WEBVTT - Touchstone’s Paulin on Looking Beyond Performance 0:00:15.170 --> 0:00:18.319 Welcome to Inside Active, a podcast about active managers that 0:00:18.360 --> 0:00:22.660 goes beyond soundbites and headlines and looks deeper into their processes, challenges, 0:00:22.760 --> 0:00:26.160 and philosophies in security selection. I'm David Cohn. I lead 0:00:26.239 --> 0:00:29.420 mutual fund and active research at Bloomberg Intelligence. One of 0:00:29.460 --> 0:00:32.220 the challenges with active management is that choosing the right 0:00:32.320 --> 0:00:34.990 manager can be just as important as choosing the right 0:00:35.050 --> 0:00:38.529 investment strategy. Past performance can tell you what a manager 0:00:38.570 --> 0:00:41.970 has accomplished, but it doesn't necessarily tell you why they succeeded. 0:00:42.370 --> 0:00:45.440 whether their process is repeatable, or how they'll respond when 0:00:45.450 --> 0:00:48.880 their investment style inevitably falls out of favor. That makes 0:00:48.960 --> 0:00:53.639 manager selection its own investment discipline, requires looking beyond returns 0:00:53.680 --> 0:00:57.140 to understand the people, philosophy, and process behind them, and 0:00:57.160 --> 0:01:00.780 then continuing to evaluate whether what initially made a manager 0:01:00.820 --> 0:01:04.530 compelling remains intact over time. So today I wanted to 0:01:04.580 --> 0:01:07.370 explore how that process works in practice, how managers are 0:01:07.430 --> 0:01:11.190 identified and evaluated, how investment skill can be separated from 0:01:11.230 --> 0:01:15.140 a favorable market environment, and what warning signs emerge after 0:01:15.180 --> 0:01:18.020 a manager is hired, and ultimately, what distinguishes the best 0:01:18.160 --> 0:01:21.399 active managers over the long term. Joining me to discuss 0:01:21.440 --> 0:01:24.360 that is Tim Paulin, Senior Vice President of Investments and 0:01:24.400 --> 0:01:27.880 Practice Consulting at Touchstone Investments. Tim, thank you for joining me. 0:01:28.700 --> 0:01:29.819 Thank you, David. Great to be here. 0:01:31.940 --> 0:01:34.970 So, You know, Touchstone has built its business around partnering 0:01:35.010 --> 0:01:38.110 with outside investment managers rather than trying to build every 0:01:38.250 --> 0:01:41.660 investment capability internally. What do you see as the biggest 0:01:41.700 --> 0:01:43.580 advantage of the sub-advisory model? 0:01:45.280 --> 0:01:48.200 Yeah, it's a great question, David. It's an underpinning of 0:01:48.240 --> 0:01:49.820 kind of how we think about things is that we 0:01:49.860 --> 0:01:53.419 don't have to rely on identifying and hiring talent to 0:01:53.480 --> 0:01:56.920 bring them into Touchstone to manage portfolios. We can find 0:01:56.940 --> 0:01:59.540 the talent where it lies, so to speak, around the globe. 0:02:00.220 --> 0:02:03.440 and hire managers that have demonstrated alpha historically. So we 0:02:03.520 --> 0:02:08.240 focus on demonstrated success rather than experimenting with managers that 0:02:08.260 --> 0:02:10.609 may not have experience to see what they can do. 0:02:11.330 --> 0:02:13.930 So we don't like to experiment with shareholder dollars. We 0:02:13.990 --> 0:02:16.930 do like to think about who our clients who are 0:02:17.030 --> 0:02:21.200 intermediaries that are focused on building portfolios of mutual funds 0:02:21.260 --> 0:02:24.480 and ETFs. What are the asset categories that they find 0:02:24.520 --> 0:02:27.570 of interest? And if we can find lasting, what we 0:02:27.650 --> 0:02:31.270 think is lasting demand in those categories, then the second 0:02:31.290 --> 0:02:34.000 step is, can we find a manager that has demonstrated 0:02:34.260 --> 0:02:38.540 historical alpha and then has characteristics that we find based 0:02:38.580 --> 0:02:42.000 on academics and our own research are associated with future alpha? 0:02:42.760 --> 0:02:44.660 You know, so, you know, there are thousands of active 0:02:44.680 --> 0:02:48.500 strategies and investment firms competing for assets. When you decide 0:02:48.520 --> 0:02:50.720 you need a manager in a particular area of the market, 0:02:50.820 --> 0:02:52.340 where does the search actually begin? 