From the July 2017 issue of Investment Advisor • Subscribe!

The Long Game: 2017 SMA Managers of the Year

The nine managers honored this year are working to move the ball for advisors and their clients

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Meet the 2017 SMA Managers of the Year (Photos: Tom McKenzie, David Handschuh) Meet the 2017 SMA Managers of the Year (Photos: Tom McKenzie, David Handschuh)

As equity markets hit records and rattle the nerves of some market gurus, the winners of this year's SMA Managers of the Year awards are taking the long view.

Consistency and steadiness were frequently cited as keys to success in interviews with the winning portfolio managers. As Dan Meyer of Pacific Income Advisers said, “We’re not there to hit home runs. We get singles and are consistent.”

Jon Christensen of Kayne Anderson Rudnick noted, “We want to find businesses that have some sort of sustainable advantage, companies that can grow, protect and sustain over long-term economic cycles.”

(Related: Torchbearers: The 2016 SMA Managers of the Year)

This is the 13th year that Investment Advisor has worked with Envestnet | PMC to identify managers who have built strategies with a proven, repeatable process and that outperform their benchmarks, not just this year but consistently.

To determine the winners, Investment Advisor editors meet with the executives and analysts at Envestnet | PMC to review the analysts’ recommendations. The winners were announced at the Envestnet Advisor Summit in May.

The selection committee considers finalists in seven categories and identifies two winners each in the U.S. large-cap and small-/mid-/SMID-cap categories. The remaining five winners are selected from the international, fixed income, strategist, impact and specialty categories.

From among those nine winners, we identify one manager who has gone above and beyond in delivering value and serving advisors. That sometimes means doing deep analysis and deviating from a benchmark to strike the best balance between returns and risk for the end client.

As Todd Solomon of Congress Asset Management, and this year's Overall SMA Manager of the Year, said, “That's the art more than the science.”

He told Jamie Green, former editor-in-chief of Investment Advisor and a member of the selection committee, “There are some quantitative measures you can use — those would be beta, standard deviation, downside capture and so on — but there are also the qualitative measures.”

The advisors who use these strategies are working with clients to help them achieve their goals, a fact that drives the team's investment decisions. “The fear I have every day is that a client is going to call me and tell me they can't do what they had wanted to with their money because we put their money in a risky investment,” Solomon said.

Todd Solomon, Congress Asset Management, Overall SMA Manager of the Year, US Mid-Cap  Mid-Cap Growth

Congress Asset Management, the winner in the U.S. mid-cap category and this year's Overall SMA Manager of the Year, uses a strategy best described as “steady as she goes.”

It focuses on growth at a reasonable risk, favoring high-quality companies with consistently strong earnings and cash flows across market cycles.

“We like companies that can grow a little bit faster than GDP, and if GDP is down they can still eke out some gains because they’re in an area that's going to do particularly well,” said Portfolio Manager Todd Solomon, who's been leading the management team since 2010.

“We’re talking about companies that we want to own forever; they may get acquired or get too big for our process [no longer mid-cap], but we don't want companies that have to change their stripes to achieve success in the future.”

One example of such a stock in the strategy's portfolio is Dorman Products (DORM), an after-market auto parts maker that sells to a number of retailers. Dorman is not beholden to any one retailer or geographic part of the country, and the company operates in a growing market, said Solomon.

The average age and number of cars on the road is growing, as are miles driven given lower gas prices, Solomon explained. “All of these things lead us to a lot of confidence that the demand for their parts is going to be there.”

The SMA portfolio of Congress Asset Management consists of 40 stocks. Over the past five years, its annualized alpha has topped 5%, and its beta has been 0.92, indicating that the portfolio not only outperformed its index but was also less volatile.

Over the past seven years, the portfolio has captured 107% of the market's move — but just 85% of its risk — and it has placed in the top decile of its peer group, according to Envestnet | PMC.

“We’ve shown in our numbers that we can do better than the market and take less risk,” said Solomon. “That's usually how we compete against passive investors.” The firm's main competition is other active managers, against which it also often outperforms.

