Today’s episode of Conviction Creates Alpha features Todd Peters, Chairman of the NS Capital Investment Committee. He joins us today to shed some light on how NS Capital identifies managers and constructs portfolios. He also discusses:
- How his 25-year career in financial services has led to and influenced his role on NS Capital’s investment committee.
- Characteristics NS Capital looks for in their managers.
- The NS Capital research process, and how managers enter NS Capital portfolios.
- Why investment managers want to be part of NS Capital portfolios.
This podcast is for educational purposes only and should not be construed as investment advice. NS Capital performance mentioned during this Podcast has been calculated net of fees, represents an average return over several periods unless otherwise specified, and is not a guarantee or indication of future performance. The views expressed reflect the current views of NS Capital as of the original recording date and may change without notice to the viewer. There is no guarantee that any projection, forecast, or opinion in this material will be realized. All investments involve risk, including risk of total loss, and you should consult with your financial advisor before implementing any investment strategy. All information is believed to be from reliable sources; however, NS Capital makes no representation as to its completeness or accuracy. NS Capital does not provide tax or legal advice and urges you to consult with your tax advisor or attorney for those specific matters.
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Douglas Heikkinen, Todd Peters
Douglas Heikkinen 00:04
Hello, and welcome to the Conviction Creates Alpha podcast. This is your host, Doug Heikkinen. . .
Todd Peters 00:17
Thanks, Doug. Great to be with you.
Douglas Heikkinen 00:20
Todd, you've had a really long and successful career doing what you do. What has been your career path in manager research?
Todd Peters 00:28
Well, Doug, I really do truly believe I'm one of the luckiest people in the world. For the past 25 years, plus, now, I've had a chance to explore the investment management industry and basically every angle and direction. And and it's really been so beneficial, because I've gotten to meet so many interesting people have many different perspectives and views that really all go into what we do at ns Capitol. I'll give you a few specifics. So people can understand my background. My first kind of quote unquote, real job out of college was at Mercer investment consulting. Now, I was the lowest rung of the ladder in the investment performance, analyst role. But it was great because I got a chance to see firsthand how institutional consultants built portfolios for Fortune 500 pension plans. And I also got a chance to meet investment managers and got to sit in on meetings, hear how these consultants were asking questions to the managers. And it certainly was a great kind of initiation to the industry. What I realized, though, at this point in time, and this was in 1996, and 1997, was I was always one quarter behind and kind of following the world because we were doing our quarterly performance reports, you know, every quarter looking backwards. But also, I wasn't seeing the internal workings of investment managers. And that's what I really wanted to get my arms around. And so I was fortunate enough in October of 1997, to join a small firm investment management firm named Mills Value Advisor. They had 150 million of assets under management and five employees. And I came in as the Director of Marketing, but quickly moved to actually being the chief operating officer. And what was fascinating about it was I actually did get that inside view every piece in part of how a manager works. And I also got a chance to do some of the things in the operational world that I knew were important, how bills were paid, how research was put through the process, I actually helped write the compliance manuals. And so that kind of really gave me a true understanding as to what a manager looked like from the inside. And that's where I had a tremendous amount of value. And then the next step along my path was for a firm called weak first union that subsequently went to West Covina securities and now is known as Wells Fargo advisors, I got the proverbial offer you could not refuse, or I could not refuse. From a dear friend of mine and colleague that I actually worked with at Mercer, he had become the Director of Research at wheat first union, and was looking to bring their research efforts in house. And he was looking for a friendly face to build the team. And I was glad to join them. And what was great about that was number one, at the time, wheat first union was the 15th largest broker dealer in the country, but was growing fast. And so I got to see what firms that had true assets in reach, could get you as far as meetings with individuals and access to Investment Management organizations. But I also had a chance to really start to