Shannon Saccocia — Allocator Series — November 30th, 2022

[00:00:00] Shannon

There’s a tendency to want to be like other people who are in that position. For instance, if your head of research is a certain way and their skills are X, Y, Z, you believe that you have to have those same skills to be in that position. Someone told me a long time, before I became the CIO, they said the role is whatever you make of it.

So, just widening your aperture to say what type of director of research do I want to be? What type of analyst do I want to be? What are my strengths and what can I bring to the table for the company? 

[00:00:41] Intro

Imagine spending an hour with the world’s greatest traders. Imagine learning from their experiences, their successes, and their failures. Imagine no more welcome to Top Traders Unplugged, the place where you can learn from the best hedge fund managers in the world so you can take your manager due diligence or investment career to the next level. 

Before we begin today’s conversation, remember to keep two things in mind. All the discussion we’ll have about investment performance is about the past and past performance does not guarantee or even infer anything about future performance. Also, understand that there’s a significant risk of financial loss with all investment strategies, and you need to request and understand the specific risks from the investment manager about their product before you make investment decisions.

Here’s your host, veteran hedge fund manager, Niels Kaastrup-Larsen.

[00:01:35] Niels

For me, the best part of my podcasting journey has been the opportunity to speak to a huge range of extraordinary investors from all around the world. In this series, I have invited one of them, namely Alan Dunne, to host a series of in depth conversations on the topic of what it takes to be a world class allocator.

In today’s world, portfolio construction is fast moving to the top of the agenda of many investors as they try to analyze and understand the riskiness of their portfolios. With ever increasing uncertainty around the globe, being well diversified across many different strategies and themes, in your portfolio, can mean the difference between ruin and survival when the next crisis emerges.

The aim of these conversations is to try and understand the experiences that have influenced these highly specialized allocators and the processes they follow to harness the best returns for their clients so that we can all become better informed investors. With that, please welcome Alan Dunne.

[00:02:38] Alan

Thanks for the introduction, Niels. Today I’m delighted to be joined by Shannon Saccacias. Shannon is Chief Investment Officer of SVP Private, the private banking arm of Silicon Valley Bank in Boston. SVP is a $70 billion RIA and Shannon has been involved in international markets, for going on a couple of decades now, in a variety of roles.

She’s a frequent speaker and commentator on markets. Shannon, it’s great to have you here today. How is it all on your side? 

[00:03:06] Shannon

Doing well, thanks. Thank you so much for having me. Good morning here in a very sunny Boston this morning here in November. 

[00:03:13] Alan

Good stuff. It’s great to have you on and it’s typical for us just to get started to hear a little bit about the background of the person we’re speaking to.

So could you just give us an outline of your experience, how you got involved in financial markets and what took you to your current role as CIO? 

[00:03:32] Shannon

Absolutely. It was a little bit of a path for me. Going into college I really expected to be in the medical field, actually. I was pre-med looking to be an epidemiologist, which prior to the pandemic over the last couple of years, really no one knew what an epidemiologist did at the time, unless they had seen the movie Outbreak, which, if you recall, followed some CDC epidemiologists. 

Coming into my sophomore year of college I fell in love with economics and decided that I wanted to do something, as it related to economics in my career. I really anticipated actually being in academia, but got a job, right out of school, at State Street, which was a large custodial bank here in Boston.

I spent about six years or so, really on an institutional consulting path there, and decided that I wanted to switch over and be in the private wealth world. So, I joined a very small firm – at the time, I was the 10th employee of about a $900 million RIA. I really got to wear almost every hat, from an investment perspective, in the 16 years since I joined that small RIA.

So, I’ve done everything from fixed income and equity trading, equity analysis, equity portfolio management. I spent the bulk of my career in asset allocation, portfolio construction and manager selection, allocating capital building portfolios, attempting to find new opportunities that would be complementary and diversifying for our clients.

And coming into this role, I’ve been the chief investment officer now for about four and a half years. 

[00:05:08] Alan

Okay, great. In terms of the types of portfolios that you’re running, obviously it’s a private wealth RIA business. Could you give us a sense on the types of portfolios, investment objectives? What’s the kind of typical profile of the clients that you deal with? 

[00:05:22] Shannon

It’s so interesting because as we’ve come together (between my legacy firm, Boston Private, and SVB) to form SVB Private last year, one of the things that we’ve noticed is that we have a much broader set of clients and solution sets that we really need to apply in order to meet their goals.

We were historically in the, what I would say, already wealthy camp. Many entrepreneurs, business owners, real estate developers, that were our sort of traditional clients, now we have the new clients that we have incoming from the innovation economy where they’re still very much in growth mode with looking to potentially continue to invest in different companies.

We also have a lot of VC and PE principles as part of our clients. The solutions that we really provide are trying to think about it in terms of three, what I would say are three buckets that generally tend to lend to outcomes, whether we start with liquidity, as we all know, particularly those of us who suffered through the financial crisis, liquidity can be at a premium when it’s least easy to unleash it. 

One of the things that we really talk about with our clients is making sure that we understand the liquidity they need and also to be able to utilize that liquidity across a number of parameters to make it work best for them. Then on the other side of the equation, all the way on the other end of the spectrum, is what we call aspirational assets. For many of our clients that may be assets that they already hold, or they may be assets that they have through their professional experience.

In that bucket, what we’re really looking for is asymmetric sources of return and risk. If you think about the parameters around that, that could include lower or no liquidity. It could include a potential for perhaps more concentration than we would accept in a more traditional marketable portfolio.