Since it's not an aggressive growth manager, Congress Asset Management sometimes pairs off with other managers who are more aggressive, said Solomon.

“We have a very good track record, and the people that have been working on the product since 1999 are still here.”

The firm works with wealthy individuals and families as well as pension plans, endowments, foundations and municipalities. Pension plans need to make sure their members get paid; endowments and foundations have long lifespans and large cash demands; and individual rich people want to stay rich, said Solomon, explaining the strategy's limited risk approach.

“Clients give us their assets with some further goal in mind,” he noted, and he and his colleagues don't want to disappoint them. “The fear I have every day is that a client is going to call me and tell me they can't do what they had wanted to with their money because we put their money in a risky investment.” —Bernice Napach

(Related: SMA Manager of the Year Todd Solomon on Beating Passive Investors

Margartet Vitrano, ClearBridge Investments, US Large-Cap  Large-Cap Growth

A longer-term orientation was only one factor that helped ClearBridge's Large-Cap Growth portfolio beat out 29 other programs to win the 2017 SMA award for large-cap equity portfolios. Co-managed by Margaret Vitrano and Peter Bourbeau, the portfolio led the category with an 8.37% gross return in 2016, beating out the Russell 1000 Growth Index by more than a full percentage point. The program has an annualized gross return for the past five years of 16.54%.

Vitrano said they select companies by researching business models to find key markers. For example, Visa, as a duopoly, is in a high-barrier-to-entry arena. Plus, “it has a nice secular tailwind of people using less cash and more plastic to pay for things. And it's highly profitable.” She and Bourbeau also prefer self-funding businesses.

A second factor guiding the selection process, she said, is that they believe having some valuation sensitivity is a “smart way to manage risk and think about investing. It can be dangerous to fall in love with a fad or idea without thinking through the valuation of a stock.”

The team's view on diversification also distinguishes it from competitors: It's not via sector, but by growth drivers. She noted the Large-Cap Growth portfolio is a fairly concentrated strategy of 40 to 50 stocks, so “what you see from the outside looking in is one of the more consistently compounding portfolios vs. some concentrated strategies that can be quite volatile. Our goal is to have less volatility in that application.”

For example, within the strategy, they have some consistent compounders, such as Microsoft, Johnson & Johnson and Comcast, but in the last year they also added some energy holdings. “It's unusual for growth portfolios to own energy, but the nice thing about energy is it tends to move in different ways than the overall market, so it adds diversification.” If the macro economy isn't headed for a global recession, they believe some of those energy companies can be good compounders as well.

They also include what they call their “select group” of stocks, which are faster growing companies that can be expensive and volatile, like Amazon and Facebook or biotech stocks. “We think about that when we think about portfolio construction. We diversify the portfolio with companies with different growth drivers,” she said.

They don't sell a stock on outright valuation, Vitrano noted, “but we have a clear idea of why we invested in every name we own in the portfolio. So when the thesis is played out or no longer valuable, that's when we exit.”

Nike is an example. They owned the stock for several years, but became worried about the competitive landscape, and some of the company's targets over the next several years were aggressive, especially in the Chinese market. ClearBridge wasn't convinced about the growth in China, and certain areas, such as women's apparel, had a lot of new competitors. Plus the valuation of the stock was two times the market at the time, so they sold.

The strategy's success in 2016 was due to several reasons, such as some positive stock selection and growth driver diversification in the health care area. They had some biotech stocks, but also owned managed care companies that did especially well. Vitrano added that the portfolio's quality bias helps protect assets in down markets, and the portfolio typically will perform well in low-growth environments. She also noted that its low turnover of 15% to 30% makes the portfolio very tax efficient. —Ginger Szala

Andy Bischel, SKBA Capital, US Large-Cap  ValuePlus

SKBA Capital's ValuePlus strategy, one of two winners in the U.S. equity large-cap category, uses relative dividend yield to build a portfolio of high-quality stocks that have the potential to outperform the Russell 1000 Value Index over time.

The strategy invests in 40 to 60 large-cap stocks with above-average dividend yields (compared to the S&P 500), which have the potential to provide long-term capital appreciation with relatively low volatility.

