Download Hiding in Plain Sight

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Fall 2013
PMS 627
C
AN INVESTMENT MANAGEMENT, AN ENDEAVOR WHOSE VERY
PUBLIC SCORECARDS PUT THE COMBINED STATISTICS OF PRO
SPORTS AND THE BILL­B OARD CHARTS TO SHAME, SOMEHOW BE A
BASTION OF UNDIS­C OVERED TALENT? AND IF IT IS, HOW DOES A BOUTIQUE PRIVATE BANKING AND WEALTH ADVISORY FIRM GO ABOUT
FINDING HIDDEN GEMS?
Hiding in Plain Sight
How Fieldpoint Private makes a science out of
finding investment managers others miss.
BY Nick Markola,
CIMA, Director of Manager Research
In 2001 an estate planner and former small-town mayor
named David Raub launched an investment firm based
on an obscure theorem known (to very few people) as
the Gordon Growth Model. The theorem stipulates that
the expected return of a portfolio of stocks is equal to the
portfolio’s dividend growth rate plus its dividend yield.
In the last ten years, David Raub’s strategy has gone on
to outperform its benchmarks 80% of the time, and has
done so in an era when a significant majority of managers
fail to meet their respective benchmarks each year.
With such remarkable performance and an easily
understood strategy, you might expect that by now the
assets managed by Mr. Raub’s firm would have swelled
well into the billions and that they would be found on
the platforms of every major firm on the Street. After all,
investing is the ultimate meritocracy, isn’t it? Instead,
the firm, Raub Brock Capital Management, has less than
a half dozen employees and manages less than $350
million in assets – an amount that would reside far to the
right of the decimal point at most firms you could name.
Can investment management, an endeavor whose very
public scorecards put the combined statistics of pro
sports and the Billboard charts to shame, somehow be
a bastion of undiscovered talent? And if it is, how does
a boutique private banking and wealth advisory firm
go about finding its hidden gems? Are these managers
hiding?
Investment funds cited herein are available for qualified investors by prospectus,
which should be read carefully before investing.
Or are they in plain sight, just waiting to be discovered
by people who can discern luck from skill?
OUTLIERS
Finding and vetting undiscovered managers is an
important part of the investment approach at Fieldpoint
Private. There are many reasons for this, but the most
important is that achieving “alpha” in a portfolio –
returns above the relevant benchmark – virtually
requires the presence of outlier managers who rarely
underperform and whose results persistently resist
reversion to the mean. By definition this means they are
doing something different.
The trick lies in discerning whether their success is luck,
or skill. Did they simply buy Google in 2004? Or have
they developed a well-modeled insight about dividends,
for instance, or a repeatable skill at bottom-up emerging
markets security selection?
In our continuous search for manager alpha, we have
found that the profile of skilled, above-average investment teams is remarkably consistent, regardless of
the managers’ sector or style. Most importantly, these
outperformers tend to look at beating the benchmark
not so much as an investment goal in and of itself, but as
a puzzle to solve. In doing so, most have discovered that
the key to upside performance over time is exceptionally
strong downside protection.
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RISK MITIGATION IS THE NEW BLACK
Put simply, experience has taught us to like managers
who focus mainly on not losing money, or – in down
markets – on losing less than the markets. Their processes
are more about mitigating risk on the downside than on
capturing the upside. It’s not an either/or scenario, but
they don’t like cleaning up spills.
Given this, our research team pays a great deal of attention to how effectively the manager can demonstrate
that their performance is a function of their strategy and
its execution. The best tend to be particularly skilled
at finding under-levered companies with exceptionally
strong management teams and sound products, in business categories consistent with thoughtful macro themes.
When the markets become volatile on the downside,
these companies tend to hold up well.
THERE IS NO SECRET
IN THEIR SECRET SAUCE
In our research we look for teams that have demonstrated
a consistent, repeatable investment methodology that
underlies their above-par returns. In the case of Raub
Brock it is a model based not simply on the presence of
dividends, but on sustained growth in those dividends.