0:02:52.360 --> 0:02:57.060 Yeah, fortunately, we've I wouldn't say we exactly have an 0:02:57.240 --> 0:03:00.500 open-door policy for any manager that wants to talk to us. Obviously, 0:03:00.520 --> 0:03:03.080 we're busy on any given day, but we try to 0:03:03.120 --> 0:03:06.200 have a pre-open-door kind of mentality so that we can 0:03:06.300 --> 0:03:10.460 learn about firms, learn about managers, what they've done historically, 0:03:10.580 --> 0:03:14.440 how they invest, so that we're not starting flat-footed in 0:03:14.490 --> 0:03:16.690 a situation where we might be looking for a manager 0:03:16.710 --> 0:03:19.970 to replace a current manager or looking to bring another 0:03:20.630 --> 0:03:23.790 new strategy to market in a particular asset category. So 0:03:23.850 --> 0:03:26.000 that means we can go to our research archival system. 0:03:26.400 --> 0:03:29.960 In that research archival system, there are records of historical 0:03:30.160 --> 0:03:33.340 interactions we've had with managers. Some of those go back years. 0:03:33.780 --> 0:03:38.020 Some of them might be more recent. But that allows 0:03:38.100 --> 0:03:40.160 us to have a bit of a perspective on who 0:03:40.180 --> 0:03:42.840 these managers are, have a bit of a relationship that 0:03:42.880 --> 0:03:45.260 indicates that this could be somebody that would want to 0:03:45.300 --> 0:03:48.840 partner us in a sub-advisory capacity. So we'd start with that, 0:03:48.940 --> 0:03:51.910 with managers we already know. There's probably 400 managers that 0:03:51.950 --> 0:03:54.710 we have within that research archival system that we have 0:03:54.850 --> 0:03:57.490 some level of knowledge on. But we're also going to 0:03:57.530 --> 0:04:00.580 marry that with doing a search within the databases. So 0:04:00.960 --> 0:04:04.160 whether it's Morningstar Direct, eVestment, you know, there's a pretty 0:04:04.280 --> 0:04:07.140 broad databases where we can go and find managers. We 0:04:07.160 --> 0:04:10.860 have separate account composites, learn about the managers at a 0:04:10.880 --> 0:04:13.370 high end, apply some of our own multi-factor kind of 0:04:13.410 --> 0:04:17.010 quantitative screens to discover whether these managers might be a 0:04:17.029 --> 0:04:21.020 good fit and then engage those managers directly. to complement 0:04:21.220 --> 0:04:24.200 the managers that we already know within that particular asset category. 0:04:24.460 --> 0:04:26.790 So if you take that grouping of managers that you have, 0:04:27.130 --> 0:04:29.390 what does the manager have to demonstrate to even make 0:04:29.430 --> 0:04:32.710 it onto your radar? Are there any characteristics that can 0:04:32.890 --> 0:04:35.130 eliminate them very early in the process? 0:04:36.330 --> 0:04:40.859 Yeah, I mean, our approach that I would say is 0:04:40.940 --> 0:04:43.240 our version of the four or five Ps that a 0:04:43.279 --> 0:04:45.700 lot of people within asset manager research think about is 0:04:45.720 --> 0:04:49.390 what we call SPDRs. It's really four parts qualitative, one 0:04:49.430 --> 0:04:52.810 part quantitative. And the quantitative is the results, which we 0:04:52.870 --> 0:04:56.860 think are reliant going forward on having the other elements qualitatively. 0:04:57.330 --> 0:04:58.740 And so, you know, one of the things we think 0:04:58.770 --> 0:05:02.010 about is organizational stability. And so if we're looking at 0:05:02.060 --> 0:05:06.900 a strategy with a firm that is limited people resources, 0:05:07.000 --> 0:05:11.740 limited technology, limited assets, meaning they're probably not profitable yet, 0:05:12.120 --> 0:05:14.360 that's a hard thing for us to imagine, you know, 0:05:14.440 --> 0:05:18.380 putting something in a mutual fund or ETF form. with 0:05:18.420 --> 0:05:20.800 a firm that's really not sustainable yet. We want to 0:05:20.820 --> 0:05:24.610 see evidence of sustainability from an organizational standpoint. Think about it. 0:05:25.560 --> 0:05:27.060 We don't want to be working with PMs that are 0:05:27.080 --> 0:05:28.440 thinking about, am I going to be able to keep 0:05:28.460 --> 0:05:30.049 the lights on this week? Am I going to be 0:05:30.060 --> 0:05:33.310 able to meet