And then in the middle is the growth part. I would say that’s where you get, whether it’s alpha or beta, but really in from a marketable securities portfolio. Sizing those three, across a client’s situation and for a client’s situation, is really how we think about asset allocation.

So although we do utilize what, I would say, is a traditional asset allocation framework for our client reporting and the way that we lay out the portfolios for clients, those three, what I would call buckets, are really the way that we determine the right outcome for clients, or the right potential outcome for clients.

So, we spend a lot of time thinking about if there are specific investments that we’re looking to vet or potentially include on the platform, where do they fit in one of those three? And are our expectations for those investment solution strategies consistent with what we’re trying to derive from those classifications?

[00:08:24] Alan

Okay. Interesting. You mentioned how you’ve had that evolution in the client mix over time, so, presumably their weightings in those three buckets are a bit different. Is that fair to say? 

[00:08:35] Shannon

It is fair to say, although one of the (I would say) misconceptions about younger clients (and I don’t know that I fully embraced this misconception previously, but many people do) is that younger clients have a higher risk appetite.

Actually what we’re finding is that, having gone through the financial crisis when they maybe had just been entering the workforce, and then having the pandemic occur, there’s a lot of younger clients that I think are perhaps more risk averse than we would model them through a traditional financial planning software, if you will.

So, [it’s about] really trying to understand what are the drivers, what is the reason that they are investing, what are the drivers for their wealth in terms of long-term goals? And it seems that we’re entering a phase, at least just from my anecdotal experiences, that this idea of accepting a reasonable return for perhaps a little less risk seems like it’s more palatable to younger folks.

Perhaps that goes back (and this is just conjecture), perhaps it does have to do with the fact that they do have a long runway for earning. They’re not worried about retirement per se. For many of them, they’re not even really worried about things like education or housing.

They’re still in that sort of prime spot of just consumption. I think, not really knowing that they’re going to continue to work for a long period of time and that the expectations are that they’re going to make enough, from an income perspective, to really supplement, allows them to perhaps be a little bit less risk-on than clients who are closer to retirement and looking to really maximize their portfolio.

[00:10:32] Alan

Interesting. The opposite of what you might expect. 

[00:10:35] Shannon

Absolutely. 

[00:10:36] Alan

Yeah. Yeah. We can get into markets in a minute, which I’m sure we’ll get into in depth. One of the things I’ve been thinking about is that we’ve had this very sharp change in the landscape. Interest rates in the US have gone basically from zero, and the messages are going to 5%, which is a huge shift. For the last number of years, a lot of investment behaviors were motivated towards how could you generate 2%, 3%, 4% and now you can pick up 5% just by (well, not yet), but if you believe J Powell, you’ll get it from T-bills pretty soon.

So, do you think that’s going to have a big shift in terms of investor behavior, or are you sensing that already, or how are you thinking about that? 

[00:11:16] Shannon

I do think it’s going to be a big shift, and I know that this has been an incredibly painful year and I think it’s important to acknowledge that. I think that investment professionals tend to operate in the historical precedence and the acknowledgement that we know that things, like if you look at equity markets over a period of time, they go up over time. If you look at significant drawdowns, you can go back in history and see that those drawdowns were regained and that there were additional gains on top of that, post a severe drawdown.

But, in the moment, that’s obviously very difficult. I think it’s important to acknowledge that this has been a really challenging year. However, I would say that this entry into a more normalized environment, particularly from a yield perspective, is going to result in two things.

One, obviously as you noted, there’s going to be opportunities, there are alternatives. There are, probably, more alternatives that afford a return that is reasonable with less risk. I think that’s not a situation that we’ve been in really for much of the last decade. We did see a rate hiking cycle prior to the pandemic, but it was very slow and sluggish and there was really no, I would say, momentum or enthusiasm around it because we were really hamstrung, in terms of inflation on the deflationary side. It was difficult for the Fed to get really aggressive. 

I would say this more normalized yield environment produces more opportunities, but I also think it produces (and maybe this is a longer term trend, it’ll be interesting to see if this is born out in the data), I think it probably creates more responsible capital allocation across the board.

There’s much to be said, right now, in terms of what sort of excess – how we’ve been funding with zero interest rates, here in the United States, and globally, frankly. We’re not the only people who’ve engineered some speculation, from an asset perspective here in the US.

But I think it’s thinking about, does this create a better crop of management teams? Does this create more realistic expectations for investors in terms of long-term returns? Do we enter an environment where capital is seen as dear rather than disposable? And does that create, perhaps, even stronger forces for economic growth?

That’s how I look at this. The short term is a lot of pain and probably some continued pain and headwinds over the next couple of years as we reset to this environment. The important thing to remember too is that whether it’s 4% or 5%, or I guess even 5.5% or 6% (although that seems rather unlikely if you take our opinion on that), that shouldn’t be enough to hinder the economy from growing at some point.

And so I think that you just have to look out the other side and say, “Okay, are there some, some positive unintended consequences or intended consequences from this activity?” And I think I’m in the boat that there are. 

[00:14:44] Alan

Okay. You touched on capital allocation and, we might see more responsible capital allocation, and obviously what’s come with this rising rate environment has been a reassessment in technology stocks in particular.

And you could argue that maybe that’s evident of that. Or you could say, there’s been a shift in sentiment. There seems to be a lot more pessimism around the space and, some of the, hopes in terms of the expectations for growth, and adaptation, and network effects, and all of these things. There seems to be a reappraisal of that in how do you balance all of that in terms of thinking about that there’s going to be ups and downs in the stock market, over time. You want to capture the growth in companies, but you want to be cognizant of these potential structural shifts.