“We’re trying to take advantage of some of the dysfunctions of the marketplace,” said Andy Bischel, CEO and chief investment officer of SKBA Capital Management.

He explained, “Markets routinely overshoot the true change in the underlying fundamentals, whether it's earnings deterioration or a valuation issue.” As a result, dividend yield — the ratio of dividend to stock price — rises because the stock price is falling.

Some portfolio managers will avoid those stocks but SKBA doesn't, especially if the stock's dividend yield is also high relative to its own history and there are no signs that the company is in such dire straits that it might cut its dividend.

“We’re not contrarian for the sake of being contrarian, but at turning points you’ve got to be willing to be,” said Bischel.

He describes that moment when, relative to a stock's own history, “all of the pessimism and all of the hate for a stock because it hasn't performed well is now reflected in the valuation. That is the right time to pick up that absolute yield,” he continued, because “you get the premium dividend yield … , which compounds into return and reduces downside volatility. You also get capital appreciation opportunity because the stock is already depressed.”

The strategy returned 18.96% in 2016, topping the Russell 1000 Value Index by 1.62 percentage points. It outperformed the median return of its peer group over three, five, seven and 10 years, according to Envestnet | PMC analysts. It typically doesn't experience deep declines during bear markets, which means it doesn't have to have heroic returns when the market is rallying, said Bischel.

In addition to consistency of returns, the same three portfolio managers have run the SKBA Capital ValuePlus strategy for over 20 years (two, including Bischel, since 1989; one since 1994), and all of them invest their own money in a mutual fund that uses the same strategy as ValuePlus. Moreover, 75% of the firm is owned by its employees.

Bischel said the ValuePlus strategy is fitting for a core position in clients’ portfolios or as a complement to another growth or international stock strategy because it has a lower risk profile.

“You can preserve your wealth better with better downside protection, and you can get the capital appreciation over the cycle as well,” said Bischel. “Boring is kind of beautiful after all.” —BN

(Related: SMA Manager of the Year Andy Bischel on Market Dysfunction and Fundamentals)

Jon Christensen, Kayne Anderson Rudnik US Small-Cap  Small-Cap Sustainable Growth

Process and experience conducting in-depth research of companies with growth sustainability were two key reasons Kayne Anderson Rudnick's Small-Cap Sustainable Growth strategy won the 2017 SMA Manager of the Year award in the small-/mid-/SMID-cap equity category. The program's 2016 gross return was 26.11%, more than double the Russell 2000 Growth Index. Since its inception in 1998, the annualized gross return has been 9.58%. The Envestnet | PMC analysts noted in their evaluation of the finalists that they were “impressed that the majority of significant outperformance was driven by stock selection” in Kayne's strategy.

Jon Christensen, co-portfolio manager of the portfolio with Todd Beiley, said their strategy looks at businesses for the long haul. “We want to find businesses that have some sort of sustainable advantage, companies that can grow, protect and sustain over long-term economic cycles,” he said. “That comes back to business, and our task is to find high-quality businesses that can grow during good and bad times.”

Through research, the KAR portfolio team finds 25 to 35 companies, and digs into their businesses. “We do organic types of research, using third-party sources some times, but usually doing our own research,” he said. They look for small companies and business inefficiencies. “We want to find that next generation of blue-chip stocks that go from $1 billion to $2 billion to $10 billion to $20 billion market cap.”

He said that the key to their approach is having business analysts on the team. “Valuation is important, but we need people who can understand business because the No. 1 thing that can happen in businesses is they can evolve or devolve.” He said there could be a great business, but it could erode due to competition. “Our task is to make sure it's not eroding, but sustained. Over time, you will see they made a bad acquisition, or competition position erodes, and that would be an indication to sell the stock.”

Another reason the team would sell the stock is if a company gets too large. He said when holdings get up to the $8 billion to $9 billion area is when KAR replaces it with another stock that fits the strategy. The strategy's holding period typically is three to five years, and portfolio turnover is between 25% and 35%.