payroll? We want to make sure that 0:05:33.330 --> 0:05:36.430 they can act like, and this is the forethought of 0:05:37.190 --> 0:05:39.890 managers that we think are sustainable, is we're going to 0:05:39.950 --> 0:05:43.780 prepare ourselves to be Every bit the institutional asset manager 0:05:43.820 --> 0:05:45.919 is a manager that might be multiples of our size 0:05:46.240 --> 0:05:48.229 because we know we need to have that structure in 0:05:48.260 --> 0:05:51.130 place for a fiduciary like a Touchstone or other firms 0:05:51.170 --> 0:05:54.910 applying a disciplined process to actually invest with us. So 0:05:54.950 --> 0:05:58.529 that's a mentality is looking at some evidence of organizational stability. 0:05:58.810 --> 0:06:00.990 Some of those things too could be personnel oriented, right? 0:06:01.029 --> 0:06:05.130 I mean, is there evidence of seasoned staff that have 0:06:05.170 --> 0:06:07.810 been placed for a while or is the opposite true 0:06:07.850 --> 0:06:12.049 where there's a lot of turnover? So the qualitative elements, 0:06:12.070 --> 0:06:14.950 those are examples of that. On the quantitative side, we 0:06:15.000 --> 0:06:18.080 apply kind of a multi-factor approach to taking a look 0:06:18.140 --> 0:06:21.460 at skill over time. So we're not just consumed by 0:06:21.500 --> 0:06:23.660 what have you done for me lately kind of aspects 0:06:23.720 --> 0:06:28.760 that tend to drive selection in the marketplace for investors. 0:06:29.839 --> 0:06:31.559 But we want to take a look at rolling periods 0:06:31.600 --> 0:06:33.460 over time. We'll go back as far as we can 0:06:33.730 --> 0:06:35.910 so we can look at different market environments and say, 0:06:36.089 --> 0:06:39.310 did they outperform when we think they should have? And 0:06:39.350 --> 0:06:41.890 how did they weather the storms when they were facing 0:06:41.930 --> 0:06:45.350 headwinds that any strategy that's truly active is going to 0:06:45.390 --> 0:06:47.570 experience because you're going to go through peaks and troughs 0:06:47.610 --> 0:06:50.410 of relative performance. So it's a combination of looking at 0:06:50.470 --> 0:06:52.790 qualitative elements that we feel are going to create a 0:06:52.830 --> 0:06:56.800 sustainable asset manager and then quantitative elements that show evidence 0:06:56.839 --> 0:06:59.940 of historical alpha and characteristics associated with alpha. 0:07:01.839 --> 0:07:02.860 So I kind of want to go back to a 0:07:02.880 --> 0:07:04.500 point you made, you know, I think one of the 0:07:04.520 --> 0:07:07.200 things I, you know, I look at is, you know, 0:07:07.260 --> 0:07:10.730 separating skill from just, you know, a manager, their, you know, 0:07:10.790 --> 0:07:14.030 portfolio simply being in favor at a certain time. And 0:07:14.110 --> 0:07:17.270 so you're really distinguishing the two by looking at, as 0:07:17.290 --> 0:07:19.720 you mentioned, rolling periods in different, you know, how they 0:07:19.760 --> 0:07:20.940 performed in different timeframes. 0:07:22.880 --> 0:07:25.080 Exactly. You know, we'll go back over time. And the 0:07:25.120 --> 0:07:26.300 first thing you can do is you can kind of 0:07:26.320 --> 0:07:28.800 take a look. It's like, okay, what's the consistency with 0:07:28.860 --> 0:07:30.750 which they delivered alpha, but we know that it's not 0:07:30.770 --> 0:07:32.870 going to be a hundred percent. Right. If you're consistent 0:07:32.930 --> 0:07:34.730 with how you apply your discipline, there's going to be 0:07:34.770 --> 0:07:37.070 times where you go out of favor because the market 0:07:37.110 --> 0:07:40.810 is rewarding other things. We find that there's a lot 0:07:40.860 --> 0:07:43.340 of nuance in how we need to look at those results, too, 0:07:43.380 --> 0:07:47.280 when we start trying to pinpoint certain market environments over time. 0:07:47.740 --> 0:07:51.880 Common types of tools in the marketplace would be Brinson attribution, 0:07:52.040 --> 0:07:56.040 style attribution, things like that. But even though if we're 0:07:56.060 --> 0:07:58.560 looking at a sector-based attribution, which is a pretty common 0:07:58.600 --> 0:08:04.640 approach that... you know, manager research groups would apply. You know, 0:08:04.680 --> 0:08:08.260 if I'm a high growth manager and I'm comparing myself 0:08:08.310 --> 0:08:14.010 to the Russell 1000 growth, it could be that there's within, say, 0:08:14.030 --> 0:08:18.270 a particular sector, let's say consumer discretionaries, that the types 0:08:18.330 --> 0:08:20.670 of stocks within that sector that were being rewarded at 0:08:20.690 --> 0:08:23.550 a particular point in time might be really low growth stocks. 