put my my own research in interviewing skills to work. And I was given essentially the Northeast, which was New York and Boston, to cover and I got a chance to do about 600 manager interviews during my time at that organization. So this was June of 2000, to ultimately April of 2003. And it really served as the basis for my initial network in the investment management industry. And also my thoughts around how to ask questions, interview investment managers, but also how to put them together in portfolios because at the time, and we were overseeing about 20 billion of client assets in the various programs that we were working with. Now in April of 2003. This is kind of a pivotal point. And I should make a point to kind of make a statement of here of saying that I had always wanted to build my own investment organization, and I had been working on a business plan since college. And so the first eight years encompassing Mercer Mills value and Wachovia securities was to kind of build that underpinning so that I could give myself a chance. And so in April of 2003, I decided that was the right time for me to launch a company called Lyndhurst enterprises. And Lyndhurst enterprises is my firm. And I continue to operate that as a manager research company. And that was incredibly valuable because I now had the ability to go in any direction I wanted. And I could then really fine tune my approach to the research effort. And what I looked for what I believed was important. And I'll tell you, the most important thing I learned early on was what I thought I knew doing manager research, I had no idea. Because once you're in charge of your own firm, everything changes. And so it completely changed my approach to what I look for in investment managers, how I look for it, and what I'm trying to identify as being important. And it I'll tell you, and we'll expand on this as we go. It really has little to do with the investment philosophy. And it has everything to do with how they run the organization. And that was one of the most important lessons I've learned, you know, being on my own since April of 2003. It also gave me a chance to really move into a lot of different directions. So in addition to manager identification work, I started a strategic consulting practice helping managers grow, I formed a third party marketing organization to help raise assets. For investment managers, I also serve on the advisory board of a select group of managers. And so it gave me a true 360 degree perspective on the investment management industry. In addition to that, I've started my own strategies over time, and I've networked with people in compliance, to publications to conferences that really help me get a great understanding as to what matters in selection and research. And so that really kind of set me on the path of where we are today, within s capital, I was greatly most grateful for the fact of having been mutually introduced from a by a friend to Lew day in 2008. And lou is the founder of Venice capital, as you know, and has done the prior to podcasts with you. We actually met in the Orlando airport on December 30, of 2008, to form a partnership that continues to today. And it's been one of the those experiences that I've really been a highlight of my career, we share an absolute common philosophy on client experience and what the expectation should be. And it was really exciting for me to not have a legacy issue, because ns capital was just being formed to be a part of watching it grow and develop. And so in 2009, I joined in a consulting capacity to help with manager selection. And in 2010, I became chairman of the Investment Committee. And that's a role that I continue with today. And it's been so gratifying to see from start to where we are, the trajectory that ns capital has has been on. I guess I'll tie this kind of background up with the following. I've been extremely fortunate now to have done over 4000 manager interviews in the last 25 years, I've done that at over 2000 individual, unique investment managers, I have learned that the style box concept is probably one of the worst things that's happened to investing least in my opinion, I have determined that emerging are undiscovered managers are where I really like to live, and those that are then willing to concentrate in their best ideas. And lastly, as I mentioned earlier, I'm really looking to identify people that are business operators as well as investment professionals, because I think that's what unlocks the probability to maximize your your success going forward. And so I consider as I mentioned earlier, I consider myself one of the luckiest people, I've gotten a chance to explore this industry in every way. And all of that kind of contributes to the way we think about manager identification and portfolio construction at ns capital
Douglas Heikkinen 09:22
4000, manager interviews, that's a significant amount. Are there critical moments that were particularly impactful to your research approach?
