than a transition from one fundamental structure to another. And where megatrends intersect, investment opportunities can be identified e.g. economic growth, demographic development, commercialization, a focus on health and environmental factors drive themes like Water (see Fig. 1).
We are excited to bring Pictet AM’s Themes to the United States through our partnership with John Hancock Investment Management. We are the pioneers in this space and it’s a privilege to be able to offer these strategies alongside a world-class partner
Elizabeth Dillon CEO Pictet AM USA
Pictet AM has identified 15 such developments in the past 26 years, each of which has found its way into the asset manager’s range of thematic equity strategies. Since 1995, they have launched a range of single theme strategies: Biotech, Water, Premium Brands, Security, Clean Energy, Digital, Timber, Health, Robotics, Nutrition, Smart City and Human as well as multi-theme strategies: Global Megatrend Selection, Global Environmental Opportunities and Global Thematic Opportunities. The strategies are run by teams of dedicated specialist investment managers and benefit from dedicated advisory boards of scientists, business leaders and academics for each theme. The idea behind Pictet AM’s megatrends-based thematic approach is as simple as it is compelling: companies that address new demands of the changing world economy through innovative products and services will benefit from unrivalled growth potential. As a result, investors in those companies are likely to be the winners of tomorrow.
A global take on megatrends To maximise the pool of investment opportunities, Pictet AM ignores the constraints of benchmarks and looks for opportunities globally. After all, megatrends don’t stop at national borders. Environmental degradation, for example, affects economies around the world. It also requires a deep understanding of an industry’s ecological impact. Pictet AM offers several strategies that tackle the depletion of natural resources, among them their Global Environmental Opportunities (GEO) and Clean Energy theme strategies. The managers of Pictet AM’s environmental strategy deploy a scientific, rule-based framework to measure the environmental footprint of each of the 100-plus industries that make up the global economy. The goal: find companies whose products and services can help reverse environmental destruction. The clean energy strategy, on the other hand, enables investors to take advantage of structural changes in the global energy industry. Mastering the shift from oil and coal to sustainable alternatives will be one of the main challenges for policymakers, corporations and households in the years to come. While both strategies provide only a glimpse into the range of options Pictet AM’s investors can choose from, they are proof of the firm’s long-term investment philosophy. As they say, good things take time. “We are excited to bring Pictet AM’s Themes to the U.S. through our partnership with John Hancock Investment Management, who we act as sub advisor for Global Thematic Opportunities and Global Environmental Opportunities strategies. Thematic investing is becoming increasingly popular in the U.S. as investors here seek solutions that are better aligned with their personal world view, diversification needs, and performance objectives.”, explains Elizabeth Dillon, CEO of Pictet AM USA. She continues, “We are the pioneers in this space and it’s a privilege to be able to offer these strategies to the U.S. market, alongside a world-class partner.” For more insights on megatrend investing, please visit assetmanagement.pictet
Disclaimer This material is for distribution to professional investors only. However, it is not intended for distribution to any person or entity who is a citizen or resident of any locality, state, country or other jurisdiction where such distribution, publication, or use would be contrary to law or regulation. Information used in the preparation of this document is based upon sources believed to be reliable, but no representation or warranty is given as to the accuracy or completeness of those sources. Any opinion, estimate or forecast may be changed at any time without prior warning. Investors should read the prospectus or offering memorandum before investing in any Pictet managed funds. Tax treatment depends on the individual circumstances of each investor and may be subject to change in the future. Past performance is not a guide to future performance. The value of investments and the income from them can fall as well as rise and is not guaranteed. You may not get back the amount originally invested. This document has been issued in Switzerland by Pictet Asset Management SA and in the rest of the world by Pictet Asset Management Limited, which is authorised and regulated by the Financial Conduct Authority, and may not be reproduced or distributed, either in part or in full, without their prior authorisation. Pictet Asset Management Inc. (Pictet AM Inc) is responsible for effecting solicitation in North America to promote the portfolio management services of Pictet Asset Management Limited (Pictet AM Ltd) and Pictet Asset Management SA (Pictet AM SA). In Canada Pictet AM Inc is registered as Portfolio Manager authorized to conduct marketing activities on behalf of Pictet AM Ltd and Pictet AM SA. In the USA, Pictet AM Inc. is registered as an SEC Investment Adviser and its activities are conducted in full compliance with the SEC rules applicable to the marketing of affiliate entities as prescribed in the Adviser Act of 1940 ref. 17CFR275.206(4)-3.