Predictably, the list of companies that can satisfy that
screen is short, so the portfolio tolerates a relatively
high concentration in just 20 or so securities. In another,
HHR (a long/short manager focused on growth
equities), the manager demonstrated that their results
stem from an unconventional methodology in which
their short positions are not used as hedges, but as the
source of their alpha.
Such managers typically run more concentrated portfolios, conduct their own fundamental investment
research, and at times analyze securities that are not
well followed or understood. But while the merits of
the strategy are important, equally important is the
manager’s ability to articulate it in their discussions with
us (some might call it more of an inquisition) and demonstrate that luck plays no meaningful part in their results.
THEY EAT THEIR OWN COOKING
The managers whom we like tend to have a sizeable portion of their net worth committed to the strategies they
manage for other investors. We know this because it is an
essential part of the data we require in our due diligence
process. Having skin in the game helps explain why these
managers tend to be so patient, analytical and focused on
downside protection.
Investment funds cited herein are available for qualified investors by prospectus,
which should be read carefully before investing.
An example of this is St. James Investment Company, a
$1.3 billion firm seeded not only with the managers’ own
money, but with the savings of their friends, families, and
childhood gym and kindergarten teachers.
To be clear, the Fieldpoint focus list of managers includes
many names you know, like PIMCO, Gabelli, and Ivy.
But many of our managers are off the beaten path, and
they are there on purpose. Some wish to remain small so
they can more easily move in and out of trading positions
The trick lies in
discerning whether
their success is luck,
or skill.
and protect the integrity their strategy, without the massive buys and sells that can signal the market or hinder
their trading flexibility. Others might manage a niche
strategy or concentrated portfolio that doesn’t fit neatly
into an existing slice of a large firm’s asset allocation.
Some are as unskilled at marketing as they are skilled at
security selection, while others don’t believe in paying
the platform fees that are required to gain distribution
access with most of the well-known Wall Street firms.
Alas, nothing is forever. There are times when we have
to part ways with a manager team. Often it’s for reasons
other than performance, but for things our collective
experience tells us may lead to performance issues.
For example, the manager may exhibit an unsignaled
drift away from their strategy, or take substantial new
assets that we project will be a challenge or distraction
to digest. They may experience intellectual turnover. In
such instances we tend to subscribe to our own brand of
downside protection and opt to part ways with managers, recognizing that truest of truisms: past performance
is not a guarantee of future results.
Ultimately it can be as true with managers as we believe
it is with wealth management firms: size is the enemy
of excellence. If you would like to learn more about
the managers highlighted below or the others on our
60-manager focus list, we invite you to talk to your
Fieldpoint Private advisor.
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A B O U T F I E L D P O I N T P R I VAT E
Fieldpoint Private (www.fieldpointprivate.com), headquartered in Greenwich, Connecticut,
is a boutique financial firm providing the highest degree of personalized, confidential wealth
planning and private banking services. Catering to highly successful individuals, families, businesses and institutions, Fieldpoint Private offers a powerful combination of wealth management and strategy, family office, private banking and business banking services addressing
every financial need for each of our Members including: wealth transfer advice, tax planning,
aggregation and performance reporting, risk management, goals-based investing strategies,
sophisticated investment selection, discreet and personalized banking, highly customized
credit solutions, custom custody and trust solutions, highly attentive/responsive service and
concierge services.
Fieldpoint Private was established in 2008 by 31 Founders with a specific vision and purpose.
These extraordinary leaders of industry and community recognized the opportunity to create a financial firm totally attuned to people’s individual circumstances. Our firm is built on a
philosophy of exclusive Membership and client-centricity. Working with a limited number of
relationships gives every person the experience of belonging to an extremely selective group.