0:08:23.610 --> 0:08:27.270 Maybe they might be very stable from an earnings quality 0:08:27.390 --> 0:08:30.420 and an earnings consistency standpoint. But if they're not consistent 0:08:30.460 --> 0:08:33.040 with what we hired that manager to do, in this case, 0:08:33.080 --> 0:08:36.970 to choose high top line, high bottom line, earnings growth, 0:08:37.270 --> 0:08:40.350 revenue growth, then why would I expect them to outperform 0:08:40.390 --> 0:08:43.130 in a period where low growth was being rewarded? So 0:08:43.290 --> 0:08:46.110 we really have to uncover those elements and ask ourselves, 0:08:46.350 --> 0:08:51.260 why did that outperformance or underperformance occur? And was it 0:08:51.300 --> 0:08:54.440 consistent with what we think should have happened given the 0:08:54.480 --> 0:08:55.300 manager's process? 0:08:57.740 --> 0:08:59.900 So how do you, you know, obviously performance is part 0:08:59.940 --> 0:09:02.800 of that evaluation. How do you look behind those returns 0:09:02.840 --> 0:09:05.690 to understand how the returns are generated? Do you look at, 0:09:05.920 --> 0:09:07.510 you know, what they are buying and selling? 0:09:08.350 --> 0:09:11.290 Absolutely. So some of it is looking at the purchases 0:09:11.350 --> 0:09:13.449 and sales. That's kind of, if you know that they 0:09:13.470 --> 0:09:15.990 bought something that was a time where you're going to enter, 0:09:16.370 --> 0:09:21.600 then that should be rife with the ability to understand 0:09:22.040 --> 0:09:26.239 how the process was applied to identify that company and 0:09:26.950 --> 0:09:29.910 and what the characteristics were that made it consistent with 0:09:29.929 --> 0:09:32.550 the process. So at a purchase and sale level, we 0:09:32.570 --> 0:09:36.369 certainly are looking at that from a portfolio construction aspect overall. 0:09:37.530 --> 0:09:40.690 Does the portfolio have characteristics relative to peers and the 0:09:40.750 --> 0:09:44.390 benchmark that are consistent with the processes we understand it? 0:09:44.690 --> 0:09:46.689 And a lot of that kind of early days, and 0:09:47.290 --> 0:09:49.430 we can go years getting to know a manager before 0:09:49.470 --> 0:09:52.869 we actually make a decision to hire them. The formative 0:09:52.950 --> 0:09:55.620 years or days of us getting to know a strategy 0:09:55.670 --> 0:09:59.349 is about us creating reasonable expectations of what a process 0:09:59.370 --> 0:10:02.250 should do in any particular point in time. And the 0:10:02.290 --> 0:10:04.620 tool set we have helps a lot with that. So 0:10:05.050 --> 0:10:08.400 we've got Bloomberg is on the desktop of all of 0:10:08.480 --> 0:10:12.099 our manager research analysts. We've got style analytics where you 0:10:12.120 --> 0:10:14.079 can get in some of the different kind of look 0:10:14.140 --> 0:10:17.679 at style exposures over time at a relatively granular level. 0:10:18.059 --> 0:10:20.219 And some of those things will surface You know, a 0:10:20.240 --> 0:10:23.420 lot of times it's not answers, but it might ask 0:10:23.500 --> 0:10:26.550 us to ask more questions to understand what was going 0:10:26.630 --> 0:10:27.890 on at a particular point in time. 0:10:28.410 --> 0:10:32.030 Okay. You know, you kind of talked about earlier, you know, 0:10:32.070 --> 0:10:35.150 having an established firm, you know, in the market as 0:10:35.230 --> 0:10:37.150 one of the kind of the initial things you're looking for. 0:10:37.650 --> 0:10:40.550 So how important is the length of a manager's track record? 0:10:40.610 --> 0:10:43.450 Can you be comfortable with a talented manager who doesn't 0:10:43.490 --> 0:10:45.610 have a really long standalone history yet? 0:10:47.280 --> 0:10:49.679 Yeah, the standalone element that you referenced there is important. 