08.
i05
20
120
7
Jayson Bronchetti
President
What’s the best thing a manager can say or do in a meeting? Ask us questions to better understand our needs. What’s the worst thing a manager can say or do in a meeting? Attempt to deliver a scripted monologue without engaging in thoughtful discourse. One investment decision you and your team got right? Our quantitative research team, led by Alex Zeng, in partnership with our manager research team, led by Harold Singleton, made the decision to hire Schroders as a risk overlay manager in 2019. Its process and algorithm worked extremely well during 2020. As a result, our risk-managed funds provided investors with downside protection in early 2020 and re-risked quickly to maximize upside capture as the market rebounded. Have there been any recent changes to your subadvisor lineup? We recently launched a suite of Lincoln Defined Outcome funds, which are subadvised by Milliman, a long-standing partner of ours. The best thing you have read in the past year? Think Like a Monk: Train Your Mind for Peace and Purpose Every Day by Jay Shetty. What one possession (not a family member – they are all OK!) would you save from a fire? My latest copy of Citywire Professional Buyer magazine *wink face emoji*
When the world fully reopens, where would you most like to go? Southern Europe. I haven’t traveled overseas in a long time, and I look forward to hopefully getting back to France and Italy sometime soon.
What is top of your to-do list right now? Our team is conducting due diligence on a meaningful number of minority- and women-owned managers for the possibility of subadvisory assignments in the future.
105
09.
2.3
Rajat Jain
Head of equity strategies
What’s the best thing a manager can say or do in a meeting? We want to hear and see their real self, not a marketing presentation. For us, it really comes down to understanding a manager’s mindset: how they are wired as an investor and portfolio manager. When push comes to shove, what’s their comfort zone? How do they deal with uncertainty, the unknowns, when making a decision? What sort of risks are they willing to take; what are they not? What’s the worst thing a manager can say or do in a meeting? A red flag would be a manager deflecting blame onto someone else on the team instead of trying to learn the right lesson from a mistake, as it shows lack of accountability, poor leadership, and is indicative of an unhealthy culture. One investment decision you and your team got right? One manager has been with us since PartnerSelect International’s inception in 1997 and they have added tremendous value. And one that could have gone better? I have come to realize that company and team culture is a more delicate thing than I may have appreciated in the past. There was one instance in which there was a health issue with the manager’s team leader but he was still present. We believed the team would remain strong and cohesive because they had been working together for many years. But the culture deteriorated. In hindsight, we should have parted ways a bit earlier than we did.
When the world fully reopens, where would you most like to go? To watch a baseball game with my daughter in the packed stadium in San Francisco.
What is top of your to-do list right now? We are looking to add a quality growth manager on the PartnerSelect International fund. The fund’s long-term manager batting average remains strong: of the 14 subadvisors hired since its 1997 inception, 12 have outperformed. However, over the last few years, the fund has lagged its benchmark because of its subadvisors’ value/cyclical stock bias in an environment that has favored growth for an extended period, not seen historically. With quality and growth recently underperforming cyclical areas since the Covid vaccine announcements last November, we think it may be an opportune time to achieve the style balance we want going forward.
Have there been any recent changes to your subadvisor lineup? We did lose a subadvisor due to early retirement last year. This was not a complete surprise. The manager had always expressed his passion for teaching. He was a great investor and a good mentor to younger analysts. In the end, he made the decision to retire, and while we were sorry to see him leave, we respect his decision. The best thing you have read in the past year? The Mobile Wave: How Mobile Intelligence Will Change Everything by Michael J. Saylor. What one possession (not a family member – they are all OK!) would you save from a fire? Old family photos and videos that we have yet to digitize!
