An advisor’s role, as we at Beacon Pointe see it, is to understand each client’s goals and priorities, to formulate an investment strategy and determine a strategic asset allocation, to recognize risk in all its forms and make sure it does not exceed the target parameters, and to implement the investment plan by constructing a diversified portfolio and recommending investment managers in the selected asset classes. A prudent investment plan, combined with a long-term investment horizon and strict discipline, should withstand the vagaries of economic and market weather over time and deliver results. An essential component of that investment plan – and a key to its ultimate success – is investment manager selection. For that reason, investment manager research is central to what we do. Every investment professional at Beacon Pointe is involved in that process. Decisions are made by our Investment Committee as a group, but not before we have spent countless hours getting to know the firm and debating the merits and possible drawbacks of partnering with the asset management firm under consideration.
Investment manager sourcing and performance evaluation (“quantitative analysis”) are the first steps in our research process. Beacon Pointe’s initial pool of candidates encompasses not only the standard sources – such as investment manager databases and directories – but referrals, industry contacts, and one-on-one meetings or calls. Many of our best ideas have been generated outside of database screening. While some of the firms we work with are among the largest and most well-known in the industry, we often have candidates that are “proven but unknown” firms – they are not found on investment manager databases and have little or no marketing effort, but at the same time they have solid performance track records. Beacon Pointe believes this is an important aspect of our value proposition to clients – looking where others may not and relying on our thorough due diligence efforts to independently verify a candidate’s investment skill and resources.
Beacon Pointe utilizes a proprietary performance evaluation model, which allows us to filter the vast universe of investment managers and narrow it down to a focused group of strong candidates for further due diligence. Our performance scoring methodology emphasizes:
- Consistency of results (absolute returns and risk-adjusted returns) and peer group ranks; and
- An attractive ratio of upside to downside capture over the long term (two full market cycles or since inception).
We measure consistency by focusing on rolling five-year periods rather than simply looking at a snapshot of annualized returns over the one-, three-, five-, seven-, and ten-year periods. The latter methodology, which is very much the industry standard, introduces a significant – though unintended – short-term performance bias. In other words, a very good or very poor last year skews the longer-term numbers and may be misleading. Investors’ preoccupation with the short-term, we believe, is one of the main behavioral hurdles to good long-term results. It would explain why, as a group, investors’ timing is irrational – moving into securities, segments, or assets classes at the top and exiting them at the bottom. Sub-optimal decisions result from investors’ tendencies to weigh the most recent past much more heavily than would be prudent.
That is why our performance analysis centers on a long-term investment time frame, downside protection, and consistency of results. In addition, while we gain valuable insight from our quantitative analysis, we place much more importance on the qualitative steps in our research process. Ultimately, only 25% of Beacon Pointe’s investment manager selection decision is based on performance; the remaining 75% of the decision is driven by qualitative factors related to the organization, ownership, team, philosophy, process, and resources of each investment manager candidate under consideration. Our team recognizes the limitations of a “backward-looking” performance assessment. That is where our qualitative research comes in. Through multiple meetings and discussions, both at Beacon Pointe’s offices and during on-site visits with investment managers, as well as through a detailed questionnaire and various reference checks, we gather and analyze information pertaining to the:
- History and ownership structure of the firm;
- Compensation policies and motivation programs;
- Qualifications of key investment professionals;
- Integrity – are the people who run the business and make investment decisions trustworthy;
- Team dynamics – who is responsible for idea generation, security research, and final decisions;
- Turnover among portfolio managers or analysts;
- Core investment philosophy – what is unique about the team’s approach;
- Buy and sell disciplines, risk monitoring, and portfolio construction process;
- Depth of the team’s research process and knowledge of each portfolio investment;
- Composition of the portfolio over time, holdings-based attribution, and style analysis;
- Firm resources in research, client servicing, trading, operations, and technology; and
- Fees (which affect the actual or net results for clients).
As a firm, we have identified certain investment manager traits that we believe lead to long-term outperformance and alpha generation for our clients. These preferred characteristics include:
- Boutique, independent organizational structure;
- Client-centric firms as opposed to “asset gatherers”;
- Significant and broad employee ownership;
- Stable and high-tenured team with minimal turnover;
- Key decision makers’ assets invested alongside their clients’;
- Highly-engaged, passionate investment professionals;
- Truly active, benchmark-agnostic, and often concentrated portfolio construction;
- Focus on capital preservation in difficult markets (the “make more by losing less” philosophy) with adequate upside participation;
- Strong valuation discipline with a “margin of safety” requirement; and
- Willingness to be contrarian and move against consensus.
Beacon Pointe’s research team summarizes all findings into a detailed report which is debated meticulously by the Investment Committee before making a decision. The Committee meets with the Portfolio Managers for each strategy under consideration. Among the ten members of our Investment Committee, we assign a “devil’s advocate” and often compile a list of follow-up question to be addressed before the final vote. Ultimately, the candidate is either added to Beacon Pointe’s Focus List of approved investment managers, tabled for future consideration, or rejected. The Investment Committee does not rush into decisions: our due diligence process takes at a minimum several quarters from sourcing to final recommendation and sometimes we may be in talks with a firm for years before working with it.
Our due diligence work is never complete, We monitor all Focus List investment managers on an on-going basis through quarterly communications (meetings or conference calls), organizational/team/asset updates, performance commentaries and attribution reports, portfolio and outlook discussions, periodic on-site visits, etc. Although our Focus List turnover is low, occasionally we are compelled to terminate a firm due to: a) a material change in the organizational structure, ownership, or investment team, b) a deviation from the stated investment style, portfolio construction process, or target risk parameters; or c) a significant performance deviation from the benchmark or peer group that is not attributable to the investment manager’s style being temporarily out-of-favor. At other times, we may identify a better alternative and the new candidate displaces the existing Focus List manager. None of these decisions are made lightly – we are very deliberate in the research we do, honest in the debates we have internally, and mindful of the impact our recommendations have on client portfolios. And every step of the way, we keep our clients’ best interests at the center of everything we do.
Disclaimer: This has been provided for informational purposes only and should not be considered as investment advice or as a recommendation. Beacon Pointe does not endorse and is not responsible for the content, product, or services of other third party sites or references. Beacon Pointe does not offer legal or tax advice. Private legal counsel alone may be responsible and relied upon for these purposes. Only private legal counsel may recommend the application of this general information to any particular situation or prepare an instrument chosen to implement the design discussed herein. CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the IRS, this notice is to inform you that any tax advice included in this communication, including any attachments, is not intended or written to be used, and cannot be used, for the purpose of avoiding any federal tax penalty or promoting, marketing, or recommending to another party any transaction or matter.