So how are you thinking about that particular theme? 

[00:15:41] Shannon

So in terms of a structural shift, especially when you think about that you could take it from a number of different directions. If you think about it from the inflation impact, technology is inherently deflationary and we’ve heard a lot about that.

Now, there’s a broad sweeping evaluation of that statement that implies that inflation’s not a problem. I don’t interpret that statement to be that way. If you think about technology as a force for what we’ve seen, even over the last 20 years, I would say that the lack of wage inflation for the 10 years prior to the pandemic was almost entirely attributable to a combination of globalization and technology, right? So, you have those two sorts of forces. 

I think technology also is… We’re really entering into an environment where technology as a sector, technology as a segregated investment opportunity – Looking at it through that lens is probably limiting in terms of what you think about technology in a future state.

If you think that technology is going to continue to create disruption, innovation and perhaps most importantly (in a constrained labor environment) more productivity and more efficiency, then you should be looking at the application of technology across all businesses, not necessarily just looking at those companies that are producing that technology or creating that technology.

And so, I think the other thing that’s happened is that there was a lot of spending in terms of technology. Corporations were spending a significant amount, particularly at the enterprise level, on technology. Even with the consumer, we’ve increased our technology spend, as a percentage of our wallet, over the course of the last 10 years.

I think that it created a proliferation of Me Too technologies. I think that this is, probably, a right sizing of the repackaging of similar (whether it’s software as a service), but just similar go-to-market because there was so much capital. So, there didn’t need to be, necessarily, as much attention paid to who would win because everybody was winning.

I would caution on saying, we’re entering this new world, we’re back to fixed asset investments. Fixed asset companies are going to continue to thrive and be the leaders. That may be the case from an asset/price perspective, at least in the near term.

But that’s partially because technology companies have performed so well, and a lot of that performance has been loaded into the prior five or six years. I look at it more in terms of, I think that my belief is that technology continues to fuel the economy across industries and sectors, and that companies that are effectively and dynamically utilizing technology, to improve their businesses, will end up being better off. Companies that are producing technology solutions that can help other companies do that, I think will continue to be a driving force for growth in the economy.

[00:19:12] Alan

Okay. Taking a step back (we kind of jumped from the general philosophy straight into markets), if you were to go back and think about, you talked about the three buckets, in terms of liquidity, aspirational assets, and growth, how does that then move from there to thinking about asset allocation and constructing portfolios?

What’s the framework or overall investment philosophy that drives that portfolio construction process? 

[00:19:44] Shannon

Sure. When I made my move from the institutional consulting world into private wealth management, that was right around 2006. We were really caught up in what the next phase of investments looks like?

And if you recall, during that period, US investments really weren’t outperforming. This was the renaissance of international, developed, and emerging markets equities. Many clients were asking, “Why do I even own stocks in the US? It was a challenging time for US companies. It was a challenging time to get excited about growth and momentum here in the United States. 

One of the things that we try to think about is how has the landscape changed over time? The other thing that was happening then was really this passive versus active debate really started to set up and build its foundation.

And so, coming out of the financial crisis and really thinking about the reallocation to a lot of passive strategies, I think we just took a big step back over the last, probably seven or eight years and said, “What does that active/passive debate mean to us? And what are the implications of that?

And our view is that it’s important to actively allocate capital at the highest level. However, if you think about that second part of the decision tree, what are you trying to accomplish with that capital allocation? And so, are you attempting to capture the beta of a particular market, or do you think that there’s enough alpha to uncover?

And so, the way we think about portfolios is that we’re always balancing the opportunity with the costs. Costs are both fees and taxes. Most of our clients, private clients, we live in a taxable asset world. If you think about that, then you say, Okay, I probably want to be the most active in the places where the alpha should be present at a higher rate, and that’s in less efficient asset classes. 

So, fully believe in active allocation, and fully believe in the ability for managers to engineer alpha in less efficient asset classes. Certainly, believe that for many US investors, a lot of their core exposure is probably going to be in low cost, tax efficient exposure, just to capture that beta.

And so it’s a little bit more of a like second and third derivative type conversation, in terms of our portfolio construction. It just comes back to, where do you spend your money, if you will, from a cost and tax perspective? 

[00:22:46] Alan

It’s like a core satellite with some passive exposures, for certain core exposures, and then being willing to pay for certain strategies and markets. Is that it? 

[00:22:59] Shannon

Yeah, I think a lot of people dilute that down completely to say, “Okay, all of our marketable exposure will be passive or factor based exposure. Where I’m going to bother with it.” We take a little bit more of a nuanced view.

For instance we believe that the bond market, for instance, is still very inefficient and there’s still a lot of opportunities, if you’re buying individual bonds, to be able to not only potentially pick up better performance, potentially. More importantly, if we think about that liquidity bucket that I talked about earlier, the best way to align your clients’ assets and liabilities is through a portfolio of consistently maturing vehicles that provide cash without a transaction cost, right? Individual bond portfolios are great examples of that’s maybe not the most efficient way to express that exposure (if you will), but it’s a way that you can actually add real value from that perspective.

Yeah, I would say, and this has been, at least for me, a change in viewpoint over time. If we had this particular podcast, probably, with much inferior technology, back in 2006, we would’ve been talking about how I very much believed in active management at all levels, at the top level, as well as at the implementation level. But, the landscape has changed. 