Although, or maybe because, it is such a concentrated portfolio, the team keeps a tight grip on risk management, and that's shown in the numbers. Christensen noted that although the portfolio has been running for 18 years, it has only had three negative years. “Even in years [when] we’re negative, the index is more negative, so we are preserving capital at a more efficient rate.” He said when the market is extremely speculative or coming out of a recession, they might be trailing the market. The strategy fits best for clients who want to preserve capital and grow their portfolio. “When you mitigate downside, that helps you overall preserve capital over time. That's our goal.” It must work as the portfolio has had strong alpha with a 0.7 beta. —GS

(Related: SMA Manager of the Year Jon Christensen on Valuation and Business Analysis)

James Donald, Lazard Asset Management, International  Emerging Markets Equity Select ADR

With boots on the ground in 14 countries and a staff of 70 evaluating a bottom-up approach to emerging markets, Lazard Asset Management's Emerging Markets Equity Select ADR portfolio won the 2017 SMA Manager of the Year award in the international and global category. Beating out 19 other strategies, Lazard not only had a stellar 2016, with a 22.37% gross return, almost double the MSCI Emerging Market Index return of 11.17%, it produced over 1.6% of annualized alpha over the last peak-to-peak market cycle (July 2007-December 2016), according to Envestnet | PMC's analysts. Since its inception in 2004, the fund has had an 11.01% annualized return.

The depth and quality of personnel is a key reason for the fund's success, said James Donald, managing director and portfolio manager. The fund is a relative value strategy so it focuses on a trade-off between valuation and financial productivity of an individual security. “Essentially, we are trying to find mispriced securities that have high and stable levels of profitability but for some reason have low valuations,” he said.

The bottom-up approach begins with a review of a universe of stocks to find those that are inexpensive based on a database screening. “Then we [review] financial statements for each of those companies, look at accounting and see what needs to be adjusted for various inconsistencies in accounting,” Donald explained. If they find the stocks are inexpensive, they go on to a fundamental analysis to forecast levels of profitability and derive price targets. “We then do a final stage of discounting, where we look at political and macroeconomic risks and governance risks, and price and discount for those. [Once] we have a price target, stocks make it into the portfolio or don't based upon whether upsides are competitive with positions already in the portfolio.”

There are typically 70 to 90 holdings in the fund, with a portfolio turnover between 30% and 50%. Measures of financial productivity include return on equity, return on assets, cash return on equity and operating margin. Valuation measures include price/book, price/earnings, price/cash flow and price/sales. Though portfolio managers only select countries that are in the MSCI EMI, the weightings may be different. For example, they might have almost double the holdings in Latin America than what is in the MSCI EMI.

“We do invest in places that ... might be highly risky, but we think [that] in our process, we take that into account,” Donald said. However, he added that the value investment tends to be relatively conservative for the emerging market world because “we don't like to pay high prices for securities.”

Emerging markets “typically have high political risk and high governance risk; protection is not as high as it would typically be in most developed countries, so emerging markets aren't for everyone,” Donald said.

He recommends the strategy for people with long-term horizons, 10 years or more. Those with shorter-term time horizons, less than five years, may not find it as effective of a strategy. The strategy is best suited for “people who want a consistent value strategy that might underperform in a year where expensive stocks are doing well, but probably will, in the long term, do well as long as value is an effective way of investing,” he said. —GS

(Related: SMA Manager of the Year James Donald on Taking Risks)

 Dan Meyer, Pacific Income Advisers Fixed Income  Limited Duration MACS

Knowing its place in a portfolio and fulfilling those expectations are what helped Pacific Income Advisers’ Limited Duration MACS strategy beat out 95 other short- and intermediate-term fixed income products to win the SMA Manager of the Year award in the fixed income category, said Dan Meyer, who is co-portfolio manager on the fund with Evangelos Karagiannis.

“Our philosophy and process are rooted in knowing and embracing an overall allocation process,” Meyer said. “We’re not there to hit home runs. We get singles and are consistent. We look to build portfolios that are repeatable and get consistent risk-adjusted performance in any cycle. That's what we’re going for.”