The result is a new breed of institution established on the basis of personalization, responsiveness, and exclusivity, and an ensured commitment to impeccable service and consistently
flawless execution. Our Member-oriented service approach offers a unique client experience
custom crafted to each Member’s financial needs.
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© 2013 Fieldpoint Private. All rights reserved.
Banking Services: Fieldpoint Private Bank & Trust
Registered Investment Advisor: Fieldpoint Private Advisors, Inc.
Securities: Fieldpoint Private Securities, LLC, Member FINRA, SIPC
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COMPLIANCE DISCLOSURE
This material is for informational purposes only and is not intended to be an offer or solicitation to purchase or sell any security or to
employ a specific investment strategy. It is intended solely for the information of those to whom it is distributed by Fieldpoint Private.
No part of this material may be reproduced or retransmitted in any manner without prior written permission of Fieldpoint Private.
Fieldpoint Private does not represent, warrant or guarantee that this material is accurate, complete or suitable for any purpose and it
should not be used as the sole basis for investment decisions. The information used in preparing these materials may have been obtained
from public sources. Fieldpoint Private assumes no responsibility for independent verification of such information and has relied on
such information being complete and accurate in all material respects. Fieldpoint Private assumes no obligation to update or otherwise
revise these materials. This material does not purport to contain all of the information that a prospective investor may wish to consider
and is not to be relied upon or used in substitution for the exercise of independent judgment and careful consideration of the investor’s
specific objectives, needs and circumstances. To the extent such information includes estimates and forecasts of future financial performance, such estimates and forecasts may have been obtained from public or third party sources. Fieldpoint Private has assumed that such
estimates and forecasts have been reasonably prepared on based on the best currently available estimates and judgments of such sources or
represent reasonable estimates. Any pricing or valuation of securities or other assets contained in this material is as of the date provided
as prices fluctuate on a daily basis. Past performance is not a guarantee of future results.
Asset allocation models are based on capital market expectations for each classification and segment using a thirty (30) year time-series
of historical returns and standard deviations. Returns and risk assumptions may vary from historical averages based on prevailing market
conditions, Fieldpoint Private’s macro economic assumptions, and changes to assumptions including state and federal income tax rates,
among others. These models and the information contained in these materials has been prepared from sources believed to be reliable, but
is not guaranteed by Fieldpoint Private as to its accuracy or completeness.
Asset allocation models represent the views of Fieldpoint Private’s investment professionals and are based on their broad investment
knowledge, experience, research and analysis. However, market conditions, strategic approaches, return projections and other key factors
upon which the views presented in these materials are based remain subject to fluctuations and change. Consequently, it must be noted
that no one can accurately predict the future of the market with certainty or guarantee future investment returns or performance. The
models displayed herein represent hypothetical performance and do not represent actual investments or the performance of any investment account or results of actual trading. These hypothetical models may have certain inherent limitations. Modeled returns and past
performance are no guarantee of future results. Models are based on pre-tax data.
Fieldpoint Private does not provide legal or tax advice. Nothing contained herein should be construed as tax, accounting or legal advice.
Prior to investing you should consult your accounting, tax, and legal advisors to understand the implications of such an investment. You
may disclose to any and all persons, without limitation of any kind, the tax treatment and tax structure of any transactions contemplated
by these materials and all materials of any kind, (including opinions or other tax analyses), that are provided to you relating to such tax
treatment and structure. For this purpose, the tax treatment of any transaction is the purported or claimed U.S. federal income tax treatment of the transaction and the tax structure of a transaction is any fact that may be relevant to understanding the purported or claimed
U.S. federal income tax treatment of the transaction.
Investment advisory services offered by Fieldpoint Private Bank & Trust (“Bank”) and/or any non-deposit investment products which
ultimately may be acquired as a result of the Bank’s investment advisory services:
Are Not FDIC Insured – Are Not Bank Guaranteed – May Lose Value
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Public and market data sources may include Fieldpoint Private, Windham Global Solutions, Bloomberg and FactSet.
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