The information advantage, particularly for US stock analysts and portfolio managers, has really been diminished through regulation. If you’re all working off the same information, and the market moves quickly and reacts, whether or not you believe in the efficient market hypothesis or not, the US large cap equity market reacts pretty darn quickly to new information.

S, I think that’s where there’s tougher sledding. Now with that said, there are some benefits of active management in that space, particularly if you are working around existing positions; if you have a really strong team; if you have a viewpoint that there’s a particular factor (like dividends, for instance) that is incredibly important for your clients.

Active management, even in US large cap, can make sense, but it’s just always thinking about, again, going back to the intent of your allocation. Why am I making this allocation? That should be driving what vehicle you’re using or what strategy you’re using to implement. 

[00:25:53] Alan

Okay, fair enough. It’s interesting, I saw an article that it’s 50 years since A Random Walk Down Wall Street was written, I think Burton Malkiel has been interviewed in the Wall Street Journal. The message in that book seems still to hold true. He was, I think, a fan of passive and avoid Uncle Sam was one of the other core tenets of that one. It sounds like you’re still very much embracing that.

You mentioned it’s been a very tough year, which obviously it has for both equities and bonds. Bonds having a worst year ever, at least in the last kind of century or so. Is that something that you had, transitioned portfolios, in terms of diversification, had thought about that kind of scenario from an asset allocation perspective? Secondly, now that we’ve had that big sell off, does that motivate a very different kind of asset allocation looking forward?

[00:26:56] Shannon

Just to be candid, we certainly were not expecting inflation to be as hot for as long as it has been this year. I think, coming into the year, we anticipated inflation to be the biggest challenge for the markets and particularly as it relates to Fed policy. We were more optimistic, frankly, coming into the year about Europe. We really felt like there were opportunities and we were going to see a broader economic recovery.

Yes, we were going to see inflation, but all of the economies are going to be dealing with inflation. The war in Ukraine really upset a lot of our thesis, coming into this year, just in terms of the undue and, frankly, compounded pressure on Europe and the UK based on what we’re seeing from an energy supply situation.

We actually came into the year knowing that bonds were going to be under some pressure, and we had been structurally underweight for most of our portfolios to, what we would call, our long term strategic targets. The reason for that was we didn’t feel like we were, from a yield perspective, really being compensated for the duration risk that we were anticipating.

And that proved to be true. What I would say is that we had added some real assets exposure over the last several years. We had added some exposure to our platform at least. Obviously, for each client the scenario is different, but we had added some exposure to what I would say are more structured opportunities that had higher correlation, whether it was to inflation or to commodities. So, those proved to be fortuitous during this year. 

Then in the middle of the year, towards the end of the summer, we just looked at the risk reward opportunity in the fixed income market (for instance) and actually increased back to our neutral weight, from a bond perspective, just feeling like there could continue to be some residual pain, but a lot of the pain had probably been felt, or at least the bulk of that, in our assessment. Our view was that, with yields where they are, you are getting compensated (if you will) for some of the duration risk, which you certainly weren’t getting compensated for in 2020 and 2021.

So yeah, that’s definitely changed. If you think about sharpe ratio, for instance, and, trying to maximize the amount of return for the risk, a lot of people think about that as just maximizing the return part, but lowering the risk level, that can do a lot to improve your sharpe ratio as well. I think that was where we really wanted to try to increase the potential opportunity to at least lower our risk and produce a similar return, if not a better return. 

[00:30:02] Alan

Yeah. That moved back to neutral, is that reflecting, is it a belief that the world hasn’t fundamentally changed and that maybe some of the themes that might have been in place before this spike might come back?

Or I guess to put it another way, are some of those disinflationary forces (you mentioned globalization technology earlier), do you think they’re still lurking in the background there once we get over this very strong period of aggregate demand? Or how are you thinking about all of that?

[00:30:34] Shannon

I would say that you don’t even have to look at it in terms of getting back to deflation. I just think we’re going back to a lower growth environment. One of the things that I think gets lost in the shuffle a little bit, from 2018 and 2019 in particular, is that we were in a manufacturing recession here in the United States due to the trade war with China. We were experiencing incredibly slow growth from a GDP perspective. There really wasn’t a catalyst for any sort of escape velocity for the economy. If you think about a low growth environment, that implies that you don’t have a secular economic tailwind to be able to produce top and bottom line results.

So, I just go back to if we’re back in a low growth environment, then it comes back to execution. It also does imply that inflation will ease. The opportunities for a more nuanced potential, on a company by company basis, becomes more important.

So, not that I would say… because we haven’t obviously seen the rising tide lift all boats in the course of the last couple of years, but you certainly have felt like that, big rush in demand, and activity coming out of the summer of 2020, and the return certainly helped a lot of businesses really regain growth on the top and bottom line.

That’s why we’re seeing expectations for earnings growth come down next year. It’s not entirely due to the fact that we’re expecting this contraction in economic activity or implying there is a depth of that contraction that’s expected. A lot of what you have has probably been pulled forward and these growth rates are probably not sustainable.

So, going back to a lower growth environment really puts the emphasis on companies to engineer their own growth, whether it’s through a number of things: M&A, buybacks, new products, capbacks – there’s a lot of ways you can engineer growth from a revenue perspective. But most companies were not doing a great job of that prior to the pandemic because they were really focused just on financial engineering. 