Todd Peters 09:35
You know, Doug, there are obviously when you've been as lucky as I have, there's a lot that really have impacted the way I think but I believe there are three that I would put as kind of the each one being an anchor to the way that that i and n ns capital think the first one was joining Mills Value Advisor in in October of 1997. That firm and the gentleman Charlie Mills was my boss there. And he was the founder and operator and Portfolio Manager, he ran a five stock portfolio. And I really appreciated that. It's what I learned from him to see a the depth that he would go in understanding the companies he would invest in, but also that he would really interact with management's of these companies. And that was two or the two things that were really important in the way I was starting to form and think about investing. And also, because of the nature of our portfolio, you realize very quickly that you needed a stable client base in order to implement that and execute it. And so understanding the quality of the investor base became paramount. And so I would put first my Mills value, advisor experience as number one, number two, I would put at when I was at wheat first union slash Wachovia securities. And that's when I had a chance to meet an investment management firm named Third Avenue management, this was in 2,003rd Avenue was much smaller than but was starting to really grow and develop, I got a chance to meet with the principals there and came away saying these were incredibly smart people doing very unique things. And I wanted to be a partner with them. But they didn't fit neatly into a style box. And I said, that was it, I was done with worrying about anything fitting neatly into a box, I just wanted to find smart people, dedicated people that were executing unique strategies. And so I would put that as number two as kind of the final nail in the coffin of me worrying about things having to fit neatly somewhere. And the third one would be the start of Lyndhurst. Because in in April of 2003, and really, that truly showed me that if an individual is worrying about paying the bills, or dealing with unhappy employees, or restless clients, they're taking their time and energy away from the execution of their strategy. And I had not constant contemplated that when I was working at a big firm myself, it was only when I started to understand what it takes to run a business on my own. Did I realize that success is really driven by those that understand how best to manage the business side, that the strategy itself will take care of itself if people have the ability to focus on it. But if you have all these other distractions, then you're not able to focus the way you should. And I did not know that and contemplate that until I was on my own. And so I would consider that as really the third critical element or moment that helps to drive the direction of which I ns capital now look and explore managers today.
Douglas Heikkinen 12:58
Let's get into the managers themselves. What specific characteristics are you looking for in your manager partners?
Todd Peters 13:06
Well, Doug, as Lou mentioned, on your prior podcast, you know, we really do try to find the undiscovered and emerging, we want them to be employee owned, with proper alignment. So that's sort of definitely the starting base of what we look for. But I'll go a little bit deeper with some of the specifics. And I think one of the things that you'll notice is that very little of this has to do with the process themselves. The investment process, it has more to do with the people that we're dealing with. And so number one, um, first and foremost, I would say that it we want to partner with managers were the individuals that are executing the strategy created the strategy. And that is important to us, because that gives the buy in, at the end of the day, we're wanting people that are passionate about what they do, that are excited to go into the office. And for us, one of the things that makes that very easy to see is if you created something you have that emotional buy in So number one, we want them to develop the strategy that they're implementing. Number two, which pulls about what we just spoke about a moment ago, is we want to make sure that the individual individuals understand that they are running a business, not simply a collection of ticker symbols. So they are understanding how resources need to be allocated at the firm. They are taking compliance and infrastructure seriously. They are partnering with the right client base. They have incentives internally aligned properly. So they need to know that they're running a business and so we spend a lot of time making sure that the individuals we look for do truly understand that and I will say one of the most enlightening things of all of my career thus far is how few investment managers actually do consider themselves to run a business. And so when we find those that are business operators, as well as investment professionals, that's exciting for us in that and kind of taking it one step further, that the organization is structured properly, so that the investment professionals can do their job. And what I mean by that is, they are free of distractions, that they have properly delegated, or outsourced all of the business functions that they need to, so that those that are really in charge of the investment approach, are able to do that in a way that maximizes their efficiency. And so again, we're really trying to understand how the organization is structured, and most importantly, how the investment professionals can have their focus put where it should be, which is research and decision making. The fourth is that they are understanding how little of the outcome they really are in control of so we put this as kind of our humility rule, we are looking for people that are humble enough to know that the only thing they can control is themselves. And that they really understand the fact that there are a lot of unknowns out there. It may sound a bit cliche, but we want to make sure that we're dealing with people that do know that so that they just put their effort on making sure that they come to work every day, do the best job they can. And if they do the best job, they can over time, we know that they can be rewarded for that, but that they don't think that they can control the outcome directly. So we do focus on finding those that have that level of humility. And lastly, we want to find individuals that possess the characteristics we believe that they can handle adversity, and pivot when necessary. One of the things that I have certainly learned in multiple ways is that you're going to have adversity, you're going to have bad outcomes, you're going to have mistakes, you're going to have all of those things that stack up against you. How many of these individuals can persevere through that, and continuously grow, continuously evolve, and really plan on how to learn and build from those adversity moments. And not everybody can do that. So we're really trying to find those individuals that we believe possess the characteristics to work through the adversity. And then when necessary, make the enhancements and pivots to continue to grow and develop and do a good job of executing their approach to investing. And so those are really the specific characteristics that we are looking for when we're trying to assess partners at ns capital.
