Monthly Archives: August 2022

What is “Institutional Quality”?

From single family offices on up through to large public pension plans and even sovereign wealth funds, investors (allocators) are much more likely to engage with investment managers who have some degree of institutional pedigree, polish, credibility, and professionalism. Investors do this as a way to “de-risk” their initial investment allocation and to make the process of tracking the investment more manageable.  Since it is not always clear to those raising capital what it means to have an “institutional quality”, we thought it would be helpful to list a few key elements.

The following are Ten Signs of institutional quality that investors actively or subconsciously look for in an investment manager:

1. Firm leaders are well-spoken, dress appropriately, responsive and clear in their messaging.  Meetings and calls are interactive, properly paced, and respectful.
2. The manager can comfortably field tough questions and does not display angst discussing their investment process, philosophy, team, and challenging periods in their track record.
3. The manager’s investment strategy is described in a concise fashion such that the allocator can repeat it to his/her colleagues.
4. Follow-up after calls and meetings from the placement agent and/or manager are gently persistent, informational, and help to develop a relationship.
5. An institutional quality manager will deliver performance that meets or exceeds expectations and when they do not, the manager is transparent as to the reasoning and steps to correct going forward.
6. Certain strategies lend themselves to a need for NDAs. The manager must be comfortable sharing enough information so that a potential investor can determine whether they even want to go through the NDA process.
7. Following all steps from initial call/email through to signing subscription docs, the manager is one step ahead and is in a position to provide a teaser, a presentation deck, performance attribution, data room, any/all docs, etc.
8. Marketing materials must be polished, professional, error free, and cannot contain unserious, amateurish graphics.
9. The senior team members have experience, relevant track records, and well-written bios.
10. Senior team members must be polite, kind, and pleasant to work with and should not shy away from being direct and candid.  During due diligence and negotiations, the senior firm members must not get too heated or impulsive.

For the S&P 500, 1H2022 was the worst in 50 years. For fixed income, 1H2022 was the worst on record. Long only growth strategies suffered. Hedge funds, on average, provided meaningful alpha.

More miserable than the 1st half of 2020, almost 80% of the S&P component stocks were negative. In fact, only 110 of the S&P 500 stocks were positive year-to-date, including dividends. The median stock slightly outperformed the S&P 500 for the period.

Thankfully, there was dispersion and some sectors, strategies and managers excelled if not absolutely, certainly generating meaningful alpha for their investors.

• If you bought the top 100 performing stocks in the S&P 500 on an equal weighted basis on Jan. 1st this year and held them until June 30th, you would have been up 15.5%, and beaten the S&P 500 total return by 35.5%.
• If you concentrated and picked the top 10 performing stocks on Jan. 1st, and again held them for the 1st half, you would have generated a total return of 45.2%, 65.2% greater than the S&P for the half.
• If instead you somehow picked the 100 worst performing stocks for the 1st half, you would have had to mark your portfolio down by 41.1%.
• If you held the 10 lousiest performing stocks for the 1st half, you would have had to mark your portfolio down 60.7%.

* The data in this table was generated from the S&P website at www.spindices.com and Refinitiv, www.refinitiv.com. The calculations from this data were performed internally. Perkins Fund Marketing LLC deems these sources to be reliable, but they are not in any way guaranteed and should not be considered as any form of an investment recommendation.

While the average hedge fund was down -3.2% in 1H2022 according to the PivotalPath Composite Index, the average hedge fund solidly outperformed the S&P’s -20.0% and provided significant alpha relative to the majority of long only indices and index funds.  Value stocks have now outperformed Growth for the trailing one and two-year periods.

We would welcome your thoughts on which asset classes, strategies and managers may provide alpha for the next cycle.

Best wishes to all,

Doug
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J. Douglas Newsome, CFA
Managing Director, Director of Research
Perkins Fund Marketing LLC