[00:33:01] Alan

You mentioned about having some diversification in the portfolio with real assets and then certain structured opportunities that had a beta to commodities. Have you placed those in the portfolios or do you look at more hedge fund or alternative risk premia type strategies, in that context, for diversification? Or is that a challenge in terms of the kind of costs and taxes and vehicles, or how do you think about accessing those types of strategies, if at all?

[00:33:35] Shannon

So that’s a really good question. I would say that our interest in those areas has been cyclical. If we go back to just prior to the pandemic (the couple of years there), our exposure to what I guess you call traditional hedge fund strategies (equity, long/short, relative credit, managed futures), it was pretty low and it was pretty low because we felt like there really weren’t (especially from trend following perspective)… I did a podcast a couple weeks ago with one of my colleagues in the bank on FX, for instance, and just looking at if you think about central bank policy and how consistently similar that was. Does it create a lot of opportunities there? I would say that goes for the commodity markets too. We really didn’t see a lot of demand. Even, interest rates, and duration, and derivatives on that; it was very difficult to make money in that environment.

What’s really changed is (what we touched on at the top of the podcast) there is potentially some bifurcation differentiation nuance, now, in what’s happening in the markets. That really does speak to managers who are making not only a positive call on something, but also a shorter negative call.

I would say that the other thing that we anticipate happening (so that sort of speaks to equity long/short), whether you do that on a limited sort of sector basis or whether you’re in a broad portfolio is really a question for what your appetite is. I think if you look at sector and industry specific long/short funds that’s a really interesting space right now. 

The other thing that I would say that may become more of an opportunity, but I don’t know if it’s as good an opportunity in the hedge fund structure as it is in more of a traditional drawdown structure, is in the credit market.

For such a difficult year and so much uncertainty, we really haven’t seen a meaningful impact on spreads, and we haven’t hit this wall. If you go back several years, how many market notes did I write about this refinancing wall of worry for Triple B debt? Everybody was concerned about that coming in, prior to the pandemic, that eventually the Fed was going to raise rates. All of these companies were going to have to refinance at higher rates. It was, huge wall of worry. It’s still there. No one talks about it anymore because we really haven’t seen the spread widening that everyone would’ve expected in this uncertain environment.

But I think that there’s probably some opportunity in credit. I think that is because… 

[00:36:52] Alan

Why do you think that is? I was noticing that. 

I was looking at some data earlier on, and looking at the different ETFs and the HYG hasn’t seemed to have suffered as badly as emerging market debt or investment grade. I was a bit perplexed about that given all that you have said about it that was such a theme in the end of 2019. 

Now obviously, I guess a lot of firms refinance and the Fed did bail out the credit markets in March, 2020, but presumably a lot of that debt will have to be refinanced at some point again. Is that not a problem on people’s radars? You’re clearly thinking about the opportunity that will eventually follow that.

[00:37:34] Shannon

I think people are less worried about it because I don’t think it will be a wall. I think there’ll be fissures in that wall that create opportunity. I think companies came into the pandemic, for instance, with much stronger balance sheets than one would’ve potentially expected. Corporate and consumer balance sheets are much better off – in much better condition than we were in 2006 and 2007, for instance. I feel that, with the ample cash… 

Okay, let’s be honest. There’s still a lot of dry powder out there in the private asset space that would love to come in and take advantage of any sort of distress or softening and probably wouldn’t wait until it is truly distressed. So, there is a little bit less concern, I think. If you talk to distress debt managers, for instance, they’ve been waiting for 10 years for an opportunity to buy anything that remotely sounds like, or seems like distress. 

I think it’s less about true distress and more about finding, potentially, some pockets in the credit markets that are softer and could potentially be benefited by managers, in particular, who know how to work out credit. That is quickly becoming something that people don’t know how to do. They don’t know how to assess the risk of a company that needs to refinance and can’t necessarily refinance. What is that if you step into that void for them. What should you charge? And, how do you monetize that?

So I just look at that as a longer term opportunity to say, not everything that’s been afforded an investment grade credit rating, or even higher high yields credit rating, maybe deserves that. It’s not going to be a ‘one size fits all’ opportunity, which is why, I think, operating in the private space for that probably makes better sense than expecting there to just be some sort of huge spread blowout and being able to capture that in the public market.

[00:40:02] Alan

You mentioned at the start of those comments (about trend following) pessimism around the space, maybe in 2019 – the changed environment that we’re seeing in FX, and as you say, rates were ranked at zero around the world. Now, we’re seeing those divergences. I’ve also seen the argument made that, with this kind of new theme of deglobalization that, maybe, there’s less of a tendency back towards equilibrium in currencies because if something’s cheap in China, western companies don’t want to produce it there anymore because of all of those issues around supply chain.

So, this enhanced currency volatility, maybe part of the new era along with, obviously, we’re seeing much more volatile commodity markets as well. With all of that, would you be more open to the kind of managed futures macro space now, or is that always one that people have a bit of uncertainty about?

[00:41:02] Shannon

I find it to be one of the most interesting asset classes because if you are a true ambassador evangelist for diversification, then you should have managed futures in your portfolio because they are, essentially, not correlated. The problem is that lack of correlation, in periods where other assets are going up, has always been a challenging one particularly, I would say, for private clients to really wrap their head around.

When you’re looking at the underlying holdings of one of those strategies, there’s nothing that is going to resonate that a private client can grab onto and be like, “Yeah, I get it. I really understand that.” With that said, I think that we could be ushering in a new environment where that could be more competitive. I don’t know what that implementation or allocation ends up looking like. I do know that it is something that I was just attending a conference here, in Boston, a couple weeks ago, and was talking with one of the managers in that space, and we’ve known each other for 15 years.

