BOSTON-Understanding what makes a good manager can make or break a fund firm in terms of getting its products distributed or dropped.
Brokers-dealers and chief investment officers recently gathered in Boston for the fourth edition of FundForum USA Thought Leadership Summit to key audience members in on what they're looking for, and not looking for, in managers looking for a home for their funds.
Paul Hatch, vice chairman of Morgan Stanley's wealth management group, which manages some $500 billion in Separately managed accountsand fund assets, said his firm is not looking for product manufacturers as much as firms that can work together as a team.
"We see thousands of managers every year and there isn't anybody unwilling to build whatever we need," he said. "The people that have done well have come as a unit so we can see the various components. Selection criteria with our due diligence team is always going to focus on consistency and performance more than outperformance. We also want to know that the portfolio manager isn't going to fly away six months from now to start another firm and we have to start the process again. So we look for stable companies, strong marketing organizations and we look for a consistent message."
Hatch added that firms with the inside track are ones that have people "who literally live in our building and are with us almost every day" dedicated to his firm's due diligence and marketing teams.
Successful product manufacturers most often come from the institutional market where they "figured out what worked there and came to us knowing how to deliver it in a retail format," said Hatch, adding that vanilla large cap growth funds need not apply.
Going forward, multi-asset class and retirement income products will continue to garner the interest of gatekeepers, as well as registered products in the alternative space such as hedge funds, according to Hatch. "We're the largest distributor of alternative products out there on the private client side and we only have $60 billion," he declared.
Asset management companies should come in as a team, with a relationship manager, sales manager, product manager and research manager all present, said Lorna Sabbia, head of the managed solutions group at Bank of America Merrill Lynch. Merrill manages $650 billion in separately managed accounts and mutual funds. And they should focus on how their products hit specific objectives.
"We're looking for truly outcomeoriented solutions,'' she said, "that get away from your traditional styleboxes."
John Guthery, alternative investments strategist for broker-dealer LPL Financial Research, takes a below the radar approach to finding managers. He said he's not looking for the biggest current names. Rather, he wants to partner up with ones on the rise, getting better in a demonstrable fashion.
"What we ask for people to present to us are highly qualified and skilled managers who aren't, right now, at the top of their game. Assets follow managers at the top of their game and things get harder and harder to manage and it is a self-fulfilling prophecy that sooner or later that could lead to a pattern of underperformance," Guthery said.
"Overtime, we believe this helps us avoid mistakes and things like that,'' he said.
The worst position "you can be in is defending bad performance,'' said Chris Vella, chief investment officer of the Multi-Management Group at Northern Trust, a manager of managers. "You want to make sure investors understand market environments where your strategy is not going to do well," he offered.
"There are a lot of strategies out there and you need to understand the type of role you're playing in the total portfolio,'' Vella said, such as a hedge against inflation as in the case of TIPS funds, or a hedge against hedge funds as represented by managed futures funds. "Understanding how you're being utilized by the end client is really important."
According to Vella, real assets (i.e. infrastructure), real estate, and alternative fixed income products could have the potential of just exploding.
"The opportunities that present itself in the long/short credit space could be huge," he said.
Bob Boyda, head of global asset allocation at Manulife Asset Manager, has an even more basic requirement than the other gatekeepers.
"When you come, bring research, portfolio management. But make sure the person who comes is articulate," he cautioned.
"Sometimes your best portfolio managers are not really on the ball when it comes to articulating products," he said.
So what kind of managers makes Boyd giddy?
"I want active, active," he declared. "I want somebody who actually understands whether Russia is managing its companies for the bond holders or they're managing it for the shareholders. Or whether I ought to be in the state-owned enterprises in China or the small-to-mid cap companies that are not part of the (state-owned enterprises), that have an entrepreneurial spirit and are doing mundane things like their version of waste management."