American Beacon’s Cavazos on Durable Managers

different challenge. Distinguishing between performance driven by skill, process and durability versus outcome shape by market environments factor exposure are simply good timing today, I wanted to explore what separates truly durable investment managers from those that may only look compelling for a moment in time, and how experience allocators approach that challenge. Joining me to discuss that is paulk

Senior Vice president and Chief Investment Officer of American Beacon Advisors. Paul, thank you for joining me.

And so from the beginning we focus on, you know, finding differentiated external managers that are that are very active, you know, doing the work to understand whether their edge is is real and durable like a consistent performer, and then building you know, lasting relationships around you know, the

strongest opportunities for investors. So that's kind of philosophy. You know, rigorous selection, you know, thoughtful product structuring and and really a long term view are the backdrop for how we

think about, you know, evaluating managers today. But yeah, and you know, look, so as you said, like performance, performance is important, but the first things we really look at our philosophy process and people you know behind it, and and you know, we want to make sure you know, the team has the experienced resources you know, discipline necessary

to execute on their on their process consistently. You know, we also look at things like capacity, portfolio construction, whether it's a good fit and role to play for the broader product structure. And in our platform, certainly performance matters, but we think it it really comes down to the first things. We look at our philosophy process and the team.

you have quantitative combined with with fundamental. I think how we look at it, maybe peeling that back a little bit, is we really see you know, quantitative and qualitative outputs as compliment mentory rather than competing. So we do think, you know, quantitative work when we're looking at assessing kind

of a manager and underwriting them. We certainly look at quantitative factors like performance, risk, you know, attribution, consistency, whether you know results line up with the manager's stated approach. And from a qualitative side, it's just as important because you know, numbers, you know, can't tell you how decisions are actually being made. So how does the team function? Does the process hold up into certain environments you know,

why or why not? So we we do think, you know, there's a there's a combination of both quantitative and qualitative too to really factor in when when looking at a manager holistically.

connect to their stated philosophy and process. And you know, I would say though that we are also looking at kind of factor analysis, right, so we use fact set to kind of look at it. So before we even go in and talk to them, we're kind of seeing, hey, what were those factors, like, how is their portfolio construction constructed,

and what kind of benefit that that had. So we go in there with kind of you know, that lens to begin with, so then we can have more pointed questions and kind of really see how they how they respond to that.

coming from kind of bottom up stock selection. If that's what they claim to be their edge, right, if that's supposed to be three quarters of their performance over rolling market cycles, then we certainly want to make sure we're we're seeing that because, as you know, then if if stock selection is bad, you know, that's gonna that's gonna hurt them then and in those cases where they're not making good picks or or the market moves against them.

But yes, that repeatable, That repeatability and that consistency you know, is really something that that we key in with with every one of our our partner sub advisors.

they play in. They might have a strong network that that helps them get some insight. You know. The team culture is also something we we look at, you know, and do they have scale and flexibility? So if if the edge does depend on something that can be easily you know, copied or screened for, you know, we we want to understand that and take that, take that seriously.

But you know, if it comes down to like their overall judgment experience and a process that that's been refined over time, you know that that tends to be more durable. Doesn't mean that it's you know, week in or week out or month in or month out that they're going to outperform. But that's what we try to review and and look we're we're reviewing these things on a on a quarterly basis with all of our underlying managers. So yes, we do a lot of due diligence on the front

end to onboard you know, a subadvisor partner. But it it really comes down to that ongoing relationship and that ongoing re underwriting of the managers that we think differentiates what we do and helps us have a better understanding and our view of how that manager should react in certain market environments or not.

beneath that that veneer. I think one of the best things is like, hey, talk to us about your highest conviction ideas, what mistakes have you made, what are they debating like internally right now, and what would cause them to change their mind in a position. So you learn a lot when you're when you walk through a decision from beginning to end and what they saw, what they waited, what risk were considered. You know, did they ever think

about doing something and they didn't, why not? And I think that's where you get a lot of good information from that. I also think being able to talk to different team members, not just kind of the polished you know client PM or or you know, the real good marketer and sometimes even the lead pms are are very good at sometimes they're just they're really smart, but not the best at giving the message. But some are very good.

And then you have the polished marketing person. We like to talk to the lieutenant, the junior PM, the analyst, And what we really like to do, David, is if we can let's get some of those you know, more junior folks like an analyst or senior analyst alone and

talk to them. So to us, that can be extremely beneficial because as you might be surprised what they share or sometimes when you're like the executive on the thing and you say, well, here's how we do it, and then you talk to the people that are kind of really doing the analysis and a lot of the quantitative stuff on the front end and everything you can learn, you can learn some interesting things.

of that is short term performance. I think, Look, we're all human, and I do think like retail folks in general, I know you know this, David, but like they'll tend to chase performance, right, and that's probably not what you want to do. I think. I think both of those things can be useful, but neither tells us enough on their own. And so, you know, kind of a great presentation to make a process sound more differentiated than it really is, or a recent short term track record might

not reflect, you know, kind of the true skill. So in our experience, it's it's it's better to look kind of under that surface. Again, rolling three and five year periods, you know, in and through and out of market cycles is what we want to see. And we also want to see obviously risk adjusted performance, not just top line performance, like how much risk are they taking to get that? And yeah, I think I think that's really you know, and tell us those three to five year periods are

really what folks should be looking at. And you could you could say, hey, a market cycle, now, Paul has been a lot longer, you know, with kind of financial and monetary policies and everything like that. But in general, if you get beyond three and five, people are going to say, well, why would I look at ten? So that's why we tend to focus in on three and five and we do think that can give you Again, rolling cycles of three and five can be we think can be very meaningful.

had as an example, a value manager. Now we do kind of like different flavors of value within our multi managed value products, and so we have kind of a deep, a core, and a relative and that relative value manager, David was becoming a lot more growth leaning, and this was at a time when it was beneficial from a performance standpoint, and so I think when you when you see that, you know, there's there's a lot of questions we had, and we did move on from that manager

even though they were they did lights out, but they weren't sticking to the discipline in the space that we needed them to be in. And so it was the right decision for us because when we offer something to to a client, to an investor, we wanted to stay true. Right.