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What’s the best thing a manager can say or do in a meeting? ‘We’ve lost a lot on this position, but we’re doubling down because we still believe our thesis.’ Performance data bears it out: Even the best long-term performers suffer periods of underperformance, sometimes to the extreme, when their particular style or holdings are out of favor. We believe managers who root their positions in deep, fundamental, ongoing analysis are less likely to be swayed by the ups and downs of relative returns over short and intermediate periods, and more likely to outperform over a full market cycle. What’s the worst thing a manager can say or do in a meeting? ‘We’ve lost a lot on this position, but we’re doubling down because we still believe our thesis.’ Yup, this can also be the worst thing to say. While at times a commitment to positions that are going against managers can be a sign of conviction and rigorous, independent analysis, it can also be a sign of myopic thinking that fails to evolve with new evidence. It’s on us to know which is which. One investment decision you and your team got right? Heading into 2020, the Morningstar funds favored a value orientation, which proved costly when Covid-19 and the subsequent lockdowns devastated markets in the second half of the first quarter. The temptation to capitulate was strong, especially given the extreme economic and public health uncertainty that favored stay-at-home technology and consumer discretionary stocks. However, our own research, and that of our subadvisors, encouraged us to add to positions at the market lows and hold the line. This resilience ensured that we remained value-oriented when beleaguered value stocks suddenly overtook growth fare in the fourth quarter.
What is top of your to-do list right now? Recently, we’ve spent a great deal of time integrating ESG factors into our assessment of subadvisors. Leveraging our own ESG methodology, we assess whether subadvisors consider ESG factors alongside other critical fundamental characteristics such as balance sheet strength and earnings growth.
And one that could have gone better? In the first half of 2020, we found some of our subadvisors did not behave as we would have expected, with either less defensiveness than we had predicted or with similar performance to one another despite differentiated strategies. We’ve since taken another look at the fundamentals of each strategy, reassessed our expectations where appropriate, and adjusted our portfolio construction accordingly. The best thing you have read in the past year? The Wisdom of Crowds by James Surowiecki. What one possession (not a family member – they are all OK!) would you save from a fire? I’d have no choice but to save our parakeet, Pucky, a pandemic purchase that is in equal parts tormented and adored by our three kids. When the world fully reopens, where would you most like to go? It’s the kids sporting events we’re anxiously anticipating: I can’t wait to get off Zoom and embarrass my oldest at her gymnastic competitions with enthusiastic cheering!
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5.3
Marta Norton
CIO for the Americas
11.
What’s the best thing a manager can say or do in a meeting? Share deep investment insights that go beyond the typical check-the-box underwriting or monitoring review. Insights may come from past mistakes that offer additional value and understanding at a security selection or macro level. What’s the worst thing a manager can say or do in a meeting? Be inconsistent. Our underwriting process attempts to capture a return pattern based on a philosophy. A philosophy that is not consistent in investment process, people, and operations becomes difficult to assess and is ultimately not investible. One investment decision you and your team got right? The team began implementing 130/30 strategies that allow for alpha capture on both the long and short side. The environment has been especially conducive for security selection and these strategies benefit more than your traditional active investment strategy in this environment. And one that could have gone better? Coming into 2021, we were bearish on fixed income. Year-to-date, Barclays Aggregate returns remain in negative territory despite the recent rally in bonds. Staying long bonds versus some of the alternatives has been a missed opportunity.
What is top of your to-do list right now? Alternatives for fixed income allocations. In an environment with tight credit spreads and low interest rates, we are constantly seeking alternatives to fixed income that are likely to offer positive returns during the next two years.
