Not Alone

AMR Corp.’s decision to sell its money management arm, American Beacon Advisors Inc., to a private equity consortium–a deal that was announced in April 2008–bodes well for the firm, not least because the increased financial flexibility will allow American Beacon the chance to develop new products to its roster of offerings and employ new managers.

All the same, William Quinn, American Beacon Advisors’ chairman, is firm in stating that American Beacon has no plans of following anything other than its tried-and-true approach of offering investors access to low-fee, well-diversified portfolios in a range of asset classes through a manager-of-managers strategy.

One of these products, the $8.4 billion American Beacon Large Cap Value Fund (AAGPX), has performed far better than its peers in recent times, something that Adriana Posada, managing director of trust investment at American Beacon Advisors, credits wholly to the benefits of following that multimanager strategy with the aim of realizing long-term gains, and to maintaining a strict focus on selecting cheap stocks that have the growth potential to perform better than the overall market.

We caught up recently with Posada, who oversees American Beacon’s equity portfolios and some of its debt offerings, to ask her about the large-cap value fund and the recipe for its success.

The fund is a large-cap value fund and a strong performer in a sector that has not done so well of late. How do you explain your better performance vis-? -vis that of your peers? There are a couple of things that distinguish us from our peers and, at certain times, will impact our performance. We are quite unique in that I oversee the fund but I don’t pick the stocks, since all of our equity strategies are sub-advised. This comes from our heritage of originally being a pension fund, but we really think that the multiple manager strategy is better over the long term, as it means we have a diversified portfolio. The subadvisors are similar in their long-term strategies–they tend to get to the same place, but in different ways, because in the short term, they behave in different ways to offset each other. Most of the time, if one of the managers is struggling, there are one or two more who are doing better and pulling the fund along. In most normal markets, this strategy works well, although there are extraordinary times when it doesn’t and our fund will lag.

Many would say that the market over the past year-and-a-half has been quite abnormal. Do you credit your success only to your subadvisory strategy or is there something else? Our subadvisors follow a bottom-up approach and they didn’t find financials attractive from a price perspective, so being underweight financials has really been great for us.

What’s your criteria for hiring subadvisors?

We have a very specific kind of manager we like to hire. We have a special definition of value, which we call “growth at a discount,” and we look for managers who have a portfolio of stocks that are expected to grow faster than the market, but are selling cheaper than the market today. We absolutely like to buy growing companies; we just don’t like to pay for them. When stocks are cheap, this usually means there’s some issue that we have to isolate. Our subadvisors can identify and isolate the issue and determine that it is temporary. In selecting subadvisors, we also are very focused on identifying firms that have a strong team that has been in place for at least five years, because we focus on firms where there is an incentive to retain people. Just as important, we’re looking for firms where the discipline has been in place for a long time, so that they haven’t strayed from their performance and it is repeatable.

We focus a lot on the people and the process, and if the two are in place, this means that performance should be replicated over complete market cycles. We are very long-term focused and patient with short-term disruptions. To identify managers, we ask them to plot every security in their portfolio on a grid where the X axis shows forward P&E ratios and the Y axis shows the investment growth rate. This enables us to see that their portfolios are, on a stock-by-stock basis, weighted toward companies that are cheaper than the market and growing faster than the market.

Is there a universal investment strategy for all subadvisors?

Each subadvisor has his own way of selecting stocks, but regardless of how they do it, regardless of their focus and process, their portfolios have to be composed of cheap companies that are growing. Because each is somewhat different in their approach, they end up with portfolios that don’t have a lot of overlap, and we end up overall with a very diversified portfolio. At the end of the second quarter, there were 139 names in the total portfolio, and despite the similarities of the philosophies, only 55 companies were owned by two or more managers, and only one company was owned by four managers.

How many subadvisors do you use?

In the large cap value fund, we have four subadvisors. The fund was established in July 1987, so it is a very senior fund and of the four managers managing today, two have been managing since the day the fund opened its doors. So while we like the multiple manager structure, we are not in the habit of turning over our managers, and this is another factor that makes us different.

How much do you manage in the large-cap value fund?

At the end of June, we had $8.4 billion in assets under management.

What sectors have done well for you this year?