Read Article - O`Shaughnessy Asset Management, LLC

SMALL“CALL”
THE BEST
MANAGERS
YOU HAVEN’T
HEARD OF
—YET
Reprinted from PLANSPONSOR 8/11
The consultants that guide sponsors in choosing the investment managers
to run their pension portfolios look kindly on small, new firms, or at least are willing
to give them a fighting chance against the megaliths. “We like smaller equity managers
because the whole organization often is focused on one approach, both on investment
philosophy and incentives to the owners and employees,” observes Roger Fenningdorf,
Head of Manager Research at Rocaton Investment Advisors, consultants based in
Stamford, Connecticut.
However, even when armed with a purity of purpose and a strong track record of
their work for a prior employer, managers that leave big firms to start their own still
have plenty to prove. “We like to see a [spinoff] be well-planned and -financed, with
a cushion to support themselves as the firm gets up and running,” says Brian Clark,
a Principal in Manager Research with Mercer Investment Consulting in Chicago. His
firm also will back small managers, but he says it is not a blanket view: “Founders
of firms realize they will be busier and have to do a lot of hand-holding and selling
to build their businesses. We like the situation better when the investment managers
don’t have to give up too much time to non-investment parts of the business.”
Managers setting out on their own thus need to prepare for years of 150% effort
and trace amounts of reward: “This is the only business where you have to build
and run a company successfully for five years before anyone will hire you,” remarks
Andy Wyatt, Founder and Chief Executive of Cornerstone Capital in Bloomington,
Minnesota. (Cornerstone, another high-achieving young firm, is profiled for its acumen
as a manager in the large-cap U.S. growth style in this month’s “Head of the Class”
feature, page 52.)
Two of this year’s class of PLANSPONSOR Best Managers run quantitative portfolios,
while the other relies on old-fashioned detective work. All three of this year’s Best
Managers class moved to a small-firm environment from large firms although, in one
case, much of the pick-and-shovel work was already done, as the new firm was spun
off from a large bank’s investment operation and is still owned by the same parent.
Reprinted from PLANSPONSOR 8/11
O’Shaughnessy Asset Management
Stamford, Connecticut
J
ames O’Shaughnessy started his first investment business in
1987, not managing money, but critiquing the results of others
by constructing model portfolios—quantitative simulations
that showed sponsors the effectiveness of their managers’ process
and execution. “Many of the normal rules-based portfolios significantly outperformed the managers’ actual portfolios, and I decided
to move to active management myself,” he notes.
nies, the models first screen for market value and, on the four
leader criteria, keep those that score above average. The rules
then purchase the securities at the top of the ranks for shareholder yield—dividends plus net buybacks over the previous 12
months. The strategy holds just 54 names—an unusual degree
of concentration for a quantitative approach. Rebalancing is
frequent to reduce trading costs.
He sold the first incarnation of O’Shaughnessy to Bear Stearns
in 2001, and then reeled back the operation and its staff of 14
in 2007—and not a moment too soon. In October 2008, the
firm repurchased a 10% stake that had wound up in the hands
of JPMorgan Chase; another 10% share still resides with the
Royal Bank of Canada. Managed assets were $9.1 billion after
the spinoff and $5.5 billion in June 2011.
Compared with the Russell 1000 Value index, Market Leaders
Value delivered annualized excess return of 4.35% for the year
ended March 31, 2011, and 11.26% and 7.66% for three and five
years, respectively. It also beat its benchmark for six of the past
seven calendar years, including a 41 percentage-point margin in
2009. (All performance figures come from eVestment Alliance.)
Today, O’Shaughnessy Asset Management is a quant’s dream:
“One of the beautiful parts of having my own company again is
that I could direct the spending,” says O’Shaughnessy. “I wanted
our technology to be as cutting edge as it could be and felt we
needed to have every data set, so we got them all.”
Thirteen strategies are offered, all quantitative, covering stocks
large and small, value and growth, domestic and international.
The flagship fund is Market Leaders Value.
“We define a market-leading company by criteria for valuation, earnings quality, earnings growth, and financial strength,”
O’Shaughnessy explains. From a universe of 16,000 U.S. compaReprinted from PLANSPONSOR 8/11
Photography by Ben Gancsos
O’Shaughnessy has tested his investment rules back a century in
the U.S. markets, and though he concedes investor viewpoints
change over time, there are a few constants: Value stocks outperform those that are richly priced, and good price momentum
outperforms poor momentum. “They persist in every time period
we have been able to test.
“Value has worked for about 100 years, and the subperiods are
almost meaningless,” he observes. “We’ve found that adhering to
an underlying strategy is the best way to ensure you’re there when
the market comes back, and rationality does return to markets in
short order. Usually.” —PS
O’Shaughnessy Asset Management, LLC
Contact Information:
For financial advisory firms & advisors:
Ari Rosenbaum, Director of Financial Advisor Services
(203) 975-3340
[email protected]
For institutions:
Chris Loveless, President & Chief Operating Officer
(203) 975-3304
[email protected]
6 Suburban Avenue
Stamford, CT 06901
(203) 975-3333
Fax: (203) 975-3310
osam.com
Reprinted from PLANSPONSOR 8/11 ©1989-2011 Asset International, Inc. All Rights Reserved. No reproduction or redistribution without prior authorization. For information, call (203) 595-3276 or email [email protected]