Between the Department of Labor's finally released fiduciary rule hogging advisors' mindshare, increased market volatility with talk of a global slowdown, a crash in oil prices and currency devaluations around the world, advisors are stretched pretty thin. Keeping their clients calm and focused through all this is a full-time job, never mind finding ways to make them money.
The portfolio managers and analysts running separately managed accounts take some of that off advisors' plates, allowing them to focus on clients' individual needs while meeting their investing goals. According to the Money Management Institute, the managed money industry represents over $4 trillion as of 2015, after increasing over 3% last year.
Investment Advisor has been working with Envestnet | PMC for 12 years to identify the best managers in the space every year. Envestnet's analysts narrow down the universe of strategies available on its platform to 17 finalists. It's not enough to outperform their benchmarks; to be considered, the managers must consistently outperform with repeatable processes. They must be widely available on multiple platforms (not just Envestnet's) and allow for customization to meet individual clients' needs. As you'll see in the profiles that follow, they must also work well as a team to bring value to the advisors and clients who use their strategies.
Using Envestnet | PMC's rigorous analysis, the selection committee, which includes representatives from Envestnet as well as editors of Investment Advisor, choose the best of these finalists in several categories.
The winners were announced in May at the Envestnet Advisor Summit in Chicago. Look for video interviews with the winners on ThinkAdvisor.com in the coming weeks.
Overall and International
Rick Schmidt, Partner and Portfolio Manager
Harding Loevner Global Equity ADR
Harding Loevner's Global Equity ADR portfolio is this year's big winner among the SMA Managers of the Year. It won not only the award for best global and international strategy, but also the award for the overall Manager of the Year, beating out all the other category winners.
Its Global Equity ADR Strategy uses an extensive bottom-up stock-picking approach to create a concentrated portfolio of typically 50 to 60 foreign and domestic high-quality large-cap stocks that have sustainable growth and a competitive advantage.
Securities are first selected by a team of 21 analysts in a four-stage decision-making process that ultimately ends with an unconstrained virtual portfolio, which is then assessed by portfolio managers who make the final buy and sell decisions.
The firm's "first priority is to find what we think are the best companies in the world that meet our criteria of quality and growth," said Rick Schmidt, partner and portfolio manager. "After that, and only then do we look at valuation […], and we build portfolios from the bottom up using the work of our 24 investment professionals."
The criteria the analysts use to choose stocks include liquidity, outlooks for growth in sales, earnings and dividends, quality of management, strength of free cash flow and balance sheets, competitive market position, business risk and more.
"The analysts do the work on companies, then they rate the stocks, and their job ends," said Schmidt. "The portfolio managers take those ratings and build their portfolios along the risk constraints that we have for all our portfolios."
Several portfolio managers are involved — two co-leaders plus three others who don't control the final portfolio but are running paper portfolios in the background to provide some succession planning, risk reduction and a source of new ideas and training for future managers, said Schmidt.
The "secret sauce" to this recipe, he said, is the way the team of analysts and portfolio managers interact, a process known as "collaboration without consensus."
"We don't necessarily want agreement," said Schmidt. "We think some of our best decisions are made in building portfolios where there is a slight disagreement as long as there's ownership."
Analysts don't have to agree with each other; nor do portfolio managers have to agree with the analysts or each other. The process is "very empowering," said Schmidt.
Each portfolio manager then builds his own portfolio, which is ultimately combined with the portfolio of the other manager, creating the final model that goes to the client.
The result is a diversified portfolio that has outperformed the benchmark Russell Global Large-Cap Index in six of the last nine years, and places in or near the top quartile of its peers over the past seven and 10 years.
The portfolio typically captures about 99% of the gains in the index but only 96% of its losses over a 10-year period. It performs best in slow, laggard or declining markets, said Schmidt.
Turnover is extremely low — often under 20% — resulting in multi-year holding periods for most stocks and ADRs.
As of year-end 2015, a little over half the portfolio was invested in the U.S. and Canada, 22% in Europe, 15% in Asia, including Japan, and the remainder in Latin America, Eastern Europe and Africa. The portfolio is not required to be invested in any country or region but only in many countries, said Schmidt. Top holdings as of year-end 2015 included Nike, Alphabet and AIA Group.—Bernice Napach
U.S. Large-Cap Equity
Ken Stuzin, Portfolio Manager
Brown Advisory Large-Cap Growth
Brown Advisory's Large-Cap Growth strategy is a concentrated portfolio of about 30 names and it will only own between 30 and 35 names. That's because all investors, even institutional ones, are human and make mistakes. One of those "classic mistakes," portfolio manager Ken Stuzin said, "is falling in love with names that we own and we're comfortable with."