0:10:49.700 --> 0:10:51.320 I mean, it could be that they have history, they 0:10:51.340 --> 0:10:55.260 have experience, they have credentials from prior experience. If we 0:10:55.320 --> 0:10:57.280 find that, we'll go back and look at that history 0:10:57.330 --> 0:11:00.190 at another firm. It's pretty easy for us to carve 0:11:00.270 --> 0:11:01.110 out those things. 0:11:01.470 --> 0:11:01.910 You do want to. 0:11:01.910 --> 0:11:04.970 Understand, okay, were you really a decision maker? Were you 0:11:05.010 --> 0:11:07.890 pulling the trigger on buys and sells within a portfolio 0:11:07.910 --> 0:11:12.000 and a prior experience? But that's another advantage of from 0:11:12.020 --> 0:11:16.439 a sub-advisory model, we're not just kind of looking at 0:11:16.520 --> 0:11:18.939 where you're at currently and what did you apply at 0:11:18.980 --> 0:11:21.439 the current firm to generate alpha. We can go back 0:11:21.500 --> 0:11:24.900 over time and looking at other experiences. If it's somebody 0:11:24.960 --> 0:11:29.040 that has only experienced a singular market environment, it's hard 0:11:29.070 --> 0:11:31.349 to really get comfortable with how are you going to 0:11:31.390 --> 0:11:35.610 adapt as things change, as headwinds might turn into tailwinds 0:11:35.690 --> 0:11:38.490 and vice versa. So it makes us a lot more 0:11:38.570 --> 0:11:41.630 comfortable if we have a variety of market environments we 0:11:41.670 --> 0:11:45.560 can evaluate It's a little bit difficult over the course 0:11:45.580 --> 0:11:49.520 of the past 15 plus years, really, since post-crisis. You've 0:11:49.559 --> 0:11:54.479 had a very U.S.-centric marketplace, a very kind of growth-leaning 0:11:54.540 --> 0:11:56.500 marketplace to the point now that a lot of people 0:11:56.540 --> 0:12:00.420 are talking about massive concentration risks. If we get more 0:12:00.470 --> 0:12:02.429 of an AI theme that's driving so much in the 0:12:02.470 --> 0:12:06.309 marketplace and growth and mega caps theme that's driving so 0:12:06.330 --> 0:12:09.380 much in the marketplace. So, you know... you know, you 0:12:09.400 --> 0:12:10.860 go through an extended period of time and there's a 0:12:10.920 --> 0:12:15.319 lot of managers that have only experienced that post-crisis kind 0:12:15.360 --> 0:12:20.380 of environment. So, it creates a bit more of a challenge. 0:12:20.460 --> 0:12:25.700 But even within that kind of largely, you know, heterogeneous 0:12:25.780 --> 0:12:28.220 kind of market environment since then, there's still been peaks 0:12:28.280 --> 0:12:31.800 and troughs. Obviously, there's peaks, there's times going from 20 0:12:31.800 --> 0:12:35.150 into 21 and 22. So we can look at how 0:12:35.190 --> 0:12:37.989 things change from the standpoint where maybe downside protection is 0:12:38.030 --> 0:12:42.270 being rewarded to other times when maybe low earnings or 0:12:42.510 --> 0:12:45.500 no earnings kind of companies might be being rewarded. So 0:12:46.410 --> 0:12:50.340 Even in a pretty homogeneous environment for the past 17, 0:12:50.340 --> 0:12:53.910 18 years, there's places where we can see what happened 0:12:54.429 --> 0:12:59.480 when market preferences shifted from some styles to others. 0:13:01.120 --> 0:13:03.720 Okay. You know, when I was kind of doing my 0:13:03.760 --> 0:13:07.400 research ahead of the podcast, You know, it looked like, 0:13:07.520 --> 0:13:11.640 you know, Touchstone really talks a lot about organizational stability, personnel, 0:13:11.830 --> 0:13:16.090 investment discipline, infrastructure, and results in its selection, you know, 0:13:16.110 --> 0:13:19.429 in your manager selection process. When you're actually conducting a search, 0:13:19.690 --> 0:13:22.130 how do you weigh those factors against one another? You know, 0:13:22.150 --> 0:13:25.360 can one strength actually compensate for weakness in another? 