Factors in Selecting Aston’s Subadvisors
(A version of this article appeared under the YourQ&A column in Fund Fire on June 26, 2014)
Q: Aside from performance, what factors help investment managers stand out positively during the sub-advisory selection process?
A: For better or worse, investment performance will always be the critical variable we consider when evaluating potential sub-advisors. However, we do all that we can to minimize the tyranny of the three- and five-year performance numbers. We try to distinguish random surges of short-term under- or outperformance from longer-term success driven by an asset manager’s consistent application of a robust investment process or an uncanny ability to read markets and choose securities.
It is incredibly difficult to separate the wheat from the chaff to find exceptional managers. Over the last seven years, we have probably listened to presentations from more than 500 managers and have a cabinet full of pitch books to prove it. Randomly, a handful of these managers will have great performance numbers based on nothing more than pure luck.
Unfortunately, there is no simple winning formula for sub-advisor due diligence. Much of our decision making is intuitive. All serious candidates that we consider have detailed presentations, marketing expertise and a bevy of advanced degrees and professional designations. We try to figure out if the firm’s success is due to adept synthesis of data or extraordinary stock picking skills, discipline or inspiration.
We try to understand the internal dynamic of each firm—is it a shared investment decision-making process or a strong leader with input from subordinates? We strive to figure out how the engine room really works, which is not always easy when everyone is on their best behavior in a meeting structured around a canned sales pitch. Consequently, we take a lot of time and require multiple in-person visits before adding a new sub-advisor.
We refer to the process as the “sub-advisor mosaic” — all the pieces have to fit together. We also have to like and trust each other, as these should be long-term partnerships, and if we do not get along, then it will be a rocky road.
We still see the occasional firm that will show up and “forget” to mention that they have recently had a major compliance problem or a couple of key people leave. Obviously, non-disclosure of key information will eliminate a firm from consideration.
In addition, we tend to be very nervous of large asset management firms with multiple strategies for three primary reasons: these managers can struggle to retain outstanding talent; frequent management changes at these firms can adversely affect the investment teams; and it is difficult to be competent at running multiple strategies effectively.
Our sweet spot is the privately run boutique or emerging firm with somewhere between $2 billion and $15 billion in assets under management. Many of our sub-advisors focus on a single strategy, asset class or sub-asset class.
The two biggest surprises for most potential sub-advisors is the rigor and professionalism of due diligence in the retail market and the indifference of the world to yet another mutual fund.
Some institutional managers think that by moving into the mutual fund business they will catch a break in the formality, length and discipline of the manager selection process. It is simply not the case. In many ways, due diligence teams in the retail fund world are more demanding than in the institutional market because of the public availability of mutual fund data.
There are more than 7,000 U.S. mutual funds (excluding money market funds), according to the Investment Company Institute; and investors and advisors are not going to rush to a manager’s door because it is opening fund number 7,001. The time it usually takes to get traction with a mutual fund is measured in years, not months. The marketing and sales efforts required to get there are exhausting, and while hard work is necessary, there is no guarantee of success.
A sub-advisor with a short-term horizon or unwilling to share the marketing burden is unlikely to end up on our recommended list. During the review process, we value candidates that can explain their investment philosophy and process clearly and communicate how they expect their strategy to perform across an entire market cycle. In addition, transparency, accessibility and a can-do, team-oriented attitude are paramount.
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 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.