And I said, “Hey, how’s it going?” And they’re like, “Hey, do you want to chat?” And I’m like, “Maybe.”It seems like we’re entering into this environment, and this is a space where one of the things I always tell people is that I think it’s important to always acknowledge that, as an allocator, it’s your job to make the best decisions with the information that you have, but you can always supplement that information with experts from the space.

So, my podcast the other day with a member of our FX team, that was not only for our clients’ benefit, but it was for my benefit too, because I know this is a shifting dynamic. I would not be surprised to see more, particularly in the private wealth space, more allocators looking at the managed future space again and really trying to determine what has changed.

The players have changed too, right? So, it’s sort of, I would say, an area where a refocused emphasis (at least from a due diligence perspective) is probably warranted because we are likely to enter into an environment that is more akin to what we saw prior to the financial crisis. Those strategies were able to deliver performance. I think that’s worth an acknowledgement in this environment. 

[00:43:46] Alan

Absolutely. Yeah. For sure. That’s certainly what we saw after 2008 there was a lot more interest in the space. Some people might say, from a fundamental perspective, there may even be more structural shifts underway at the moment, but that’s obviously speaking from the managed futures perspective.

But you touched on due diligence there. It’s a good segue into manager selection. I know you come from a manager selection background. Do you find that as a different kind of discipline, manager selection, relative to doing asset allocation? 

[00:44:23] Shannon

I do. I really think that the way that I’ve always looked at it is that you can find an incredibly interesting theme or market opportunity, or you could really focus on an incredibly interesting manager and they have a great process. Unless there’s an intersection of those two, you’re not fully capturing the opportunity. 

I always look at it in terms of, I think that something like trade finance, for instance, is just incredibly interesting. It is a very esoteric niche opportunity set. The problem is that you then need to find a manager that has institutional quality and sustainable process. You can feel comfortable putting in your portfolios and being partnered with them for a long time. That’s the disconnect there. Then there’s even more strategies than I can count where you’re like, “Oh, this is a really interesting strategy. It’s an interesting team.” But, based on our worldview, over here in the market, this is going to be a long time. 

I would say that the way we look at it is from sort of longer term allocation and thematic ideas tend to drive idea generation on the manager side. If there is a manager that we find, through our process, that we think is really interesting, we wait for that market opportunity. We’ve had managers, on the watch list, for a couple of years until we felt like the environment was supportive for them.

We really do try to create a level of curation in our portfolio that makes sense. It’s not too limited, but it’s also not meant to be inclusive of the entire investment universe at any given time. It’s really focused on, if we’re allocating capital over the next few years, what are the types of strategies we should be utilizing?

[00:46:30] Alan

You say, “if you come across a great manager or great team,” so, what does that look like or what are the kinds of criteria you have for assessing, I guess, the qualitative, quantitative factors? Taking a step back, and the managers you’ve rated over time, are there any characteristics that you would think stand out in great managers?

[00:56:58] Shannon

Yeah, so our team has done an incredible job of focusing, over the last few years, on refining our approach and what makes it different. I think one of the things that they’ve very much focused on, which I think lends itself to probably good positioning, if you will, going into the next few years, is this idea of continuous improvement.

The fact that we believe we are in a very dynamic period for the markets, for the economy globally, for what’s happening in terms of expectations for asset classes are changing, expectations for return are changing. Seeing managers that can be introspective (I hate to use the word humble), but acknowledge where their process may need to change.

I think from an institutional lens the check boxes were always, any process, people, philosophy changes and if you said no, that was a positive. Actually for us, saying no over and over again for years and years, against the backdrop of a shifting environment, doesn’t make a lot of sense. The other thing is, diversity of thought. Thinking about the fact that, at some of the best firms, bringing in team members who haven’t been working “on Wall Street” for their entire existence, provides a different lens.

I know that when I go out into the field and I meet with actual companies I get a much better sense of what I’m reading in the data in terms of how that is actually being expressed by these companies and the challenges. It’s the same thing, right? Go out there and find experts in the space.

So we look at, if it’s a given manager, what’s worked over time? What parts of their process do they think are critical to being able to continue to produce similar strong returns? But what ways have they changed their process, or are looking to change their process and is that ongoing introspection actually a part of their firm, a fabric of their firm? Or is it something that only occurs when a calamitous mistake has been made? 

So I think that allows us to see the manager as something that’s evolving. They’re evolving their process, and so we can see it as a longer term relationship because we know that they’re going to continue to evolve just as we’re evolving in our thought processes.

[00:49:54] Alan

Interesting. One of the things we find in the managed feature space, as well, is that there’s constant tension between looking for ongoing improvement and then style drift or excessive tinkering. Yeah, I think it’s great, and a very good point about that kind of introspection, but even without the calamitous error, as you say, if you can have that when it’s not just been forced by some kind of big down month or a big down year. 

In terms of that process for selecting managers, obviously, it’s easy to have your checklist of people process whatever else that everybody does. But then you get to the end of it and then you realize, actually, you’ve just been influenced by some kind of behavioral bias here. Do you find that in the manager selection process, and have you developed any kind of skills for keeping those in check? 

[00:50:56] Shannon

We have a process by which our manager selection team lays out their process for selection of a manager to our broader investment policy committee. And I think it’s a really good one because it affords us the opportunity to ask questions. I think that it has improved the process over time, in terms of being able to question the team, being able to point out things and seeing those types of questions being further integrated into the process on a go-forward basis. There has been a pretty clear, positive result from that.