0:13:25.380 --> 0:13:29.939 I would say there's a combination of absolute elements where 0:13:29.980 --> 0:13:32.600 you say, hey, you can't make up for this with 0:13:32.820 --> 0:13:36.630 better results. you know, if you are unprofitable and there's 0:13:36.980 --> 0:13:38.920 a chance that you won't be around next year. So 0:13:38.960 --> 0:13:42.800 that's an extreme example. So there's an element where each 0:13:42.820 --> 0:13:46.420 of those five, you know, pieces of what we call SPDR, 0:13:46.960 --> 0:13:48.800 if you don't know how to spell very well, but 0:13:48.860 --> 0:13:52.520 it's the stability is the S and personnel is the P, 0:13:53.059 --> 0:13:56.469 ID is investment discipline, I is infrastructure and R is results. 0:13:57.040 --> 0:13:59.510 And so, you know, if we're looking on the stability 0:13:59.550 --> 0:14:02.610 side of things, We're going to gather financial statements at 0:14:02.730 --> 0:14:07.270 least annually, sometimes quarterly for our existing managers and any 0:14:07.330 --> 0:14:10.980 manager that we're anticipating launching a fund or ETF form. 0:14:11.660 --> 0:14:14.600 If we see a lack of profitability, if there's big 0:14:14.660 --> 0:14:18.599 questions about debt on the balance sheet that would hamstring 0:14:18.620 --> 0:14:21.400 their capability to make appropriate investments in the firm or 0:14:21.470 --> 0:14:24.350 in the people, that'll be a warning sign. We also 0:14:24.410 --> 0:14:27.890 look for compensation structures and we dive in deep to 0:14:27.910 --> 0:14:30.350 kind of are they at Are there adequate incentives to 0:14:30.490 --> 0:14:35.940 keep people around? Certainly, if we see turnover, we'd say, 0:14:37.100 --> 0:14:39.640 why are we seeing personnel turnover? Is it because there's 0:14:39.700 --> 0:14:42.900 a lack of adequate incentives to sustain the firm and 0:14:42.940 --> 0:14:48.410 keep good people? Those kind of things are not characteristics 0:14:48.430 --> 0:14:54.130 that we can see being offset by other things. Then 0:14:54.470 --> 0:14:58.600 on the personnel front, you get into what are the credentials? 0:14:58.960 --> 0:15:00.880 What's the experience of the people that are playing a 0:15:00.900 --> 0:15:03.100 role at the firm? We want to make sure that 0:15:03.140 --> 0:15:08.880 we're seeing evidence of the type of experience that any 0:15:08.920 --> 0:15:11.400 fiduciary would look for when they're going to entrust a 0:15:11.440 --> 0:15:15.070 certain amount of assets of their shareholders with a particular firm. 0:15:17.050 --> 0:15:21.630 So I'd say that overall, we're looking for a mosaic 0:15:21.710 --> 0:15:26.170 across those five factors. but there are hard limits to 0:15:26.210 --> 0:15:29.109 kind of the types of organizations we work with where 0:15:29.510 --> 0:15:32.150 we're not going to sacrifice on any single one of 0:15:32.210 --> 0:15:33.690 those below a certain level. 0:15:36.410 --> 0:15:38.270 Okay. And so if you take that, and then actually 0:15:38.310 --> 0:15:41.510 when you're meeting with a manager or a portfolio manager 0:15:41.530 --> 0:15:43.230 for the first time, what are you trying to learn 0:15:43.270 --> 0:15:46.380 about their philosophy that you can't necessarily get from, you know, 0:15:46.410 --> 0:15:49.060 materials they sent you, like a presentation or even what 0:15:49.100 --> 0:15:52.340 you can gather from a database? Yeah. 0:15:52.360 --> 0:15:54.320 I mean, you want to, first of all, meet with 0:15:54.380 --> 0:15:58.600 various elements of the decision-making structure on the investment side. 0:15:58.640 --> 0:16:00.900 So you're not just hearing from one individual, trying to 0:16:00.920 --> 0:16:05.680 get a framework for who's making what decisions with regard 0:16:05.720 --> 0:16:09.780 to what goes into the portfolio. Sometimes that's sector-oriented. You know, 0:16:09.800 --> 0:16:12.320 we'll sit in on investment policy meetings if we can 0:16:12.360 --> 0:16:17.080 to see the interactions between the team, how they, you know, 0:16:17.220 --> 0:16:20.270 play a little bit of a kind of devil's advocate 0:16:20.290 --> 0:16:22.970 with each other? How does that decision-making process occur? Is 0:16:22.990 --> 0:16:25.690 there one person that seems to be leading all the 0:16:25.750 --> 0:16:28.590 decisions and is really doing all the talking? Or do 0:16:28.630 --> 0:16:32.420 you see more of a collegial environment where people are 0:16:32.840 --> 0:16:38.380 challenging each other towards better decision-making? And so, you know, 0:16:39.140 --> 