Research has shown that "long-tenured portfolio managers will migrate to ever higher numbers of names," Stuzin told Investment Advisor in June. "I think part of that is just a natural, behavioral finance response."
A portfolio that grows from 30 to 50 names might not sound like too much, "but it changes the characteristics of the portfolio."
Because of that, the portfolio uses a one in-one out strategy. "If we want to add a new name to our portfolio, we force ourselves to sell a pre-existing name."
Stuzin calls this "Darwinian capitalism." He said, "We want our investors to know that intellectually, we want business models to compete for their capital."
In addition to being highly concentrated, the portfolio also holds positions for the long term. Stuzin said over the last decade or so, the average holding period for a stock is a little over five years. "Over the holding period of one of these [stocks], our total returns ought to approximate essentially the trajectory of earnings," he said.
The portfolio only invests in companies that can "reasonably support 14% or better" growth in earnings per share through a full market cycle.
That's "not a random number," Stuzin said. Fourteen percent "represents double the long-term earnings growth rate of the broad market as measured by the S&P."
"The twin pillars from my perspective are the quality and the sustainability of these growth business models, as well as what we paid for them," he said.
Stuzin has been on the portfolio since its inception in 1996. There are 23 analysts supporting Brown Advisory's equity strategies, but Stuzin works closely with about 10 or 12 researchers. "We don't believe in research analysts working in isolation," he said, to avoid creating an implicit competition between analysts whose stock picks dominate a strategy.
In analyzing names to pick up for the portfolio, Stuzin and his team don't rely on the sell side. "The sell side should cater to their best customers, and a long-only manager like myself, whose average holding period is five years, frankly is a terrible customer in terms of paying the sell side a brokerage commission," he said.
Instead, the team looks at the "underlying drivers of the business model," he said, studying the customers, suppliers, competitive advantage and, of course, managers.
The team begins with an "inside out investing" approach, studying the publicly available information to determine whether it's "reasonable to assume" the company can meet the initial 14% EPS growth mandate. "If it's not, we don't want to waste the time of our research team."
For names that make it past that first hurdle, the team begins modeling their businesses, taking a one- and three-year view of each company, and creates an upside and downside target. It then follows up with a manager interview. Stuzin shrugged off arguments that manager interviews will only result in the positive side of the story.
"If you go in to those meetings fairly well schooled in those business models, then I think you can get something out of them," he said. Specifically, that's management bias. "If we don't understand management's tendencies, their biases, in past situations, how can we as investors understand or model what that company will perform like in the future?"—Danielle Andrus
U.S. Large-Cap Equity
Jennifer Chang, Executive Director and Portfolio Manager
Schafer Cullen High-Dividend Equity Strategy
One of two awards in the large-cap category, Schafer Cullen's High-Dividend Equity Strategy focuses on high-quality companies that are able to deliver — and grow — dividends over several years. Envestnet | PMC's analysts found the strategy's one-year performance and 10-year risk-adjusted return were in the top quartile of firms in Envestnet's large-cap value SMA universe.
The portfolio had almost $11 billion in assets under management as of Dec. 31, 2015, and is a "very concentrated portfolio" of only 30 to 40 stocks, according to Jennifer Chang, executive director and portfolio manager of Schafer Cullen.
"We feel as though if we're doing the work, we want to have meaningful positions in some of our highest-conviction ideas," she said. The amount of capital in one position is limited to about 4% or 5%, though, because "we know we can be wrong at certain times."
The strategy is co-managed by Chang and Schafer Cullen's chairman and CEO Jim Cullen, along with a team of 10 generalist analysts.
"We're looking for catalysts that we think would be able to drive the earnings growth and multiple expansion story over the next three to five years because we're long-term investors."
There are three main criteria to the high-dividend strategy, Chang said.
First, portfolio managers follow a "low P/E discipline" and look for stocks at the bottom 20% to 30% of the market based on P/E, she said. That helps the strategy benefit from "those stocks being defensive in down markets but also in up markets, both from earnings growth and multiple expansion" perspectives.
