David Corkins, a star manager at Janus who sucessfully ran the Janus Mercury and Janus Growth & Income funds and executed an impressive turnaround on the flagship $12 billion Janus Fund, started hedge fund Arrowpoint Partners in 2009 - delivering returns of 33%.
Money Management Executive spoke with Corkins about what it takes to attract high-net-worth and institutional clients in today's market, how he is investing his clients' money differently than other managers and how his firm's flexible approach has fared so well throughout the current turbulence.
MME: How has your experience in fixed income been helpful in the current market environment?
David Corkins: At Arrowpoint Partners, our experience across the capital spectrum in both equities and credit is a a differentiating factor that helps our clients from a risk perspective, as well as on returns.
I started my career at a large bank, Chase Manhattan, working primarily in credit-making loans, securitizing loans, analyzing loans. I primarily worked in mortgage-backed securities, credit cards, automobile loans and other areas.
The firsthand experience as a young person of analyzing credit, making loans, and understanding when you are paid back (or not), became extremely valuable to me subsequently as an investor. My last job was as chief financial officer of one of their mortgage businesses, Chase U.S. Consumer Services.
Working in the real world was very valuable for someone who ends up investing on Wall Street, where there are a lot of bright people, but who have the tendency to accelerate time, and project that issues which normally take three years should take three months, or what takes three months should take three weeks. At Arrowpoint, we have real-world experience realizing the day-to-day challenges of what a manager has to go through.
So, from a lot of different perspectives, my experience at the bank-particularly in credit, working through different economic and credit cycles in the late 1980s and early 1990s-was a very good experience for a liberal arts major right out of college.
When I went to Janus, I started out managing $1 billion in the mid 1990's on the Janus Growth & Income Fund, which invested in both equities and credit, and ended managing approximately $20 billion by 2007. Managing large and diverse pools of assets in both equities and credit, through cyclical markets of the mid 1990's, the technology driven late 1990's and crash in 2000-2002, as well as the broad-based recovery thereafter, has provided a strong foundation of perspective and experience.
A good credit analyst typically focuses on when they are going to be paid back. We focus first on the balance sheet and then on the free cash-flow statement and return on invested capital of a company. Where many equity analysts are worried about the future, they look at the income statement, revenues and gross margins, which are often window dressing to the key drivers of value.
We measure the capital we are investing and what the return on that invested capital is, and we measure that in free cash flow-not earnings, EBITDA, etc.
MME: How did these principals bear out in 2008?
Corkins: Our focus first is always on the risk of an investment and within the overall portfolio. Focusing first on risk grounds expectations and allows an investor to better determine whether returns are commensurate with the downside. Then, analyzing risk across the capital spectrum often leads to better understanding of exposures as well as opportunity. Often, the credit markets have different signals than the equity markets. Sometimes the credit markets may be signaling much more caution or fear than the equity markets, or vice versa.
So, in 2008, we primarily stayed away from equities and hedged our exposure there due to signals in the credit markets. That allowed our performance to be flat for the year. Then, in 2009, we saw more opportunities in equities, so we were able to shift the investment profile, take advantage of that and deliver a performance of more than 33%.
It's actually been a fantastic investment environment for us. The volatility in 2008 and 2009 helped us demonstrate the flexibility of our approach.
In 2010, we are finding opportunities in both credit and equity. Having a product that allows us to invest in both really provides the client the best of both worlds-through better risk, protection and opportunities.
One key component that we're using now is options. You have a lot more volatility in the market, and when you have periods with extreme levels of volatility both high and low, we have been able to successfully yet conservatively use puts and calls to manage risk.
MME: What is the most important aspect of the culture that you have created at Arrowpoint Partners?
Corkins: Culture is absolutely very important. The key question is: How do you execute? Culture ultimately helps you with your investment process and delivering for your clients. Those are the only two things that matter.
Human capital is very important in this business. It is very easy to get a couple of smart people to work together, but what is the difference between getting three or four people on board for a couple of years and them doing well some years and poorly other years-and getting them to deliver excellence consistently?
The firms that are long-term winners have figured out how to get their people to do well in good markets and in bad over 10 years. It comes back to culture. You have to create a culture that focuses on clients, investments and treats the employees well. You need to be a private firm. You can't let the market and economy whipsaw you. You need to take advantage of those opportunities.