In its evaluation, the Envestnet | PMC analysts noted that “PIA's conviction in its process, and willingness to weather through the underperformance based on the team's fundamental views, led to strong returns in 2016.” As such, the PIA Limited Duration MACS strategy finished 2016 with a 4.29% gross return, beating the Bloomberg Barclays Intermediate Government Credit Index, which came in at 2.08%.

Meyer added that today, portfolio managers tend to concentrate on short-term performance that “has a tendency to hit home runs.” But PIA is interested in “producing results over time.” The PIA Limited Duration MACS strategy has a 3.80% 10-year annualized gross return.

Meyer said the fund takes on a traditional fixed income role; that is, to prop up the portfolio “when the market goes sideways.” He said his team embraces that role, realizing the equity market usually will outperform the portfolio. “We’re not trying to beat the equity market, but we play an important role in overall asset allocation.”

A key thrust of the portfolio is a strategy developed and implemented in the early 2000s, Meyer said, which is the MACS (managed account completion shares) part of the equation. “We were looking to invest our clients’ money in diversified ways in different sectors that historically have shown a bit more volatility or are hard to invest in for retail types of accounts that require a lot of cash flow,” Meyer said. The result of that search is a BBB credit fund that replicates the BBB part of the Barclays Credit Index. The fund has hundreds of holdings, which eliminates a concentrated risk and allows retail clients to get that BBB credit exposure.

The team also wanted its clients to garner exposure to mortgage-backed securities and developed an MBS fund available to PIA advisors only and open to retail clients who “weren't able to get in based on logistics [of the market],” Meyer said. He noted that though that segment is more volatile, it still is “an important part of the market.”

The typical duration of the investment bonds is 3.8 years. The firm's investment process centers around its Sector Model, which conducts a spread analysis of 75 bond market sectors, deconstructing the bond market into yield curve, quality and industry sectors. Using quantitative analysis, it finds undervalued sectors, then applies bottom-up fundamental analysis to identify the best issues that fit the firm's sector views. Currently the fund's duration is “modestly short” due to recent uncertainty with economic and monetary policies, tax reform, regulations and health care, Meyer said. —GS

(Related: SMA Manager of the Year Dan Meyer on Hitting Home Runs)

 Brendan Clark, Clark Capital Management Strategist  Navigator Strategist Solutions

Flexibility in investment solutions was the key thrust of why Clark Capital Management's Navigator Strategist Solutions won the coveted Strategist category of the SMA Manager of the Year awards, beating out 125 other third-party strategists. “Due to the unique and flexible nature of the firm's flagship strategy, Clark Capital has created additional strategist solutions that leverage the Fixed Income Total Return Strategy as a dedicated sleeve allocation alongside other unique, multi-asset solutions that align more appropriately with a client's various risk tolerances,” Envestnet | PMC analysts stated in their evaluation of the firm.

Brendan Clark, CEO, said that the key to their success was their “deep bench” of 14 portfolio professionals who have an average of 28 years experience and almost 15 years working together as a team. Their core philosophy is driven by three principles: diversification, an opportunistic approach and a hyper focus on risk management. Clark Capital also relies on two engines to drive portfolios: methodology diversification, and using momentum and relative strength to drive portfolios toward opportunity and away from risk.

“Obviously, we believe in diversification of asset class, but we take it one step further and even diversify our methodology because no one factor will work all the time in all market environments,” Clark said of their fundamental, bottom-up strategies.

The three Navigator ETF strategies highlighted by Envestnet | PMC were the Fixed Income Total Return, MultiStrategy and Global Balanced portfolios. The Fixed Income Total Return ETF portfolio is the firm's flagship and is a part of all strategist portfolios, albeit in variable weights. The portfolio adjusts asset allocation between high-yield/low-quality debt, high-quality corporate or government bonds, and cash or cash equivalents.