Douglas Heikkinen 17:50
Todd, how did you arrive at those specific characteristics?
Todd Peters 17:55
Well, it is one of those things that it happens over time, you know, I'm trying to do everything that I just told you that that we're looking for in specific characteristics, I'm applying to myself, as well. And so it's an A continuously evolving and learning exercise. And I guess the best way to put it is we do believe that ultimately, our job is to select people, we are looking to find the right individuals to partner with. Now, beyond just simply saying that we're looking for people, what we really mean is we're looking for people that we trust their decision making abilities. And when you take that even one step further, and this is where we believe it's kind of the the critical element to maximizing your probability of success is how thoughtfully will they or do they react to the adverse or unexpected? Everybody has a great plan, when they're just making an investment or looking to initiate a position. Everyone believes with almost 100% certainty that that position is going to work out. But we all know the reality is it's not. And it's not certainly going to be as simple and as straight as simple straight line up. There's going to be a lot of unexpected events, whether it's small, meaning another competitor enters the market, to the major whether it's a government that changes the regulations in an industry, to the completely unexpected to anybody, a global pandemic. And it's how the individuals can process that information that will allow for a thoughtful reaction. Now, we're not saying that they're going to be right on the reaction, but they're making a logical, thoughtful one. And if they continuously do that, then we know that over time, the probability starts to stack in our favor of success. Now, for us when you think about how to make a thoughtful reaction, there are kind of five things that we're looking for here. What we believe kind of go into that thoughtful reaction. And that's one a passionate belief of what they do to a proper structure with which to do it. Three financial discipline. So make sure that they are not in a panic situation, because they are financially kind of state, they are financially stabilized, they're getting quality information. And they have that humility based in judgment. If we find these characteristics and can identify them, then now we're talking about these are the people we want to partner with, to execute on behalf of our clients. And so a lot of how we got to those specific characteristics really comes down to our core belief that it's the thoughtful reaction to the adverse and unexpected, that's most critical. And that really comes back all the way to the top to the individuals. And so we really believe in trying to partner with the individual. And that individual needs to have these characteristics. And that's what ultimately provides us with the the elements we're looking for in the managers and the organizations we want to partner with to execute on our clients behalf.
Douglas Heikkinen 21:06
Great people you want to work with are hard to find great managers are even harder to find. So how do you find these individuals?
Todd Peters 21:16
Well, it you're exactly right. 100%. We we do not search databases, I think that's first and foremost, I want to I want to make very clear, we also as as per what we like to do, we like to find managers before their household name. So call that in, emerging or undiscovered. So by their sheer natured most of the time, they are not on any of the databases out there. So that's a big part of why we do not, do not search that way for the partners that we're looking for. So how do we find them, it really comes down to our network, and our reputation. And I'm proud of on both of those. We are a group that is known in the industry as being willing to look for the undiscovered the emerging the zero track record, the individual going through difficult times with their track record. And so we kind of have that general reputation in the industry. And so as a result of that, we have people reaching out to us, which number one is very gratifying that they're they're looking for us as a as an avenue to present themselves to make the introductions. So that that is certainly one. Number two, we have created a network of in the investment management industry where manager colleagues or allocator colleagues will say, hey, you should take a look at this organization, we believe it meets your criteria, you know, the my peers in the industry know what we look for, and they are willing to share, and we do the same for them. So we've created a very mutually beneficial relationship that way. Additionally, as I mentioned earlier, I've been fortunate enough to meet with compliance consultants, general counsel's conference coordinators, financial publication organizations, third party marketing groups, and other family offices that all know what we're looking for. And we share information back and forth. And so a lot of our identification comes organically through our network. And so if we are looking for a certain perspective, if we're looking for something to add to our portfolio, a, I have a pretty strong list already of people that I've met with over the years that I believe fit that criteria. But if I'm ever looking to expand on that, I can reach out to my trusted network across all of those disciplines. And we'd get a we get usually a tremendous grouping of people to look at. And that's really kind of the critical component of how we get to that identification stage.