If you are a private firm, then you don't need to worry about your earnings next quarter by, for example, cutting the travel budget. At Arrowpoint, when the economy goes down-creating more opportunities in the market-we want our employees out visiting with potential investment opportunities, not worried about expenses. You want to think longer term. You want people to know you'll be around for the long term, that there are opportunities for your employees, and that you'll do well for your clients in the long run.
So, being private helps build a sense of ownership. It lets employees, essentially, enjoy the success of the business, and it lets you look longer term and think about developing the people. That's one of the critical points.
At Arrowpoint, we are on the smaller size, 13 of the 14 of us have all worked together before. So, there's that constant interaction, continuity, common values and dialogue that allows us to succeed in different market cycles.
When we set up Arrowpoint, we thought: How would we want our own money to be managed? Because that's the way we were going to set up the firm. So, we knew we were going to be registered with the SEC from Day One. We built an infrastructure that would allow us to scale up to handle clients and securities at a size much larger than we are today. We also have offsite disaster recovery for our data and client records. We have individuals with significant operational and compliance experience, and so, we are well prepared
Having the expertise to stand up to operational and regulatory scrutiny as well as the kind of markets we've been experiencing these past three years-is critical, and that's the kind of firm in which we'd want to invest our own money and, indeed, all of our own money is invested here at Arrowpoint.
MME: What about communication with clients? What kind of access do you provide, and could your open-door policy hinder future growth?
Corkins: We absolutely believe clients deserve access. It doesn't matter if a client has $2 million or $200 million. They should be able to pick up the phone and contact the person who is managing their assets to be able to ask, "How are we doing?" We want every single client to be able to pick up the phone and have access to us.
When people ask us how we want our firm, which currently has $1.5 billion in assets, to be, they typically ask us in terms of assets, and we don't think that way. We think in terms of number of clients and cultivating clients who would like to invest with us for the long term.
So, we think of our clients as individuals rather than assets. We think of our employees as human capital instead of numbers. We think about the long term in terms of actual development.
MME: Since you were at Janus when it went public, did that influence your decision to open a boutique?
Corkins: Speaking about the mutual fund industry as a whole, there are two or three critical issues that they are dealing with right now. A lot of those firms got disintermediated from their clients, or at least from a direct one-on-one relationship with their clients over the past 10 to 15 years. It could be a broker like Merrill Lynch, a platform company like Charles Schwab, or a consultant like Wilshire. Essentially, many of those managers lost a direct relationship with their client.
When you lose a direct relationship, you lose a lot of things. You lose the ability to communicate directly with your client through a market's ups and downs. You lose control of margin, because that intermediary needs to charge a fee to justify their existence, and that fee is taken away from the asset manager.
Thirdly, the attempt to be all things to all people - to sell to an individual, an intermediary and an institution - is hard to do on all three fronts, because in each of those channels you have lost direct communication with your client and those clients often have different goals.
I think a fourth challenge is many of the mutual funds they are selling were created in the 1970s or 1980s, so we are talking about products that are 30 or 40 years old. In the last decade, clients started to realize their mutual funds' strategies are based on relative returns rather than absolute returns.
In those years, the fund companies were defining their success as being down "only 35% or 40%," when their benchmark index was down 40%-plus-and for many of their clients, that is not success. Even worse, managers cannot even beat their benchmarks, and that is why passive funds and ETFs continue to take share from active managers. If a firm does not preserve capital for clients in weak markets, and cannot beat underlying benchmarks, it has no value proposition.
I contrast that with a firm that is private, that is focused on absolute returns, that is focused on directly communicating with their clients.
MME: Nonetheless, would you ever consider offering a mutual fund?
Corkins: Our client base is currently family offices, regional investment firms, foundations and endowments. So far, that's served us well, but we definitely do have plans down the road to access a wider audience. We very much would like to offer a mutual fund, perhaps as a sub-advised fund.
Principal, Arrowpoint Partners
Assets Under Management
Low-volatility, non-correlated alternative strategies offering exposure to equity, credit and unique investment opportunities-in risk-managed, absolute-return portfolios in which security selection drives returns.
"Asset management is an evolution, not a revolution."
"Tip-of-the-spear research enables Arrowpoint Partners to seize the most attractive risk/reward opportunities along the capital structure. We leverage our fundamental research platform to exploit valuation anomalies in the market."
Dartmouth College, bachelor's
Columbia University, MBA