For example, in early 2016, the fund was defensively positioned and holding U.S. Treasuries. However, in late February 2016, when the credit market contracted, managers moved into high-yield debt, a position they’ve held throughout 2016 and are still holding today, Clark said. He added that since the fund's inception in 2005, it has been exposed to high yield 82% of the time. On its own, the $3 billion fund has had positive absolute returns in 11 out of the 12 calendar years since it was launched. In 2016, it had an 18.1% gross return, better than the benchmark Barclays U.S. Corporate High-Yield Bond index that came in at 17.13%.

The MultiStrategy and Global Balanced funds both offer variable risk portfolios for advisors. For example, the MultiStrategy, which includes U.S. equities, has offerings ranging from 25% MultiStrategy/75% Fixed Income Total Return to a 50/50 weight to 75% MultiStrategy/25% Fixed income. The firm starts with a quantitative relative strength model to rank the equity style and market capitalization. Once those are selected, it will determine allocation. The portfolio typically holds three to five ETFs. In 2016, the MultiStrategy 75/25 gross return was 19.87%. (the 25/75 portfolio return was 18.26%).

The Navigator Global Balanced strategy “exploits global trends,” adding to its mix of U.S. equities products with international exposure. It too has different risk-based portfolios, blending the Global Balance with the Fixed Income Total Return strategy. In 2016, gross return of its 80% Global Balanced and 20% Fixed Income fund was 12.14%, while its 20% Global Balanced/80% Fixed Income came in at 16.15%. —GS

(Related: SMA Manager of the Year Brendan Clark on Diversifying Your Methodology)

 Matt Patsky, Trillium Asset Management Impact  Small/Mid-Cap Core

Although impact investing has been growing in popularity over the last few years, Trillium Asset Management has been in the sector for 35 years.

When the firm was founded in 1982, a lot of factors that contributed to a firm's success weren't available in its financial statements, according to Matt Patsky, Trillium CEO and portfolio manager on the Small/Mid-Cap Core strategy.

“You wanted to look at environment, social and governance issues that were material to the sustainability of businesses models but were not going to be found within the financial statement,” Patsky said of security analysis back then. However, he said, Trillium believed “that if we did it and did it well, [impact investing] would go mainstream.”

If not quite mainstream, impact investing is clearly an area of opportunity. A report released in mid-May by the Global Impact Investing Network found that in 2016, institutional investors poured over $22 billion into impact investments, with plans to increase both the amount of capital and the number of investments this year by 17% and 20%, respectively. Those investors manage a total $114 billion in impact investments, the survey found.

Although he has more competitors now, Patsky said that hopefully, “we’re moving into the mainstreaming of [impact investing] enough that 10 years from now you won't have an impact award because everyone will qualify as an impact investor.”

Impact investing isn't just a value-add or niche for advisors trying to attract younger clients or women. “These factors are material. These factors are relevant to the sustainability and performance of companies, and that’ll become self-evident over time,” Patsky said.

For the SMID-Cap Core strategy, Patsky and his team look for firms with leadership teams that have made environmental, social and governance factors a priority.

“We are trying to look within an industry and say, ‘Okay, within the restaurant industry Panera has demonstrated leadership in a lot of different activities around sourcing, but they’ve also been demonstrating great success in their financial model. You’re looking for that intersection of all of those [factors] as a reason to pick” those names over another, he explained.

Trillium's SMID strategy fits well where advisors would use any other similar strategy, even if clients aren't necessarily interested in ESG investing.

“Although we’re factoring in a lot of environmental, social and governance factors, it clearly has not detracted from performance. On a risk-adjusted basis, it's performed very well.”

Envestnet | PMC analysts found the strategy had a 2016 gross return of 17.21%, outperforming its benchmark, the Russell 2500, which returned 13.80% last year. The strategy has a 10-year trailing return of 9.17% versus 7.86% for the benchmark.

“For a traditional manager, whose client may not have asked for an environmental, social or governance overlay, or isn't as concerned about the social or environmental impact of the portfolio, this strategy still is a good choice,” Patsky said.

He noted that in addition to the portfolio managers’ long track record of being activists, the group has worked to change firms’ behavior to bring them in line with common practices. For example, Tractor Supply is a firm Trillium invests in that serves rural and suburban gardeners and small farmers.