So I guess if they if they can't clearly explain how decisions are made, if the team appears unstable, if risk controls are our secondary, and if the story you know, continues to change on how they're doing things, that's you know, obviously that's a problem that's going those are going to be red flags.

that that could be a problem. It's that if it's the relative value manager and then they are trimming it when it once it does get you know that that maybe makes some sense. But certainly, like in the large cap space right, it's been it's been tough to be an active manager with with the whole AI, you know, and the mag seven and all that going on, and I suspect that's still going to be somewhat of a of a talking point right here here going for but yeah, you do, you do see that.

better lens. So we're just not peripherally looking at, oh, this was their performance, you know, for the period, we're really looking at again that people process. You know, is there any changes to the FLAWPIA is the culture still you know, intact from what we can see, and again that that helps in talking to different levels of folks on the team. You know, are there organizational changes outside of the investment team that we should be concerned about?

What about from an operational perspective, So we we try to be as fully encompassing as we can. And again we we think that, you know, it's very helpful then, like even capacity, So we look at capacity all the time, particularly in those areas that you would expect that are more capacity constrained. But we're constantly talking to them about even those aspects to say, hey, if we can sell a half a billion dollar more in a small are we okay, Like is that good? Is this amount that

you gave us before still accurate? Or can we get more at that same price point? So all of those things are coming up, and you know, we do think it's it's been helpful for us to identify some some problems in.

they're kind of like a heavy growth manager. So from a style perspective, under performance by itself, I guess i'd say is not usually enough, because good managers will go through difficult periods. But the bigger issue is when the reasons we believed in the manager to begin you know with to begin with, start to eroad and we no longer fell you know, the process is as coherent or repeatable or trustworthy as it needs to be. Is when when we lose conviction.

you know, in difficult markets. They they really stay true to what is it we do and have to believe the fact that, hey, when quality as you know David as a factor. Last year was one of the worst periods to have quality as as a key discipline. Uh, in the last one decade and a half or so, we have some managers that absolutely are have outperformed like last year and are continuing to struggle a bit, but they're staying true to what they do and that's and

that's actually very meaningful. If we saw them veer off that course, we would have concerns. And by the way, now if quality comes back and they're not participating, we're gonna have some other you know, challenging discussions. But somebody that really knows who they are and stays true to it. That that's you know, that's what we think separates uh, you know, the good managers.

great conviction around that. And there's there's certainly risk aspects to that that you have to make sure you're you're discipline from the perspective as well, But we think that that can you know, that can be a great a great philosophy and strategy to have have certainly in definitely some some you know, specific asset classes, right, and so we we value that we you know, we try to

find managers that have high conviction. And some would say, hey, conviction is if you have you know, in a large cap you know, forty to sixty names or even maybe a little bit more than that. And then we have some that are you know, in small cap or or high yield or or in large cap growth that are you know, twenty five to thirty five names. So it's it's all in how we gain comfort in each of those managers in those spaces that they play in and

results speak for themselves. And sometimes in a multimanaged type of type of products that that we have, we have one of those managers that is very opportunistic, very concentrated. Look, they can they can ebb and flow. They're a lot more volatile than the other managers, but in that context of a multi managed product, it works extremely well.

lot of people know about. And so yeah, as there's more, you know, kind of the democratization of of of private markets, we are looking at that and how we can be helpful and really call on our our expertise of multimanager differentiated active you know kind of types of portfolios that we can construct and really call on. That's a you know, we believe offer products that are going to be useful

in specifically like the wealth in retail channels. So yes, we we're doing a lot in that space and you know, you might see more to come here in the not so distant future.

want to have full transparency there. But from the standpoint of evaluating, you know, again kind of people, process, philosophy and all that, a lot of that can be the same, right, But again you do spend typically a little bit more time on sourcing. What's their underwriting discipline, how is the portfolio constructed, what is the governance structure, how the firm behaves across longer you know, time horizons, right, and less pricing points, less frequent pricing points. You have to understand

that and appreciate that. And then from an operational standpoint, just to bring that side. And even though I'm the CEO, I'm not the operations guy, but you better have good operations folks that understand everything ties together, the right trustee, you know, custodian and really can you value these things properly and accurately, and how do you how are you, you know, communicating that in a in a relevant and transparent manner.

not be a great decision. Right. So that's where I think those multi managed value funds that I've been kind of mentioning a couple of times here, I think that makes a lot of sense. So those those in essence, again we have relative, we have deep, we have and then kind of core traditional, and then in small cap we have kind of an opportunistic manager that can go wherever the deals are, and that's that highly concentrated manager.

So I think you have to understand what role are you looking specifically for that manager you know, to play and and that's that's, that's you know, of paramount importance.