No investor understands unloved securities better than Bruce Karsh and Howard Marks, co-chairmen of $91 billion alternative-investment firm Oaktree Capital Management. During the recent credit crisis, Oaktree demonstrated its prowess by buying securities that had become toxic overnight for the record $10.9 billion distressed-debt fund it raised in 2008. Investors have entrusted billions more to Oaktree’s latest fund, which the firm plans to tap when times get tough again. For now, though, Marks and Karsh insist they are investing in a range of asset classes, albeit carefully.
“Our mantra is ‘Move forward — but with caution,’” says Marks, 69, who started TCW Group’s high-yield bond and convertible securities division in 1985 and launched Oaktree in Los Angeles in 1995 with four partners, including Karsh.
Karsh and Marks share the title of Money Manager of the Year in Institutional Investor’s sixth annual U.S. Investment Management Awards, based on a survey of investors at endowments, foundations, pension funds and other institutions. They headline a list of top asset management winners across 41 different equity, fixed-income and alternative strategies. This year we also recognize Henry Kravis, co-founder, co-chairman and co-CEO of KKR & Co., for the Manager Lifetime Achievement Award. Kravis is not only a pioneer in private equity, starting out long before it was a recognized asset class, he has also played a key role in building his firm into a diversified, publicly traded company.
This year’s manager winners include Ashmore Group, Blackstone Alternative Asset Management, Boston Co. Asset Management, DoubleLine Capital, Lazard Asset Management, MacKay Shields and Wells Capital Management. To develop our survey, we first screened managers using data from Atlanta-based eVestment. Sifting through firms’ strategies based on factors that include short- and long-term performance and risk measures, the process mirrors how institutional investors themselves identify the best possible managers. The winners ultimately reflect qualitative judgments and quantitative measures, a reflection of investors’ practices in hiring managers for their own portfolios.
The 2015 Investment Management Awards also recognize the most innovative and best-performing institutional investors in the world of endowments, foundations, and corporate and public pension plans. The magazine’s staff independently researches the best investment chiefs, who are also leaders in the financial community. Sandra Urie, chairman and CEO of Boston-based Cambridge Associates, is the Investor Lifetime Achievement Award winner for her impressive work advising endowments and foundations.
Behavioral mistakes generate a lot of good ideas for our winning investors. J.P. Morgan Asset Management’s behavioral finance group is driven by the philosophy that markets are as inefficient as ever when it comes to human sentiment. “The great financial crisis and the huge market drawdown, as well as the constant media attention on the financial markets, have only exacerbated that tendency for investors to make emotional decisions,” says Dennis Ruhl, chief investment officer for the U.S. behavioral finance team at J.P. Morgan, Manager of the Year in both the Small-Cap Core Equity and Small-Cap Value Equity categories.
Although research shows that value strategies provide above-market returns over time, investors often don’t stay around long enough to benefit. Brandywine Global Investment Management’s Dynamic Large Cap Value strategy is designed to help investors overcome their tendency to flee at the first sign of volatility, says portfolio manager Michael Fleisher. The fund is designed to provide a steadier ride than traditional value funds. “People act out of fear,” notes Fleisher. “The idea was to provide some consistency so clients would be more patient.” Philadelphia-based Brandywine, the Large-Cap Value Equity Manager of the Year, uses a quantitative model that screens potential value stocks for numerous quality factors as well.
Fleisher says the quantitative approach keeps portfolio managers’ emotions in check, especially during tough times. As an example, he explains people’s tendency toward action bias: the need to do something even if it’s the wrong move. In a classic study of soccer goalies, the overwhelming majority dove to the left or the right in anticipation of where a penalty kick would go, even though statistics have proved that the player would have been better off staying in the middle of the goal. The research, however, doesn’t sway goalies, who continue to try to project where the ball will land. Fleisher says investors, even professional ones, have a similar reaction, preferring to buy or sell a stock when doing nothing would yield better results.
William Blair & Co.’s small-cap growth team differentiates itself from many of its peers by being contrarian, as well as by including more microcap stocks than many similar funds and by being sensitive to valuation. “When you get into a momentum-driven environment, that can be tough,” says Karl Brewer, co–portfolio manager for the strategy. “But when it pops, we can find opportunities where others aren’t looking.” Michael Balkin, Brewer’s co–portfolio manager, emphasizes that the team’s contrarian tilt is supported by extensive fundamental research to find hidden gems. “We kiss a lot of frogs to find a few princes,” Balkin says. Chicago-based William Blair is the Small-Cap Growth Equity Manager of the Year.
Investors are more focused than ever on managing risk and protecting capital, even six years after the financial crisis. N. David Samra, portfolio manager of Artisan Partners’ global value strategies, says institutional investors appreciate his firm’s focus on value stocks and its ability to manage risk. Samra says the team looks for stocks that are undervalued but will hold up during crisis situations. “A mantra for us has been that we look for better-than-average businesses,” he adds. “That way we can solve the fundamental issue of value traps that can plague our peers.”
Artisan’s global value strategy is still benefiting from moves the firm made during the financial crisis. “As value investors, most of the time you don’t have access to high-quality businesses,” Samra says. “In order to get a business at a good price, it has to have a problem. In the midst of the financial crisis, everyone had problems, so we were able to buy businesses that we never had access to before because of our price discipline.” Based in Milwaukee, Artisan is the EAFE Equity Manager of the Year.
Now, however, Samra says, a lot of these businesses are fairly valued and there’s not as much to do. One area his group still finds attractive is banks. Regulators have forced banks to increase their capital, making them safer than ever. “But the noise has made them cheaper, and we can buy them below book value,” Samra explains. Artisan is the largest shareholder of Royal Bank of Scotland.
Investors who use a microscope rather than a telescope to choose investments top our list this year. “What we’ve learned is that it’s very easy to be overconfident about your view of macro events,” says Phillip Hart, who heads the small-cap equity team for behavioral finance at J.P. Morgan. “And you’re betting heavily on one thing. With stock picking you’re not reliant on one investment or strategy to work; you need the group to work as a whole.”
Oaktree’s Marks and Karsh, who is also CIO of the firm, stress that their investment decisions are not determined by trying to forecast the direction of the markets, interest rates or the economy. Instead, they rely on fundamental analysis of companies.
“We’re seeking bargains on a bottom-up basis every day in our markets, and we’re making buy and sell decisions based on that, not on what the Fed may or may not do,” Karsh, 59, explains during an interview at Oaktree’s New York offices.
Still, it’s hard to ignore the big picture. “The future is always unclear, and today the outlook is unusually uncertain,” says Marks. “There isn’t a spot on the globe for which you can’t devise a negative scenario. That’s unusual.” Despite those worries, nothing is cheap. “Virtually all major asset classes are priced on the high side of fair,” he adds.
Follow Julie Segal on Twitter at @julie_segal.