Douglas Heikkinen 23:59
So what does your research process look like once the initial identification is made?
Todd Peters 24:06
Yes. So this is obviously for our work is where the real work does start. You know, a lot of it is is sort of the traditional checklist, with just our emphasis areas being a different than a lot of other groups. So obviously, when we first meet somebody or were first introduced, we will do the traditional document request. We'll look at current and past presentations, if they've written client letters, if they've done any research reports that they can share, we'll examine the regulatory letters or any audits that they've gone through. We'll obviously read their form ATVs, part one and two, we'll do that kind of general, that general upfront search just to make sure there's something worth us extending the the due diligence process on that specific manager coming through that if we have still continued to like that. This is where we spending a lot of time is sort of the next phase. The next two phases, I will say the next the next phase is just we do our own independent searching. And we'll search on the firm will search on every individual will try to slice and dice as much in as many different ways as we can to gain any information on the firm in the organization through just online resources. And we're really just trying to see if there's anything that pops up that is a really positive or more likely something that can can cause us to be shied away from extending our work. But it gives us a chance to try to see what online profile is out there, and to start giving us a chance to build a mosaic of the individuals that we're looking to partner with. At that point, if we are still looking to move forward, then we start our communication process. And what we do here is we will either do calls or video calls, with every key individual in the organization, particularly those that we think have a direct impact on the portfolio that we will be executing at ns capital. And what we're really looking for here is to try to understand each individual's path, how did they get from where they were born and raised to the investment job that they currently have. And we really want to understand that path, because that tells us a lot about the or the individual, and really tells us about how committed how bought in they are to what they're doing. And that's really an important part for us. Then, our next phase after we kind of do these individual calls where we're learning just about each individual, then we want to talk to the senior leadership. If there's a CEO or CIO, whoever's really kind of driving the path of the organization. That call is all about the firm's vision, how it evolved, where the history has been, where they think they're going, the type of client, they're looking to have the type of strategies they want to have executed, we're trying to understand that business side that business practice, then we'll talk to the CIO specifically, on the strategy, how that strategy evolve, and how it's being executed, both from research, buys, sells trading. And we try to really make sure that we understand all that goes in to executing that strategy. What we're really looking for here is, do we believe that the strategy they're executing, this individual has the expertise to do that. And so we're really looking to kind of have that balance, that we believe they have the expertise to execute what they're doing, we will then review the portfolio, stock by stock or you know, investment by investment, to make sure that what they say they are doing, they're actually doing, and we use this as a check and balance. And then we certainly speak to the Chief Compliance Officer, if there's a chief operating officer, whoever's running the operations, we want to make sure that they are taking that role seriously. We believe that those that have best practices on the operation side maximizes the efficiency on the investment side, but also shows a commitment to just being best practices in general. And that is something that's very valuable to us. So after we've completed these series of calls, here's where we either know if we're going to move forward anymore or not, that at this point, we have a pretty good idea as to whether this is a firm that meets what we're looking for it in s capital, but we will go further. We are not track record people. Our belief is unless you were there to get it a track record isn't really of any value. We're trying to think what the track record could be looking five years out, however, we do look at it just to make sure we understand how it's performed. And more importantly, because we work in a multi manager structure structure, how that track record may have worked with some of the other managers that we've had, we're looking to have complimentary approaches. So we do try to understand from that perspective, but we don't make any judgments on the manager simply based on a track record. And then lastly, and it's been a little different, certainly over the last 18 months. But we do like to do on site visits. Because we like to just have the chance to look at both groups to validate any key points. And just to check and make sure that how we're feeling through our research approach is validated by seeing the organization's offices, seeing the individuals and making sure that we have a good communication because we think that's critical going forward is to make sure that we've built the right communication path and we think seeing, you know, face to face or having an on site opportunity to do that, you know, is certainly critical.
