I first met Mike Parker over 12 years ago when we worked together at FBR Capital Markets. Our paths diverged in 2008 with him leaving for a portfolio management position at Ohio PERS. Thankfully, through Harvest I was able to discover the Columbus, OH-based SWS Partners and reconnect with their CIO, Mike Parker.
While my career affords me consistent access to impressive individuals, my ‘catch-up’ conversation with Parker was one that I felt the need to share. The below interview delves into his unique perspective around the rapidly changing industry dynamics, servicing both institutional and retail clients, and why all investors are still probably underappreciating technology.
Peter Hans:Tell me a little bit about your experience at Ohio PERS and how you’re applying that knowledge to SWS Partners.
Mike Parker: I think it’s important to start where our paths overlapped at FBR, which developed a solid securities analysis foundation that really taught us how to analyze companies across their capital structures. Especially during that period where you could see the early signs of financial contagion taking root, it delivered powerful lessons on the symptoms that would later lead to systemic banking system problems. So basically, being able to take those experiences to a $100 billion platform allowed me to gain a better understanding of how to apply that in the context of a long-term portfolio. At Ohio PERS, I was very fortunate to work with a talented team of nine investment professionals, all while serving a very important base of current and future pension retirees. And over the course of roughly a decade of applying these tools within an institutional setting, you steadily improve the precision deciphering which firms have superior competitive advantages, which is the core of relative value creation in equity investing. Now arriving at SWS Partners, we’ve been able to take what’s effectively the best-of-all those experiences and make that available to a much broader set of clients.
PH:So, in terms of the client base that you have now have at SWS, what types of clients are you serving with the new strategy?
MP: Yeah, it’s a great question because a lot of times firms start with the premise of serving one set of customers and attempt to evolve their way into serving another set, without thinking through the necessary pieces required to make this transition. What we identified early on was that there’s really no reason why you can’t effectively serve both institutional and individual clients very effectively and efficiently under the same roof. And we have been building a platform that can address both, a lot of which relies on scalability enabled by technology. We’ve basically contemplated at the onset being able to manage strategies that can speak both languages, one to the institutional client, one to the individual client. They both care about the same exact thing; ultimately everyone is concerned with generating attractive risk-adjusted returns. They just may communicate it differently. We believe our approach is capable of serving both groups and doing so without compromise. Lastly, having individuals who can assist the wealth advisory client with individualized advice, and having those roles be segregated from asset management, allows you to avoid frictions that otherwise could get in the way of serving the needs of both clients.
PH:I guess every individual or perhaps every institution is going to have a different idea of what’s tolerable risk-adjusted return. So, is that something that you focus on a per-client basis, or do you focus holistically on the strategy?
MP: Every investor achieves some type of benefit from asset allocation, and the answer of what asset class they should be exposed to is dependent upon the unique set of objectives a client’s trying to achieve. An individual client may have very different needs compared to a large institution, right? But ultimately you have to have a platform and a strategic foundation that can address both. Then, you look for opportunities where you think you can add value. Given my background in long-term equity strategies, we’ve focused those efforts into creating our large-cap growth strategy with the goal of delivering upside that more than offsets the management fee we’re charging. If there are areas, like emerging markets or fixed income, where we don’t think we have as much of an edge, we’re going to use passive strategies and look to a basket of attractively priced ETFs.
PH:From a benchmarking standpoint, how do you think about index appropriateness for the individual client versus an institutional client?
MP: Ultimately, all investors are looking for actively managed strategies that will earn above and beyond a passive strategy from BlackRock to State Street that they would pay a few basis points for. In those cases where we think we can provide a benefit above-and-beyond what a passive index can do, we’re going to offer an actively-managed strategy. The first iteration of that is our growth strategy, built with the explicit intention of being able to outperform its stated index. We do that with a bottom-up approach where we study precisely how our active bets intend to outperform their representative value chains in the index. We believe that we have an investment process that has tremendous bandwidth where we could launch additional mandates focused on different indices, all while leveraging the exact same core investment process, again, with a risk management consideration at the core.
PH:That makes sense. So, do you see the differential between the institutional and the retail channels converging?
MP: The question of convergence between institutional and retail is one the industry has been facing for a while. The tools that the retail investor now has affords them many of the same efficiencies that the large institutions have enjoyed for quite some time. Take an efficiently-traded ETF that can do a solid job tracking its stated index, has tight bid/ask spreads, has sufficient liquidity, and gives you pretty broad exposure to an overall asset class. We harness the power of these tools for our wealth advisory clients, outside of our actively managed strategies, and provide a customized solution to achieve their specific objectives.
These same tools also allow retail-focused active managers to bootstrap their way into attempting to serve the institutional market. But large institutions care just as much about how you intend to generate alpha as they do about what alpha you’ve generated. And, you’re going to have a tough time addressing this end of the market unless you’ve thought through issues like how you’re going to perform, how your investment process is repeatable, and how that all scales. That’s one of the opportunities that made me most excited to start these strategies within SWS; we’ve tackled these big questions from the start and see a tremendous amount of scalability ahead.
PH:How do you guys approach the profiles in terms of institutional versus retail, in terms of what the difference is, or even if they shouldn’t be different?
