More Highlights from the Aston Research Symposium
Aston Asset Management (“Aston”) held its 2014 Research Symposium in May for investment professionals interested in learning more about Aston and its family of funds managed by institutional-oriented subadvisors. The daylong event featured a full lineup of portfolio managers as speakers and panelists, sharing insights into their particular approaches to investing as well as views on the current market environment.
Featured speakers such as large-cap value manager Randell Cain from Herndon Capital Management and alternatives expert Rick Lake of Lake Partners garnered plaudits from attendees, along with the previously noted Jeffrey Sherman of DoubleLine Capital. In addition, Aston Chief Executive Officer and President Stuart Bilton drew praise for his opening comments describing Aston’s role in providing these topnotch managers a mutual fund platform for their strategies.
Bilton kicked off the day with a quick and lively overview of how Aston chooses its subadvisors. He noted that the firm had probably talked with more than 500 managers during the last five years, and has a cabinet full of pitch books to prove it, while noting how “incredibly difficult it is to find the exceptional manager.” Bilton cited six key areas when analyzing potential subadvisors—firm size, ownership, performance, passion, team, and process—in a more nuanced take than the typical three P’s of people, performance, process that is the focus of most manager searches.
Firm size is important, as Aston tends to focus on boutique asset managers able and willing to focus on one core strategy or investment philosophy. It is hard for most “mega firms” to be competent in many different strategies. Bilton pointed to a range of $2 to $15 billion in assets under management as the “sweet spot” in size. At that level, firms are more likely to be majority employee-owned and still deeply passionate about a single investment approach.
Bilton especially highlighted the nuance of the Aston approach in regards to performance, process, and team. “Yes,” he said, “we worry about performance, but not in a conventional way” in referring to the “tyranny of the three- and five-year performance number.” Aston seeks to distinguish potentially random surges of short-term outperformance from long-term success derived from a disciplined and consistent application of a superior process. Having seen many strategies and investment approaches, Bilton does not see any “one right process,” though anything too mechanical does not seem to work. Instead, Aston tries to separate process results from mere randomness or luck. How an investment team and firm functions factors significantly in that analysis. Is the team one of a leader seeking input or shared responsibility? Either is okay, but how that dynamic plays out is critical to long-term success.
Value Creating Opportunities
Randy Cain, portfolio manager of the ASTON/Herndon Large Cap Value Fund, shared some of the down-home wisdom he’s discovered in his many years of investing, despite at 47 still being somewhat of a “young pup.” He said that he headed up a team of generalists, and saw the benefit of analyzing stocks broadly, from different angles and perspectives, as opposed to narrowly focused teams. As an example, Cain commented that in pursuit of value creating opportunities he is sometimes accused of investing in “junky” stocks. His first response is to admit that he does not really “know what that means” as he sees his job as analyzing and finding value wherever it may be in the market. In a way, shunning so-called junky stocks is a restricted view that serves as little more than an excuse not to invest in certain types of stocks or sectors.
Cain emphasized that the stock market is dynamic. Analyzing price/earnings and price/book is an approach to value, not the approach. He sees valuation as merely part of an analytical process that also encompasses the quality of a company and its profitability in the form of its ability to deliver return-on-equity (ROE) to shareholders. After all, what you pay for something is directly related to the quality of what you are buying, not just the price paid. This strikes Cain as a basic investment principle, “but as my grandmother used to say, if common sense were common, more people would have it.”
Cain wrapped up his prepared comments by noting that the opportunities he is seeing are off the beaten path. Although purely a bottom-up stock-picker, Cain sees post-cyclical companies likely leading the way from here, as the current market environment is “reminiscent of 2009 … ‘saftey’ is overvalued and dangerous” as investors chase current income. “Utility stocks should never trade at a market multiple” given their regulatory and earnings limitations.
Rick Lake titled his talk, Liquid Alternatives: Searching for Performance Leaders, as a lead in to explaining why it is so difficult for many investors to build a portfolio of alternative strategies. With 25 years of experience in alternative investing, including 15 years offering a liquid alternatives solution, Lake has seen the growth in the number of alternative funds explode as well as the array of strategies and instruments. The research challenge for investors is the huge dispersion in the risk/return profiles of these strategies, and how yesterday’s winners so often turn into today’s duds.
Lake’s solution is to build a balanced portfolio of hedged mutual funds that offers the liquidity and transparency of mutual funds with the greater flexibility of hedged investment strategies. The key, given the large dispersion of results of these types of strategies and their complexity, is to have someone with the experience and expertise in identifying top managers who understands how the strategies complement each other in an ever-changing market environment. The goal being an alternatives solution that can benefit a traditional portfolio of stocks and bonds by helping to avoid the risks of sharp interest-rate moves and severe market corrections.
(Lake Partners is the subadviser to the ASTON/Lake Partners LASSO Alternatives Fund)
This article is a summary of information delivered at the Aston Research Symposium on May 6, 2014. Herndon Capital Management (“Herndon”) and Lake Partners Inc. (“Lake”) are subadvisers engaged by Aston Asset Management, LLC (“Aston”). Herndon and Lake are not affiliates of Aston and their views do not necessarily reflect those of Aston.
This material is not intended to be a forecast of future events, does not constitute investment advice, and is not intended as a recommendation to buy or sell any security. Investors should consult their investment professional regarding their individual investment program. Since the date of this report, economic factors, market conditions and Herndon’s views of the prospects of any particular investment may have changed. Investors should consider the investment objectives, risks and associated costs carefully before investing. Forward-looking information is subject to certain risk, trends, and uncertainties that could cause actual results to differ materially from those predicted. Past performance is no guarantee of future results.