0:16:42.540 if we can, we'll even kind of, you know, try 0:16:42.560 --> 0:16:44.600 to get into different forums where we may be leading 0:16:44.640 --> 0:16:46.560 with a lead PM, but then separately meet with a 0:16:46.580 --> 0:16:50.050 couple of analysts. Beyond the investment team, we'll want to 0:16:50.070 --> 0:16:54.110 talk to the traders, the people on the compliance side, 0:16:54.150 --> 0:16:57.600 the operations side, to kind of get an idea of 0:16:57.660 --> 0:17:01.100 that infrastructure that surrounds the investment process that allows it 0:17:01.160 --> 0:17:04.540 to perform on a day-to-day basis. And by the way, 0:17:04.580 --> 0:17:07.119 I mean, we're one element in investment due diligence of 0:17:07.160 --> 0:17:11.620 a three-pronged approach to our due diligence process. Our financial 0:17:11.640 --> 0:17:14.010 team is the ones that collects the financial statements and 0:17:14.050 --> 0:17:19.419 does an evaluation process. of income statements, the balance sheet, 0:17:19.480 --> 0:17:23.580 their cash on hand and so forth. And then our 0:17:24.020 --> 0:17:26.340 compliance team is the one that looks at the operational 0:17:26.380 --> 0:17:29.980 due diligence effort, is doing the daily monitoring of consistency 0:17:30.020 --> 0:17:34.639 with prospectus and so forth. So that gives you a 0:17:34.640 --> 0:17:36.020 little bit of an idea of what we try to 0:17:36.040 --> 0:17:38.960 go in with. When we get into the investment discipline itself, 0:17:39.600 --> 0:17:44.330 we're trying to bring up particular stocks that we've sourced 0:17:44.369 --> 0:17:47.250 through our own prep you know processes that we think 0:17:48.030 --> 0:17:50.730 might be good reflections of the process but we want 0:17:50.750 --> 0:17:54.230 to understand that through from their perspective but then also 0:17:54.350 --> 0:17:56.210 ones where we feel like this doesn't seem to be 0:17:56.250 --> 0:17:59.510 as you know consistent of a fit with uh your 0:17:59.590 --> 0:18:03.610 stated discipline for you know for buys and sells so 0:18:03.990 --> 0:18:06.629 we want to understand things that might be challenging the 0:18:07.570 --> 0:18:12.869 application of that investment discipline so we can evolve our 0:18:12.930 --> 0:18:15.320 expectations of, you know, what are the types of stocks 0:18:15.340 --> 0:18:17.600 they're going to buy and, you know, how that would 0:18:17.650 --> 0:18:19.380 change in different kind of market environments. 0:18:21.500 --> 0:18:23.000 No, you made a couple of good points. I kind of, 0:18:23.080 --> 0:18:25.540 I've got like two follow-ups and first I'll go from 0:18:25.580 --> 0:18:27.540 what you were just talking about of, you know, how 0:18:27.580 --> 0:18:29.440 do you really, you know, kind of walk us through 0:18:29.460 --> 0:18:32.939 how you determine whether they're actually following the philosophy that 0:18:33.000 --> 0:18:36.640 they told you they would. Yeah. 0:18:36.720 --> 0:18:40.260 So, you know, it's, we have access to to all 0:18:40.280 --> 0:18:43.320 their purchases and sales, all their holdings over time. So 0:18:43.359 --> 0:18:48.619 at any point in time, we can surface particular examples 0:18:48.700 --> 0:18:51.580 and then try to look at the portfolio overall, the 0:18:51.600 --> 0:18:56.350 characteristics of the portfolio from things like valuations, growth rates, 0:18:57.720 --> 0:19:00.030 debt to capital and things like that. Are those consistent 0:19:00.090 --> 0:19:02.649 with the tenets that they talk about with regard to 0:19:02.690 --> 0:19:06.170 their philosophy and their process? It doesn't help if that's 0:19:06.210 --> 0:19:08.770 just a random approach to things where we just pick 0:19:09.350 --> 0:19:11.409 any three stocks in the portfolio and ask them about it. 0:19:11.430 --> 0:19:13.730 So we try to be, to get a little bit deeper, 0:19:13.830 --> 0:19:16.750 to try to find examples of stocks in different sectors, 0:19:17.190 --> 0:19:20.330 to understand how different people within the organization might be 0:19:20.390 --> 0:19:24.810 contributing to the process of picking stocks for a portfolio 0:19:24.950 --> 0:19:28.990 or bonds for that matter. But, you know, to try 0:19:29.030 --> 0:19:34.150 to identify particular stocks that may be a departure from 0:19:34.290 --> 0:19:35.230 what we might expect. 