Any recent changes to your subadvisor lineup, and if so, what was behind it? There have been two themes throughout most of our changes over the past 12 months. One has been increased alpha driven by stock selection and the other has been the Covid re-opening trade. The stock selection trade has been an emphasis on investment strategies and styles that can fully take advantage of the environment via good security selection, leverage, shorting, or a combination of all three. During the re-opening trade, there have been seismic shifts in performance between value, growth, and small-cap factors. Some subadvisors have struggled with the changing socio-political environment presented during the last 18 months and have not been able to perform in any of these investing regimes. The best thing you have read in the past year? Think Like a Monk by Jay Shetty. This has been a great book during the pandemic to help keep focus, purpose, and a positive mindset. What one possession (not a family member – they are all OK!) would you save from a fire? My daughter’s paintings. When the world fully reopens, where would you most like to go? Negril, Jamaica.
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80.2
Christopher Graham
CIO and head of institutional investment strategies
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4
Jordan Fettman
Director of portfolio construction and manager research
What’s the worst thing a manager can say or do in a meeting? Get defensive or flustered when answering questions about past underperformance. There are often good reasons for underperformance. But it’s less reasonable to get defensive or flustered when someone’s trying to decide whether to entrust you with a large amount of client assets. One investment decision you and your team got right? We previously decided to divest from our liquid alternatives strategies. Most of these exposures seemed to fall somewhere on the spectrum between equity and fixed income, but with higher fees. We weren’t getting any type of uncorrelated return that justified an allocation. So far, this looks to have been a wise decision. Any recent changes to your subadvisor lineup? We’ve generally been trying to limit our active factor exposure when selecting new managers due to the higher tracking error it’s caused. Strategies with a large value or size exposure have really lagged and those exposures haven’t been rewarded over the medium term. For our strategies that already have those exposures, we’ve tried to preserve that exposure so that we can benefit when they eventually revert to the mean. The best thing you have read in the past year? The Rise of Carry by Jamie Lee, Kevin Coldiron, and Tim Lee. What one possession (not a family member – they are all OK!) would you save from a fire? Probably my work laptop. I wouldn’t want to fall behind!
When the world fully reopens, where would you most like to go? I’ve been engaged for the last three years but unable to have a wedding due to the pandemic – so on my honeymoon! Hoping for some sort of island.
What is top of your to-do list right now? A shameless plug, but my colleague and I just launched Pacific Life’s Portfolio Pit Stop podcast. Please tune in if you’re interested in investing, finance, asset allocation or economics! What’s the best thing a manager can say or do in a meeting? All strategies experience periods of relative underperformance. The best managers will be proactive and own up to it, without trying to make excuses. There are valid reasons why they can’t always outperform. If it were that easy, everyone could do it.
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What is the worst thing a manager can say or do in a meeting? Taking detailed questioning personally. Sometimes, we will question managers intensively on a given topic, which can make some feel we are being judgmental. Most of the time, we are simply trying to establish a firmer understanding of their approach, which requires applying a critical line of questioning. One investment decision you and your team got right? Our best decisions generally involve identifying managers early in their lifecycle, before their franchise is fully established. One recent example involves an emerging market debt manager. We followed a manager at one of the large bond firms who left to build a new franchise from scratch. We knew the manager had an academically rigorous and comprehensive macro-economic framework combined with an intelligent portfolio-construction approach. Knowing him from his previous life allowed us to quickly build conviction as we knew him to be driven, self-aware and honest. One that could have gone better? We had one manager who had a deep-value approach and took concentrated positions. They had extraordinary performance for the first few years, but then suffered a poor patch when one of their key concentrated positions did not pan out as expected. The learning point was that great investment ideas can always go wrong, and it is important for managers to tailor their management processes to the types of trades being taken.
What is the top of your to-do list right now? Aside from updating my corporate photo, which was taken when I was 75 pounds heavier, I am excited about integrating a couple of new investment professionals onto the team. Ultimately, I want all members of the team to function as a team of chefs, blending the best ideas to make better decisions, rather than a cluster of food critics. What is the best thing a manager can say or do in a meeting? Managers should be able to demonstrate in practical terms how their portfolios reflect their processes. It’s important to use examples that are data-focused and transparent. And they should be able to clearly articulate a reasonable and relevant performance target.