I think the other thing, too, is that (like I said) I think it’s when you’re working with private clients, in particular, and I think just across the board, I think that investment people have a tendency sometimes to end up in sort of intellectual silos, saying things like, “This is a really interesting manager. This is a really interesting theme,” and become somewhat dogmatic and then really not hear or respond to feedback from the field that explains why this isn’t a particularly compelling opportunity despite the fact that the team is really interested in it.

I would say the bias that I try to make sure is that we’re not attempting to find the next awesome strategy at the expense of something that actually can be utilized as part of client solutions. That’s why I think it’s really important to have a good dialogue between the advisors, in our case, and the strategy folks on my team, and then the managers folks, to make sure that we’re all listening to each other, and assimilating that feedback into our process. Because if you’re not doing that, you end up with a bunch of strategies on your platform that nobody’s using and that’s frustrating for the manager search team. It’s frustrating for the investment strategy folks who are trying to put together best ideas portfolios, and it’s frustrating for the advisors because they don’t feel heard in terms of what types of solutions their clients are looking for or needing.

[00:53:15] Alan

Okay. 

In terms of that process for onboarding, is it the case that the manager selection team brings through the managers and then there’s a kind of a team overseeing that and questioning that? I guess that has been set up as the process to ensure that kind of check and pushback. Can you talk a little bit more about that process or how you’ve constructed it to ensure the rigor around that?

[00:53:45] Shannon

Yeah, it’s incredibly important, and the purpose is not to check each field, in terms of the due diligence questionnaires. It’s to make sure that we’re all working together. We believe that the benefit of working in a firm, that is collaborative, is to be able to leverage the expertise of different folks. While my background is in manager search, there are a lot of other people that are on the senior team for investments that don’t have a background in that, but they have a background in fixed income, or they have a background in equities, or they have a background in building out portfolios for clients in terms of suitability and modeling. Those folks can bring up questions (because I was in manager search for a long time). So, I think I’m more sensitive to the potential for this intellectual isolation than other people are, because I know what it’s like to get into a room with a manager and just be blown away and be so excited and you want to get them on the platform and then you realize, “Oh wait, I don’t know that I can actually explain that.”

That’s another thing that I think people forget. Managers out in the field, they don’t have time, especially when you start to grow as an advisory force. They don’t have time to sell their strategy internally. They don’t have time to be inside. We’re really the ambassadors and the mouthpiece for these strategies.

If I can’t explain it to my advisors, how are they going to explain it to their clients? And how are they going to be able to create that rationale? So, as part of this, I think just having this oversight in terms of, yes, for the most part, it’s really just to enhance the due diligence or enhance the selection process over all this oversight mechanism.

It really does allow us, if there’s something that is really concerning from the committee’s perspective, I, as the CIO, can obviously just not utilize the strategy and say, “Listen, we’re not going to use this.” I would much prefer to have that ongoing dialogue between a broader group, because I do think it results in a stronger process when you have this diversity of thought. 

You want to make sure that you’re not having the subject matter experts be drowned out by people with a bunch of (what I would call) ‘what about this questions.’ You want to make sure that if there is real pushback that we address that, and that we make sure that we’ve documented that as a potential concern and that we have done some work on it.

And so I think, as a manager, as a leader, ensuring that everybody who is a subject matter expert is given the proper voice and that their opinion is weighted appropriately, but also offering up this opportunity for collaboration and thought sharing is a way to improve the process over time.

[00:57:05] Alan

I just want to shift gears a little bit and get your perspective on the industry more generally. Obviously, you’ve been in an organization that has gone through a couple of acquisitions and mergers, and there’s obviously a general trend towards consolidation in the RIA industry in the US. What are your thoughts on that?

Is this raise for scale? Is it a good thing? Do you think it’s going to lead to better offerings for clients? Is there a trend towards delivering more institutional solutions or is that kind of a simplification? What’s your perspective on where all of that is heading? 

[00:57:49] Shannon

This is a really interesting question because it’s one that I’ve been talking about a lot, actually, with a lot of different folks along the frontier in the space.

When I started back as a registered investment advisor, in 2006, product teams, wholesalers didn’t even have a dedicated RIA channel. We were either covered by the bank trust team or the broker dealer team. I think that what we’re seeing today is we’re seeing another pendulum swinging in terms of, we had all of these brokers who left and went out on their own, the independent broker dealer, and we had a lot of RIAs that were small and they were growing. 

I think the challenge is that, once you hit a certain asset size, you do have to make increasing investments, not only in operations and technology and compliance, but you also have to widen your aperture in terms of, maybe we do need to work with more than one custodian, and maybe we do need to be able to take in alternative investments that we haven’t vetted.

And all that comes with increasing costs and complexity. I think now, for most advisors, what they want to do is advise. They want to be meeting with clients. They want to be sharing their thoughts. They want to be relationship managers. A lot of those other things that I just talked about dilute the time that they’re able to take.

And so with most RIAs being led by a few strong advisors, I think that’s led itself to this consolidation effort. However, I do think that there’s probably a pendulum shift back, at some point, where people say, “You know what? We probably can do more in terms of FinTech. We probably can do more for less in terms of outsourcing a lot of these solutions.”

And I think consolidation is important because it provides succession. I think one of the best things about what’s happened, in terms of consolidation, is that people are acknowledging that they want to make sure their clients are in good hands when they’re no longer managing those assets.

So, a lot of the roll-up opportunities have been because those advisors are really looking out for the best interests of their clients and making sure that they are in a structure that they can continue to receive great advice and service even as that particular advisor transitions.