MP: You’ve got to have transparency as a big pillar of your platform. That’s the only way the same level of efficiency that institutions enjoy can be offered to the wealth advisory client. A lot of times, individual investors find themselves in products with a convoluted series of fee structures, explicit ones they’re aware of, along with implicit ones eroding away a lot of the return they’re hoping to achieve. We’ve developed our platform from the start around one hundred percent fee transparency. The other dynamic that we’ve contemplated is having a cost structure that’s scalable. Your cost structure typically dictates the client size you can serve, and the key is to have an efficiency that allows you to serve a broader spectrum of clients. Due to the way we’ve built our platform, the $5,000 client can benefit from the same transparency and efficiency as the $500 million client.
PH:What efficiencies have you employed at SWS to enable you to serve both institutional and wealth advisory clients?
MP: At the core of it is putting technology at the forefront of everything we do. This allows us to provide what we view as institutional-grade active management and make that available to the masses. That comes down to trading operations, efficient rebalancing, and back office nimbleness. But it also is a big part about how we think about the positions that underlie our portfolios and where they are in their respective technology adoption curves. Many publicly traded companies used to outsource their technology-related decisions to their chief technology officers and IT departments. What you’re finding now is companies realize they have to harness technology to fortify their competitive moats. That issue is much more front-and-center in boardrooms today than it ever has been in the past. And if you’re not having that conversation internally and executing upon it, then your competition will do it instead and steal market share from you. Take for example Amazon’s acquisition of Whole Foods. All large-scale grocers are thinking very differently today about their self-checkout strategies, not only at the point of sale but also throughout the store as you shop, largely in response to Amazon’s entrance. So, technology plays a large part in companies’ ability to create value for their shareholders.
Technology has also materially changed the geographic requirements of money management. In the past, you had to be located within a high cost-of-living geography in order to have access to timely information. Now, thanks to the unlimited universe of data that’s accessible from various digital services, the inputs to our fundamental models can benefit from increased precision that data accessibility delivers. So, we’re basically trying to embrace technology in every way we can at SWS, both in how we manage our strategies as well as how we run the company.
PH:Yeah, that is a really interesting point because as I think about it, every sector is truly becoming technology. How do you think about what that implies for the market and valuations broadly?
MP: Yeah, that’s a great question because to your point, if your process doesn’t consider how technology is evolving, you’re going to miss the inflection points. Take for example companies like GE or Honeywell, who highlight the percentage of engineers on staff who are now software focused. That’s not only a marketing tactic, but it’s also an indicator of an underlying shift in their cost bases, going from operating expensive data centers with expensive hardware to being able to rent compute capacity for pennies per minute or even second. This has a dramatic impact on companies’ fixed versus variable expenses, allowing them to better align expenses with fluctuations in demand, and it, in turn, has the opportunity to impact the ROI spreads over their weighted average costs of capital. From a macro standpoint, you also have a short-term rate environment that suggests we no longer need to rely on accommodative measures from the Fed, and a corporate tax rate that’s largely removed the prior incentive to trap corporate cash offshore. All of this to us suggests an inflationary impact to valuation multiples, all else equal.
PH:That’s certainly consistent with how we see companies using tools like Harvest to grow their businesses. Outside of the technology side, what kind of competitive advantages do you see yourself as having, structural or otherwise?
MP: We see a tremendous runway for growth from being able to leverage a common investment process that can discern relative winners from losers. We believe we have a very repeatable and scalable investment process that naturally can be extended to additional equity mandates. We see natural AUM milestones with our existing strategies that will allow us to bootstrap additional investment talent to broaden out our name coverage, but the key is that we’re leveraging the same core investment process so as not to have to keep reinventing the wheel. Being in Columbus, Ohio also provides an operating efficiency advantage without any impairment to our ability to access timely information thanks to the technology aspects we discussed earlier.
PH:What does your ideal institutional client look like?
MP: Given the dynamic nature of growth style investing, it’s an asset class that we see many long-term oriented investors likely demanding, whether a pension plan sponsor, foundation, endowment, or wealth advisory client investing for retirement. There used to be this perception that growth was the opposite side of the coin to value, and any prolonged outperformance by growth would ultimately mean revert and give way to value’s outperformance. Fast forward 17 years past the dot-com era, and there is a vastly different set of circumstances occurring with growth equities. If you take a look at the underlying issuers that comprise the S&P 500, for example, you’re going to find a lot more companies considered to be of the “growth” style than you would have a decade or two ago. This is why we believe that it’s even more critical to be able to discern relative value among an increasing population of growth-style equities. That’s not to say that we won’t go through periods of corrections. We just believe that many of these big fundamental business model transformations are likely to persist for quite some time. For example, Netflix will look very differently a decade from now as the next billion internet subscribers come online globally, in comparison to CBS and Comcast. These are the exact dynamics that make it ripe for relative value creation.
Peter Hans is the co-founder and CEO of Harvest Exchange, the world’s top investor community for discovery and connection through knowledge. Prior to founding Harvest Exchange in 2013, he was on the founding team of Washington DC-based Height Capital, which launched in 2009.
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