Cover | Published in August 2013

2013 Best Managers You’ve Never Heard Of

This year’s best managers believe clients are best served by investment teams heavy on experience but small in number

By John Keefe | August 2013
Wesley Allsbrook

Faced with an abundance of investment service providers—and having few insights into what results will be realized three or five years hence—pension sponsors often make the safe choice: a big firm with substantial history behind it.

But there is a core of consultants and advisers that see a place for investment managers yet to be famous. “We believe there is value to be found in smaller, more nimble managers, who have the drive and research focus that can fade with age and size at larger firms,” notes Mary Choksi, senior managing director and co-founder of Arlington, Virginia-based Strategic Investment Group, a provider of investment outsourcing services to pension plans, endowments and foundations, and other large investors.

New firms are being created all the time. eVestment, of Marietta, Georgia, which maintains a comprehensive database on investment managers, reports that between 2007 and 2012, 148 new firms that manage strategies in U.S., international and global equities joined its ranks. And that figure could well be understated, as some managers prefer to wait until they have established a three-year performance track record to list their results.

Northern Trust – Chicago has placed about $4 billion of the $40 billion under management in its manager-of-managers program with such emerging managers. “We look for those where more than 50% of the equity is owned by employees, so the right incentives are in place for them to do well,” says Chris Vella, chief investment officer (CIO) for Multi-Manager Solutions at Northern Trust in Stamford, Connecticut. “They are hungry to do what’s right for the client, and some really shine in difficult markets. We think there’s a lot of alpha embedded in these firms.”

But a fresh face and an entrepreneurial structure only go so far. In addition to demonstrating an investment track record of institutional quality, managers have to show an ability to handle the business of investment management: regulatory compliance, managing the people and gathering assets. “There are hundreds if not thousands of small managers out there, but the ones that have a chance of being successful need to have the right mix,” Vella says.

For 2013, PLANSPONSOR has chosen two “Best Managers You Never Heard Of.” One is Huber Capital Management LLC, a California firm that sticks to the U.S. value universe; the other is Trinity Street Asset Management, a London-based manager that avoids a set style and will invest anywhere. Both were founded by seasoned investors who fared well in large firms but believe clients can be better served by investment teams heavy on experience yet small in number. But before we look ahead, let’s look back to see how last year’s best managers are faring.

Best Managers Reunion–Class of 2012

The Class of 2012 for PLANSPONSOR’s Best Managers moved from strength to strength during the past year. At Somerset Capital Management, London, the firm’s Global Emerging Markets Equities strategy again substantially outpaced the MSCI Emerging Markets Index (including dividends net of taxes) for the one, three and five years ended this June.

Vulcan Value Partners, of Birmingham, Alabama, outperformed its benchmark (the Russell 1000 Value Index) for the one, three and five years ended in June, as well. And such good performance could not remain undiscovered long: Vulcan’s assets under management more than doubled, from about $900 million in June 2012 to $2.5 billion at the end of June this year. C.T. Fitzpatrick, Vulcan’s founder and CEO, notes that through the first half of 2013, the firm’s small-cap strategies were ahead of their benchmarks, while the large-cap portfolios trailed a bit in the short term. He elaborates: “But in large cap, that’s because we are allocating capital to companies whose values are growing, but their stock prices are underperforming. In a rising market—where it’s harder to find bargains—we’re thrilled, because we’re planting the seeds for better long-term compounding.”

Wesley Allsbrook

Huber Capital Management LLC

El Segundo, California

Assets under management as of June 2013: $2.3 billion

Joseph R. Huber 

CEO/CIO since 2007

Age 44

Previous position: Principal and director of research for Hotchkis & Wiley Capital Management

Joe Huber set up a firm of his own in 2007 after successful portfolio management tenures at two large managers, Hotchkis & Wiley and Goldman Sachs Asset Management. This convinced him that value equity management is practiced best on a small scale. “Academic research says that large-cap managers can’t outperform their benchmarks, because the equity market is too efficient. I disagree entirely,” Huber says. “The fallacy is that 99% of large-cap assets are managed by firms with portfolios over $10 billion, and their scale forces them to invest only in the largest securities. In my view, the holy grail of bottom-up investing is to have a big universe to pick from. Huge inefficiencies exist in the market, but large managers can’t take advantage of them due to the size of their strategies; therefore, they don’t have the opportunity to sustainably outperform.” Not satisfied with simply beating benchmarks, Huber wants to be the top firm, bar none.

Huber, age 44, applies a highly regimented bottom-up investment process to the universe of U.S. value equities, designed to exploit the market’s tendency toward mean reversion—that is, buying companies with weak returns on the cheap in anticipation of improvement. “We invest over a three- to five-year horizon, in companies that have what we call ‘good long-term assets’—competitive advantages in their brands, scale and distribution,” he explains, adding, “Combined with a decent balance sheet, which allows time for the reversion to take hold, such companies represent opport­unities for quicker success.” Portfolios are fairly concentrated, holding between 40 and 50 positions.