Any recent changes to the subadvisor lineup? We recently focused several of our fixed income strategies in line with specialist allocations. Most fixed income managers are structurally overweight or underweight various risk premia such as duration or credit. Not all of these biases are adequately compensated. We integrate direct investing capabilities, allowing us to manage the overall structural exposure to credit and duration. This has allowed us to select managers that we believe have the greatest potential to deliver excess returns independent of these biases. The best book you have read in the past year? Putin’s People by Catherine Belton. What one possession (not a family member – they are all OK!) would you save from a fire? Like many people, I would get the family photos. I don’t think my marriage would survive if I chose Bruce, a steel sculpture of a bull that also doubles as a drinks cooler. When the world fully reopens, where would you most like to go? I would be keen to reconnect with family, friends, and colleagues in Europe.
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220.3
38
Adam Smears
Head of fixed income research
14.
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Anthony Karaminas
Director of fixed income and multi-asset
What’s the worst thing a manager can say or do in a meeting? We are long-term investors, and we understand there will be periods of challenging performance, but how a manager communicates this difficult performance is very important. Brushing over or becoming defensive is not beneficial for anyone. One investment decision you and your team got right? The SEI team has done a good job selecting, and in some cases seeding, high yield managers that have crossed over from the hedge fund space. This has provided our clients with unique manager access, and to some extent, it has paved the way for SEI’s competitive performance in a very challenging sector. And one that could have gone better? We haven’t turned our back on the absolute return bond sector, although we remain wary of the challenges and the distinctive skills required to outperform. It’s very difficult to produce consistent performance when relying primarily on top-down investment decisions, and the lack of market volatility has only accentuated this point. The best thing you have read in the past year? I find any academic or industry-led research that helps define and validate the efficacy of fixed-income factor investing interesting to read. What one possession (not a family member – they are all OK!) would you save from a fire? Our miniature dachshund. Although, he is the favorite family member, and he is usually the first out the door.
When the world fully reopens, where would you most like to go? My home country, Australia, without having to quarantine in a hotel. A sunny Aussie beach is calling my name.
What is top of your to-do list right now? We are heavily focused on ESG and impact investing. We continue to scour the investment universe for best-in-class offerings, including broad ESG integration products and targeted thematic offerings focused on diversity and climate, among others. Within fixed income, we are expanding beyond the core sectors and meeting with emerging market debt managers, both hard currency and local currency. We’re also focused on the high yield market, which is somewhat thought of as the final frontier of fixed income ESG investing given the underlying market structure. What’s the best thing a manager can say or do in a meeting? The best thing a manager can do is succinctly distil what their investment edge is and demonstrate how it directly relates to their ability to consistently generate alpha. Being transparent during a meeting is also key to setting up a successful partnership from the outset.
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36.6
Brad Watterson
Director of investment research
One investment decision you and your team got right? Hiring Sands Capital to subadvise an emerging market growth fund in 2014. Sands had a long history of success in managing a domestic growth strategy and early success managing a global growth strategy – replicating its time-tested process to a new universe was likely going to be successful. Since inception in 2014, the fund has gathered assets and produced a strong performance history and is now a $5bn fund for Touchstone. And one that could have gone better? Hedged equity or liquid alternative funds launched or acquired during the post-financial crisis market cycle. The low-interest-rate and generally low-equity-volatility environment has not been kind to liquid alternatives. Any recent changes to your subadvisor lineup? Yes, we recently closed an acquisition of the AIG funds, bringing nearly $7bn in assets under management to both existing Touchstone funds and two new funds: Dividend Equity and Strategic Income Opportunities. The best thing you have read in the past year? Value Investing by Bruce Greenwald, Judd Kahn, Tano Santos, Erin Bellissimo, and Mark Cooper. What one possession (not a family member – they are all OK!) would you save from a fire? My cell phone, so I can call 911!