0:19:37.510 --> 0:19:40.140 Okay. And the other part was, you know, really talking about, 0:19:40.160 --> 0:19:42.189 you know, you're doing your evaluation of the firm and 0:19:42.230 --> 0:19:45.730 the individual managers, you know, is there any situations where 0:19:45.790 --> 0:19:48.409 you could, you know, you really like a manager, but 0:19:48.430 --> 0:19:51.959 you ultimately decide not to part partner with them, you know, 0:19:52.030 --> 0:19:53.609 just due to the firm? Has there ever been that 0:19:53.650 --> 0:19:55.179 type of situation? Yeah. 0:19:55.200 --> 0:19:57.619 I mean, you never know if a firm is going 0:19:57.700 --> 0:20:02.610 to partner, right? At the end of the day, we're 0:20:02.619 --> 0:20:05.090 trying to find managers. We do enough due diligence to 0:20:05.130 --> 0:20:08.170 say this could be from an investment standpoint, a great 0:20:08.230 --> 0:20:10.870 long-term partnership, but it's got to work from a business 0:20:10.910 --> 0:20:13.189 standpoint too. I'll tell you one thing we did that 0:20:13.270 --> 0:20:16.740 might be a good example is back in the mid 2010s, 0:20:17.330 --> 0:20:20.389 there were a lot of Um, there's a lot of 0:20:20.430 --> 0:20:23.210 product development going on in the liquid alt space, trying 0:20:23.230 --> 0:20:28.030 to make, bring traditional hedge fund managers into the 40 0:20:28.030 --> 0:20:31.030 act daily liquid space. Of course, when you start doing 0:20:31.070 --> 0:20:35.730 the evaluation of that, what we found a majority of 0:20:35.800 --> 0:20:38.200 the time was that a lot of the strategies just 0:20:38.300 --> 0:20:42.340 did not really translate well to, to daily liquid approaches, 0:20:42.420 --> 0:20:46.119 but to, to get back to your question specifically about 0:20:46.160 --> 0:20:48.379 the business side of things and the ability to partner. 0:20:48.730 --> 0:20:50.690 We found a lot of folks coming from the hedge 0:20:50.750 --> 0:20:53.570 fund side of things that are used to getting a 0:20:54.470 --> 0:20:57.150 base fee that's pretty high and then a performance fee 0:20:57.190 --> 0:20:59.430 on top of that, looked at what the going rate 0:20:59.490 --> 0:21:05.440 was for equity or fixed income strategy, whatever was closest 0:21:05.460 --> 0:21:09.320 to what they were doing in the daily liquid registered 0:21:09.340 --> 0:21:12.360 investment company space and said, I don't think we could 0:21:12.400 --> 0:21:16.080 work for those kind of fees. You don't want to 0:21:16.359 --> 0:21:20.800 build a relationship with somebody that's mentality is completely foreign 0:21:21.240 --> 0:21:23.860 to the mutual funded ETF space. And you find they're 0:21:23.900 --> 0:21:27.940 grudgingly coming into it. They aren't making capital budgeting decisions 0:21:27.980 --> 0:21:31.310 with respect to the support or the investment strategy that 0:21:31.410 --> 0:21:36.149 are favorable to our shareholders experience. So that's a hard, 0:21:36.710 --> 0:21:38.910 as we have those kinds of discussions and you see 0:21:38.950 --> 0:21:42.840 that disconnect between how they're thinking about the opportunity You know, 0:21:43.060 --> 0:21:45.660 that's where, you know, before we even get into negotiations 0:21:45.740 --> 0:21:48.670 specifically about what the fees might be, you kind of 0:21:48.690 --> 0:21:50.429 might come to an understanding that this is not going 0:21:50.450 --> 0:21:53.230 to be a great fit. We're looking for a really 0:21:53.290 --> 0:21:56.830 strong fit where there's a lot of synergies, a great partnership, 0:21:56.890 --> 0:21:59.330 because we're going to have to collaborate to, you know, 0:21:59.369 --> 0:22:04.220 get the story out there, help people understand the redeeming 0:22:04.260 --> 0:22:08.060 qualities of this firm and these strategies. We're an extension 0:22:08.100 --> 0:22:11.950 of their brand, really, because our focus is is typically 0:22:12.010 --> 0:22:14.709 not multi-manager, as you might see with a number of 0:22:14.770 --> 0:22:18.690 other sub-advised firms. We're typically single manager, single strategy. So 0:22:18.750 --> 0:22:21.410