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Portfolio > Portfolio Construction

Envestnet, Brinker Capital Partner on Absolute Return SMA

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Envestnet Inc. announced Wednesday that it had added Brinker Capital Inc.’s Crystal Strategy I absolute return portfolio to its separately managed account platform. Crystal Strategy I uses a range of investment vehicles—including individual equities, ETFs, ETNs, open- and closed-end mutual funds and MLPs—across six major asset classes with the goal of preserving client capital in down markets while capturing appreciation in up markets.

John CoyneJohn Coyne (left), Brinker Capital’s president, said in an interview with AdvisorOne on Wednesday that he believed Crystal Strategy 1 was “the first absolute return strategy in the SMA space.” Coyne said the portfolio is “100% transparent, with daily transparency, 100% liquid, cost effective, still tactical and a multi-sector unconstrained strategy.” Putting the strategy in an SMA rather than a hedge fund, for instance, makes it “a very compelling story for advisors and investors that is unique in the marketplace.” Crystal Strategy I, Coyne said, “is a vehicle that investors can look at every night and see what they own.”

Coyne said that the goals of the strategy “are not dramatically different than other global macro or absolute return strategies, providing equity-like returns over a market cycle but with moderate volatility.” The strategy starts with a “null hypothesis,” meaning that in constructing the concentrated portfolio, no single asset class receives an underweight or overweight at the beginning. Merging top-down macroeconomic trends with bottom-up strategy and stock selection, it is only after considering valuation, technical trends, sentiment and risks that Brinker strategically overweights those areas that its management team believes will generate strong risk-adjusted returns over a three-year time horizon.

The strategy is meant to be non-correlated to the S&P 500, had 37 positions and a yield of 1.73% as of April 19, 2011, had attracted $44 million in assets as of March 31, 2011, and has an investment minimum of $100,000.

Coyne said the strategy “evolved from the frustration of advisors” coming out of the 2008-2009 markets and economic crisis. “They didn’t understand what they owned, the lock up periods, that liquidity could be at the discretion of the general partner.” In determining the best vehicle for the strategy, Coyne said “we looked carefully at a ‘40 Act fund,” but concluded that “the SMA was the most flexible vehicle” to provide the transparency and liquidity needs of advisors on behalf of their clients, while providing absolute return with a focus on risk management.

Bill Crager, Envestnet’s president, said in an AdvisorOne interview that “the Brinker team has a great track record from an investment management perspective, and it’s a solution that the marketplace needs … to achieve alpha but protect against risk,” and that any individual

advisor “would be hard pressed to create this portfolio themselves.” Crager said Brinker had done “a great job in designing the portfolio; we spent a lot of time with them to understand the strategy.”

He called it a “good complement” to the SMA strategies already on the Envestnet platform, which has nearly $140 billion in assets under management and administration and serves some 21,000 advisors in both the broker-dealer and RIA spaces. Among those choices are two portfolios constructed by Envestnet/PMC in partnership with Brian Singer of Singer Partners, the PMC/Singer Partners Dynamic Fixed Income Portfolio (see separate story on the Singer fixed-income SMA) and an alternatives strategy, the PMC/Singer Partners Edge Portfolio.

(See also a two-part interview with Singer on tactical allocation by AdvisorOne contributor and Envestnet/PMC Managing Director Mike Henkel.)

Crager called the deal a “good opportunity to partner with Brinker, which has a sterling history,” and constituted an “opportunity to bring invest management acumen to many advisors who Brinker didn’t have access to.” The Singer Edge portfolio, said, Crager, “might meet a similar need, but choice is important” to advisors.

As for its distribution strategy, and why it picked Envestnet as a partner, Coyne said Brinker saw it as an opportunity “to expand beyond traditional distribution and to meet the needs of the broker-dealers” using Envestnet’s platform. It’s a changed world, said Coyne, noting that Brinker is in talks to put the strategy on the Pershing Lockwood platform as well, though he also said that “a few years ago, if you said those three names (Envestnet, Brinker, Lockwood) in the same sentence, people would think you were crazy.

Brinker, he said, is “moving in the direction of investment management,” while Envestnet has done “a terrific job of creating one of the most dynamic platforms for SMAs."  The deal, he said was a “good opportunity for Brinker, and a good opportunity for Envestnet.” He also said that “it’s not an accident that it’s called Crystal Strategy I,” and that Brinker has “other strategies that we’re currently incubating.”


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