The firm’s methodology builds in protection against dud stocks through several levels of controls. An initial review identifies value traps—those businesses that look good on the surface but ultimately underperform. A painstaking method for estimating earnings and cash flow deconstructs complex companies into their constituent parts, which Huber believes gives more accurate assessments of earnings, cash flow and profitability than simple extrapolations of the consolidated totals. Huber also maintains, as he puts it, a “red flags” list. “That’s a compilation of mistakes that, with 20/20 hindsight, there was some sort of signal before the company blew up.”

Lastly, the portfolio is subjected to a diversification check, to ensure that the bottom-up stock selection has left no important sectors of the economy unrepresented. Huber cites the example of precious metals: “At the start of 2011, we realized we had no exposure to gold in the portfolio, after it had gone from $500 to $1,000 an ounce. We thought there was very little alpha in large gold mines. Ultimately, we invested in pawn shops, which are retailers but have 70% of their book value in the form of precious metals. They kept up with the mining stocks on the upside but offered us a lot more downside protection than the gold miners.”

The firm is owned entirely by employees, with Huber retaining a majority stake. “That enables me to make those decisions that are best for the portfolios and ultimately the clients,” he notes. For instance, the Small Cap Value strategy was closed to new clients at assets of $800 million in April—a time when recent results left prospective clients clamoring to invest. “There was only one reason behind closing the strategy at that point: Generate the best possible product for our clients.”

The firm is on its way to Huber’s goal of long-term No. 1 standing with its Small Cap Value strategy, which was the top performer in its group in the eVestment universe for the five years ended in June. While that strategy is no longer available to new clients, Huber’s Fundamental Large Cap Value product is highly ranked, as well, earning a spot in the top quartile for the three years ended in June, beating the Russell 1000 Value benchmark with annualized excess return of 1.90%.

Wesley Allsbrook

Trinity Street Asset Management

London, England

Firm assets as of June 2013: $1.3 billion

Image, left to right:

Ed Bell

Partner and portfolio manager since 2007

Age 43

Previous position: Partner and managing director of J.P. Morgan Cazenove

Sarah Lavers

Partner and portfolio manager since 2012

Age 52

Previous position: Portfolio manager for NewSmith Capital Asset Management

Richard Bruce

Founding partner and portfolio manager since 2002

Age 50

Previous position: Founder/Manager of the GLG Partners Performance Fund

The global equity markets may be large and complex, but, in the view of Trinity Street Asset Management, global equity strategies are best managed by a small team at an independent firm. “A large portfolio management group involves teams of specialists, and the need for communication among the analysts and portfolio managers creates all sorts of problems,” says Michael Hughes, Trinity’s marketing chief and a partner in the firm. He elaborates: “An analyst who is really skilled at presentation might manage to get more stocks in the portfolio than is justified by the quality of his ideas. Or is the analyst at the end of a crackly phone line in Singapore and having difficulty getting the point across? And all analysts have got to get some ideas into the portfolio or they won’t feel relevant, even when the best thing might be not to invest at all in their region or sector.”

Trinity Street was founded in 2002 by Richard Bruce, a veteran investor in global equities, after 15 years of working at large firms such as Rowe Price-Fleming, Jardine Fleming and GLG Partners LP. The firm’s global strategy—and a Europe, Australasia and Far East (EAFE)/international version, which excludes U.S. stocks—is managed jointly by Bruce, Ed Bell and Sarah Lavers, who joined Trinity in 2007 and 2012, respectively. Bell had managed the technology research effort at J.P. Morgan Caznove, while Lavers headed emerging markets research at Schroders and was a founding partner at Latinvest; she joined Trinity from a portfolio management position at NewSmith Capital.

The design of Trinity’s strategy—portfolios of just 30 to 35 stocks, with targeted turnover of about 30% per year and no predetermined slant toward growth or value—allows portfolios to be managed by a small team. “Each portfolio manager is looking for, say, five genuine best ideas each year, so we don’t have to analyze everything and cover the whole world,” Hughes explains. “But we know what we are looking for and have the research expertise to gain the conviction in our ideas that we need. What we bring to bear is experience and genuine ability, rather than a large quantity of people.” Accordingly, the portfolio managers stay plenty busy, making about 600 company contacts a year.

The market’s reliance on sell-side analysts for estimates of companies’ earnings creates a systematic flaw and opportunity, says Hughes. “Analysts follow an entire sector and are not on top of every company. And it can happen that when a company is changing rapidly, the forecasts the market uses for valuation can get behind the curve.” Trinity believes its portfolio managers are capable of accurately forecasting what will happen two or three years out. “The beauty of all this is that the source of our outperformance is corporate change, which is happening at least somewhere all the time,” Hughes says.

Also central to Trinity’s success, Hughes contends, is the three portfolio managers’ direct ownership of the business. “Their remuneration is linked to the performance of the stocks they select, and they invest their money alongside the clients, so their interests are completely aligned and they have to make it work.”

Performance has been excellent: eVestment ranked Trinity Street’s Global Equity portfolio in the second percentile among global managers for the five years ended in June. Further results are detailed in the table at right.

Trinity’s total staff numbers just eight: three investors, three marketers and two operations staff—enough to serve the firm’s 17 clients. “We will visit the issue of our capacity when assets hit $3 billion,” says Hughes. “But a good deal of our business is on performance fees, and given that we believe performance could suffer with much larger assets under management, why on earth would we let that happen? We want to grow, but we don’t want to get too big.”