I do think what it could create, on the investment side, is a lot of overlap in offering because, as you get bigger, you need to be able to allocate more assets. I think for some of these larger firms, some of them have a very hands-on approach in terms of the investments for the underlying groups, and some don’t. But I think that’ll be interesting to see. 

Then, the last thing (I know this is a longer answer than you were looking for), but the last thing is that everybody wants to be in the private client space now. You look at all these institutional firms that are founding their own RIAs that are asset managers; are product producers.

“Oh, why are we going to these RIAs and then they’re putting a fee on top of it? We want that.” That’s a really interesting change because dealing with people like me and my team versus dealing with the end clients, for some of these large asset managers, is a whole different ball game. So, I’m interested to see how successful those efforts are. 

Again, I think it just comes down to private clients. RIA clients, they’re in high demand and there’s a lot of competition for them. Companies are just trying to find different ways to capture that sort of growing universe of very important investment opportunities.

[01:02:00] Alan

But from an investment perspective, do you think there’s greater similarity between the offerings as everybody gets bigger and has to be able to deploy large amounts of capital, that’s your potential takeaway, is it? 

[01:02:16] Shannon

Yeah, it’s much easier to apply an institutional framework if you’re going across the board. You have a scorecard. Again, I don’t work in one of those larger firms that have been this kind of aggregator model. I don’t know that you’re that incentivized to work with a manager, for instance, that has a really high minimum that only could be appropriate for your high net worth – ultra high net worth and family office clients, for instance. For us, even if those strategies are not for the broad footprint of our client base, wow, they’re a way to get exposure to a new space. They’re a way to get exposure to other investors. They have many advantages that can be afforded to the due diligence process just by partnering with those types of strategies. I feel like those teams may miss out on some of that if they’re really just focused on ‘what can we do for the broad set of clients that we’re now working with.’ 

[01:03:25] Alan

Interesting. Interesting space. It’s obviously in a state of a lot of flux at the moment, so we’ll see how all of that shapes up. 

Before we wrap up, we normally just like to ask our guests, obviously, we’ve talked about your journey towards becoming CIO. If you were to give some advice to people starting off or not quite as far along in their careers as you are about skills to develop, things to read, things to do, if they want to run multi-asset portfolios, do asset allocation for private clients, and ultimately be a CIO what would you say to people?

[01:04:01] Shannon

So, there’s sort of two things that I would say. One is communication. Having the ability to communicate across multiple mediums verbally, in writing, in person, in large groups, making sure that your messaging resonates. Remembering that the use of terms, and phrasing, and narratives, that people can really understand and can digest, but also reiterate, is really important.

I think that’s something that I’ve learned. You don’t have to use a lot of jargon to sound really smart. What you have to do is make people understand what you’re saying and that gives you much more credibility. 

The thing on the path. And this, probably, is maybe a little bit different from my seat because I’m a woman who’s a little bit on the younger side. When I came into a chief investment officer role, I think that, depending on who you work for, and who you work around, and what in your community there’s a tendency to want to be like other people who are in that position. For instance, if your head of research is a certain way and their skills are X, Y, Z, you believe that you have to have those same skills to be in that position. Someone told me a long time ago, before I became the CIO, I made a comment that, “I’m not really good at this,” and they said the role is whatever you make of it.

So, just widening your aperture to say what type of director of research do I want to be? What type of analyst do I want to be? What are my strengths and what can I bring to the table for the company as part of that? 

Not every chief investment officer does their job the way I do my job. Some people do the job wildly differently, but what I’ve done is I’ve said, “These are the things that I think I bring to the table. This is where I can benefit the company most.” Then I filled my team with people that maybe do those things that I don’t do as well in order to create a better group and a better function. Just don’t get caught up in trying to think about what is the ideal X, Y, Z person for a position.

Try to think about, I want to get to that position and how do I make myself the best that I can be, to be able to contribute to the company? And it’s just much easier than trying to follow directly in someone else’s footsteps. 

[01:06:36] Alan

Great. It sounds like pretty sound advice. Thank you very much. I do actually think that makes an awful lot of sense. 

We’re over an hour, so I’d just like to say thanks very much for coming on. It’s been great speaking to you. We’ve learned a lot. With that, I’ll pass back to Niels. 

[01:06:55] Niels

Thank you so much Alan and Shannon for some great insights into the registered investment advisor world and where you managed to cover quite a lot of ground.

I thought it was really interesting to hear Shannon talk about how the younger generation is starting to change their requirements when it comes to the expected returns, but also the risk levels they’re willing to take, as this may well drive a change in how asset allocation is done for these generations.

Also, I appreciated Shannon’s acknowledgement that alternatives, such as managed futures and trend following, should play a bigger role in portfolios, even if it’s still a bit of an uphill battle to explain the lower returns during times of strong equity bull markets. 

Shannon’s insights as to what they look for in their manager selection, in terms of identifying the critical parts of a manager’s process, but also how the manager’s looking to improve upon these, was quite interesting. But of course, there are so many more gems in this conversation. 

That’s it for this episode. Make sure you go and follow Shannon’s and Alan’s work because, as you can tell from today’s conversation, it is so important that you understand what is going on from a global macro point of view in order to allocate capital well, and we really look forward to sharing more of these insights as our series continue.

From Alan and me, thanks so much for listening, and we look forward to being back with you on the next episode. In the meantime, take care of yourself and take care of each other. 

[01:08:24] Ending

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