Douglas Heikkinen 29:56
Wow, that is a process. How does a manager ultimately enter into an NSC capital portfolio.
Todd Peters 30:04
So, at the end of the day, it's a vote by the Investment Committee, which as, as you mentioned, I'm chair of. But what the way it tends to work for us is, we will determine if there's a perspective that we need. If there's a perspective that we need, we then identify, we do that process, which we just discussed. And then the Investment Committee will go through multiple layers of conversation, one, do we need the perspective to is this the right group, and ultimately, I will do my work, and Lew day will, will then come back and do his own independent conversation with the manager after I've presented our findings to the Investment Committee. If Lou comes back, equally pleased with the manager that we're looking to add, then we have the official vote, the official vote is then made, and then at that point, we will determine the proper allocation that a manager would get with inside of the alpha rank. And so really, that kind of getting in is the final vote of the Investment Committee.
Douglas Heikkinen 31:15
So let's look at it from the other side, why would an investment manager want to be part of the US capital portfolio?
Todd Peters 31:22
It's a great question. And it's one that I spend a lot of a lot of time thinking about. I believe that we are fortunate, when we get a chance to partner with the managers that we do. And we want to make sure and I'll tell you what our ultimate goal is, our ultimate goal is to be the best slash easiest client relationship that that manager has. And the the way that we kind of do that I'll break it down on the easy side is we expect to know client communication from the manager to our individual clients, the only person that that manager really has to interact with is me as chairman of the Investment Committee, so we've tried to minimize any of the communication that they would traditionally have with other organizations, we have taken over trading. So we at ns capital actually handle the implementation, Eric Hahn, who is a part of the Investment Committee with myself and Lu de, he handles the implementation. So we've made it to where the manager just has to provide us with their intellectual capital will take care of the execution. And then as ns capital develops and grows, they essentially get assets by every new offering account that we open without ever having to do any part of the sales process. So as we grow, they grow. And we hope that they see that that's certainly an easy way and an easy path of growing kind of on the best part, we try to be as supportive and understanding during the adverse times, we are very realistic and understanding that not every strategy is going to be rewarded by the investing public at a given time. And so that's when we really step up to make sure that our manager, partners know that we're there to support them, we don't beat them up, we want to make sure that they know we're committed to the long term with them. And so that's support, I hope they see. And they really appreciate that. And then we also know that particularly since we're dealing with the The Undiscovered are emerging typically then meaning smaller asset managers, they're growing themselves. And we want to support that growth, not just through Inverness capital, but we'll be willing to be a reference to them with any of their, you know, prospective clients so that those groups can see why we pick them, how we use them, and why we believe in the long term of that managers capability. So we really do try to be that easy slash best client for each individual manager. Ultimately, though, from our See, we hope that they see the value proposition we're trying to drive for our clients and ns capital, and that they want to be a part of it. So combining that best and easy client relationship with them, seeing what we're trying to do for our clients and ns capital, they're getting excited, that allows them to be a part of what we're building here. And we have been so grateful for the client or the manager relationships that we've had in this first 12 years of our life. And we're excited about continuing to grow with them, hopefully for the next 30 years of ns capital's life.
Douglas Heikkinen 34:39
Todd, I'm sure everybody heard the conviction you have towards ns capital, the managers and in your process, and we thank you so much for joining us today.
Todd Peters 34:50
It's a great pleasure. Thank you so much, Doug.
Douglas Heikkinen 34:52
If listeners want to know more, please visit NSCadvisor.com for everybody on the Conviction Creates Alpha Podcast team. We thank you so much for joining us. Take care