When the world fully reopens, where would you most like to go? South Florida.
What is top of your to-do list right now? Enhancing our ESG due diligence rigor. At Touchstone, we essentially view ESG in the same vein as investment discipline: Does the manager do what they say they do? What’s the best thing a manager can say or do in a meeting? Be yourself, plain-spoken, straightforward and truthful! We view our manager meetings as discussions rather than interviews. What’s the worst thing a manager can say or do in a meeting? Spin, be dishonest, or not address the questions asked. Humility and awareness of faults are greater attributes in this tough business rather than saving face.
16.
What’s the best thing a manager can say or do in a meeting? We’re looking for managers to clearly identify their ‘edge’ and provide evidence to back that up. What’s the worst thing a manager can say or do in a meeting? The more difficult meetings are when a manager talks through a thick slide deck without identifying their edge and providing sufficient evidence of it. Also, not giving enough time for questions or offering succinct answers. One investment decision you and your team got right? Something that really differentiates Vanguard’s approach to sourcing external manager talent is our long-term perspective. We will remain patient and even supportive when great managers experience inevitable periods of short-term underperformance. For us, short-term can be defined in multiple years. Those truly great managers can turn around a rough few years and more than make up for it over longer periods of time. And one that could have gone better? Hindsight is always 20/20!
What is the top of your to-do list right now? Our top priority is always ensuring that our existing funds meet the expectations of investors over long periods of time. We’re also constantly exploring potential ideas for new funds and investment strategies that meet investors enduring needs.
Any recent changes to your subadvisor lineup? We added Sprucegrove Investment Management to the Vanguard International Value fund last fall. We had conducted research on Sprucegrove for about 10 years. It has a compelling edge and is a strong complement to Lazard and Arga on the fund. Sprucegrove also stood out to us as they are majority-owned by minorities and women. We believe the diversity – cognitive, identity, and experiential – of investment teams can drive investment performance and is a key component in how we evaluate a manager’s likelihood of generating strong performance. The best thing you have read in the past year? More Straight Talk on Investing: Lessons for a Lifetime by Jack Brennan. What one possession (not a family member – they are all OK!) would you save from a fire? I’d grab the commission and sword once carried by my relative, Captain Walter Newhall, who was killed fighting for the Union in the US Civil War. When the world fully reopens, where would you most like to go? Skiing out West. I’ve really missed hitting the slopes these past two years.
797.4
Dan Newhall
Head of global oversight and manager search
17.
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Halvard Kvaale
Head of manager research and selection
What’s the best thing a manager can say or do in a meeting? Provide full transparency on their approach, the portfolio, and the firm. What’s the worst thing a manager can say or do in a meeting? Not be transparent or provide honest responses. It’s better to say: ‘I don’t know, but I will get back to you.’ One investment decision you and your team got right? Building great portfolio construction tools for our multi-asset, multi-manager portfolios. And one that could have gone better? With hindsight, we should have taken more risk (beta). The best thing you have read in the past year? Besides a variety of Norwegian crime novels, Kitchen Confidential (I know I am about 20 years behind schedule) by Anthony Bourdain. What one possession (not a family member – they are all OK!) would you save from a fire? My dogs, or are they considered family members?
When the world fully reopens, where would you most like to go? I would like to visit my mom in Norway, then Italy.
What is top of your to-do list right now? The top priority is always to generate alpha. Currently, we are focused on improving our small- and mid-cap lineup, as well as analyzing our managers’ ESG integration.
appendix
The Citywire Subadvisory Directory is not an exhaustive list of firms in this space but gives a snapshot of the market. Other firms that were approached to be featured in the directory included Goldman Sachs Asset Management, Jackson National Asset Management, New York Life, Principal, and PGIM – all of which declined to participate for a variety of reasons or could not supply information by the time of publication. Data and responses were collected over July 2021 and most statistics featured are as of June 30. If you or your firm would like to be included in next year’s edition of the directory, please get in touch at:
agarland@citywireusa.com
amelia garland
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