“They had no measure of their greenhouse gas emissions as a retail concept,” Patsky said. “We approached them and said, ‘It's become clear that best practices are to understand your total footprint of greenhouse gas emissions as a retailer.” That includes operations as well as shipping functions.

“What we approached them with is dialogue about measuring and reducing their greenhouse gas emissions.”

He noted that, as “often happens at this point, [they said], ‘We’re not sure that's important to our shareholders.’”

Trillium filed a shareholder resolution, and in drafting its opposition statement, the company's leaders realized the value of including environmental factors in its strategy.

“It always involves the CEO and the board being aware of it. They’re looking at it and saying, ‘That doesn't make sense. We should be doing this,’” Patsky said. “Over the long term, doing the right thing has positive dividends.” —Danielle Andrus

(Related: SMA Manager of the Year Matt Patsky on the Mainstreaming of Impact Investing)

Libby Toudouze, Cushing Asset Management, Specialty  MLP Alpha Total Return

Investing in energy is a multi-decade strategy, according to Libby Toudouze, co-portfolio manager for Cushing's MLP Alpha Total Return strategy, SMA Manager of the Year award winner in the specialty category. The industry is evolving, she said, “because we need so much energy infrastructure in North America, and it will take multiple decades to build that out.”

Cushing won the specialty award in 2014 with the same strategy. Its MLP Core strategy was recognized in 2015, also in the specialty category, the same year the firm was recognized as the overall manager of the year.

The Alpha Total Return strategy is a portfolio of master limited partnerships, almost exclusively in the energy sector. In addition to the long growth story, the strategy focuses on companies that connect energy products with end users.

“We operate in the midstream space, which basically is the energy infrastructure architecture of North America,” Toudouze explained, such as pipelines, storage facilities and terminals. “Anything that it takes to get the crude oil, natural gas or refined products from the field to the end user — that's what we invest in.”

The sector is a similar size to REITs and utilities, Toudouze said, with between $800 billion and $900 billion in market cap. The strategy picks from a universe of about 150 publicly traded securities.

“The interesting thing about these energy infrastructure companies is they’re designed to pay a nice cash distribution,” Toudouze said. They’re a high-yielding equity (again like REITs and utilities), but Toudouze said they also have a “very large growth component because we’re in the early stages of the energy infrastructure buildout in North America.”

Toudouze and co-portfolio manager John Musgrave are supported by a team of 18 analysts and an in-house risk manager. They look for companies with drilling operations in parts of the country that have “more prolific basins” for oil and natural gas. They’re also looking for companies that have the potential to add new operations, a solid management team and balance sheet, and that are primed for growth.

Falling oil prices have set the good companies apart from the bad, Toudouze said. “With $100 oil, everybody's making money and everybody can move products. When you get down to the lower prices, the $45, $50 where we are today, it's important to be with the companies that know how to make the connections, how to build on time and on budget, and how to be in the basins where there are going to be volume increases.”

The portfolio is an all-cap strategy, Toudouze said, and the securities held in it are publicly traded so it works well in the equity portion of clients’ portfolios. However, “it's got a nice income component,” too, she said. “It's not a bond substitute, but it can be a bond-like proxy with a growth component.”

That's especially useful in an environment like today's. Interest rates are rising, albeit slowly, and inflation is coming back, Toudouze noted.

Some institutional investors are using the strategy in their real assets allocation, Toudouze explained.

The strategy struggled in 2015, but came back strong the following year with a 27% return, outpacing the Alerian MLP Index by 8.65%, according to Envestnet | PMC analysts.

The securities in the portfolio aren't as sensitive to changes in commodity prices, according to Toudouze. “What's important to them,” she explained, “is that we have a normal, functioning energy supply chain.”

Pricing needs to be in a range that provides profit for producers without hurting consumers, she continued. Current energy prices of $45 to $50 are at the bottom end of the range, while $75 or $80 prices represent the upper end of the price band. When energy prices are within that range, the strategy has a strong demand story, Toudouze said.

“Unless you can think of anything in your life, in your clients’ [lives], where they’re going to use less energy, that's the only thing that hurts this story.” —DA

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