The second criteria is that stocks have at least a 3% dividend yield. "Dividends are really a huge part of total returns. They're about 30% to 40% of total returns over the last 70 years," Chang said.
Higher dividends also indicate higher-quality companies, which leads to the final criteria for selection.
"We're looking for companies that pay strong dividends that are growing because it's really a reflection of the type of businesses that we want to be involved with," Chang said.
Schafer Cullen also looks at dividend growth relative to earnings growth to screen for companies that might be buying back stocks to pad earnings reports. Chang said companies with higher dividend yields and slower earnings growth should show slower dividend growth with those higher yields.
For example, she said, "We've been finding some great companies in spaces like technology where the dividends are slightly lower, still meeting our 3% threshold, but they've been generating double-digit dividend growth over the last five-plus years."
The strategy outperformed its benchmark, the Russell 1000 Value Index, by about 400 basis points last year. High-dividend stocks didn't do well compared to growth stocks in the first quarter of last year, Chang said, but several factors, including a slowing economy, China's devaluation of the yuan and emerging markets "blowing up," have led investors to look for more stability in consumer staples and telecom, she said. "The fact that we were underweight in more cyclical areas like energy and industrials, that really benefited the strategy."—DA
— Corrections: An earlier version of this article misstated the value of dividends to total returns and misquoted Chang. This article has been updated to reflect those changes.
U.S. Small- and Mid-Cap
Mark Wynegar, Managing Director and Portfolio Manager
Tributary Capital Management Small-Cap Equity
Tributary Capital Management, winner of the SMA Advisor of the Year in the small-cap category for its Small-Cap Equity Strategy, has been known to hold some individual stocks for as long as seven or 10 years. "If the investment thesis remains intact and the valuation remains attractive […], we can hold that stock until it graduates into mid-cap," said Mark Wynegar, one of two portfolio managers working on the strategy along with four analysts. "That is the ultimate outcome for us," he said.
The Small-Cap Equity Strategy is a traditional bottom-up stock-picking strategy that consists of 60 to 70 high-quality stocks chosen for their value proposition. The stocks are held for as long as that proposition holds, until the stock price reaches its target price, the market cap reaches $5 billion or the company is taken over.
"We're buying good businesses with attractive valuations, good balance sheets and free cash flow," said Wynegar. "Those become attractive candidates for either strategic or financial buyers, [but] we'll never buy a stock explicitly because we think that it's a takeout candidate," said Wynegar.
Another attribute of Omaha, Nebraska-based Tributary's $1 billion flagship strategy is the consistency of its management. Wynegar has been managing the portfolio since 1999, and co-manager Mike Johnson has worked alongside him since 2005. Four analysts are also on the investment team, which continuously monitors holdings, maintains valuation, and estimates and identifies new names and fresh ideas, said Wynegar.
Performance has been strong since 2004 with the exception of 2012.
The Tributary Small-Cap Equity Strategy focuses on companies with market caps between $1 billion and $2 billion whose stock prices are deemed to be trading at a discount to their intrinsic value, even if the stock is not statistically cheap. That differentiates Tributary from other small-cap value managers. The investment team is also willing to purchase growth stocks if they believe the market is underpricing the prospects of those stocks.
In addition to a market cap below $2 billion and valuation, the investment team looks at profit margins, leverage and earning revisions when screening for names. That analysis yields about 200 to 250 stocks that will be further analyzed to learn about potential catalysts that can drive stock prices in the future and about the stocks' financials and valuations. Once stocks pass those tests, based on a three- to five-year time horizon, they become the subject of a full research report, after which they can be purchased or placed on watch for a future purchase, but only if both portfolio managers agree.
Stocks that are purchased tend to hold a 1% to 1.25% position in the portfolio and positions are trimmed if they reach 5%, which would be unusual. Turnover is low, between 25% and 35% a year.—BN
U.S. Small- and Mid-Cap
Paul Viera, CEO and Partner
EARNEST Partners Mid-Cap Value
EARNEST Partners, winner of this year's SMA Manager of the Year award in the small- and mid-cap category for its Mid-Cap Value Strategy, has a highly unusual investment team. Rather than buy- or sell-side analysts, it hires individuals with real-world experience who have worked in the sectors that they cover.
"Most asset management firms hire finance people," said Paul Viera, founder and CEO of the firm. "We wanted to hire practitioners in the industry that we're asking people to cover."
