The Interview Bill Woodruff, Bandon Capital Management: “Alternative strategies are valuable portfolio components for mass affluent and small institutional investors”

Bill Woodruff, founder, president and portfolio manager at Bandon Capital Management, says the firm’s directional interest rate strategy, offered through separately managed account or unified managed account structures, aims to offer mass affluent investors and small institutions uncorrelated absolute returns regardless of the market environment.

GFM: What is the background to your company and fund?

BW: Bandon Capital Management is a Portland, Oregon-based private investment management firm founded to meet the needs of the mass affluent and small institutional investors for investment solutions that deliver non-correlated, absolute returns regardless of market direction. The firm currently has USD90m in assets under management.

Bandon identifies institutional-quality alternative strategies that can be translated and implemented using liquid, transparent securities and delivers these solutions through financial intermediaries. This commitment to delivering the attractive investment characteristics of alternative investing to a wider audience than typical institutional structures is often referred to as the democratisation of alternative investing and is one of the firm’s founding principles.

Our directional interest rate strategy, launched on August 1, 2004 through a separately managed account structure, seeks to provide investors with absolute returns, uncorrelated with the equity and fixed-income markets, by investing in US Treasury market using ETFs or mutual funds, and is available to non-accredited investors.

I am Bandon’s founder, sole principal and managing member, responsible for the oversight and management of all aspects of the firm’s operations, including portfolio management. Before founding Bandon in 2007, I spent four years with Beacon Investment Group and its subsidiaries, ultimately serving as the portfolio manager for the firm’s various hedge funds and alternative investment products.

At Beacon I was responsible for trading a USD230m hedge fund portfolio (more than USD300m on a leveraged basis), and created the trading approach for the directional interest rate strategy programme that is now a flagship Bandon product. I began my career in the investment business in 2002 as a stockbroker for Philips & Co. Securities.

Brie Valant, Bandon’s chief compliance officer and operations manager, began her finance career in 2003 in the operations department of Heritage Capital Management, a USD250m registered investment adviser in Boston, where she eventually became operations manager, responsible for manage the firm’s database management systems, all related custodial and data interfaces, and client service support. She subsequently worked at Beacon, with varied responsibilities including performance reporting and compliance, and joined Bandon at its launch in 2007 when the firm assumed management of the Beacon products.

Managing director Mike Miller, who is responsible for the sales and marketing strategy to the intermediary marketplace, has more than 25 years of experience in building, leading and managing intermediary distribution organisations and has held senior level positions with firms including Federated Investors, Weiss, Peck & Greer, mPower/Morningstar, Invesmart/Standard Insurance and Concord Wealth Management. He joined the management team in July this year

Matt Engstrom, also a managing director, has more than 30 years of business development experience and devotes the vast majority of his efforts to attracting and supporting clients’ participation in Bandon’s alternative investment products.

GFM: Who are your key service providers?

BW: The strategy vehicle delivery structure is a separately managed account or unified managed account. The current custodians for our SMA program are TD Ameritrade, ProFunds and NFS, while current UMA platforms are Schwab, Fidelity, Pershing and TD Ameritrade.

GFM: What is the profile of your current and targeted client base?

BW: Our mission is the democratisation of alternative and absolute return-oriented strategies – essentially making the attractive investment characteristics of alternative investing available to a larger audience. We firmly believe that alternative strategies are valuable portfolio components due to their non-correlation to traditional equity and fixed-income markets and absolute return orientation.

They should not only be the domain of the ultra high net worth and large institutional investors, but can play an important role in the portfolios of the mass affluent and small institutional investors. Our distribution focus is intermediaries that serve these investors, with a focus on investment consulting firms, registered investment advisors, bank wealth management organisations, independent trust companies, multi-family offices and independent broker-dealers.

Historically our marketing effort was less comprehensive and proactive than our current approach and emphasised word of mouth within the broker-dealer community, so our existing client base reflects the client profile of these firms – skewed more towards private clients than institutions.

GFM: What is your investment process?

BW: Utilising macroeconomic and valuation principles, a forecast regarding the direction of Treasury interest rates is generated monthly. Based on the monthly forecasts we tactically position portfolios with Treasury exposure between plus and minus 12 years of duration. This approach occurs each month systematically without discretion.

GFM: What is your approach to managing risk?

BW: Each forecast includes a 4 per cent stop loss and two profit-taking trades, one at 4 per cent and one at 5 per cent.

GFM: How has your recent performance compared with your expectations and track record? Do you expect your performance or style to change going forward?

BW: Recent performance has been marginally above our longer-term expectations. We expect the strategy to provide annualised returns of between 8 and 12 per cent net of fees. The strategy was up 11.7 per cent over the seven months to July 31.

Our framework for decision-making is a well-established quantitative process producing a consistent style. Strategically, the firm embraces an approach of continuous improvement through research.

GFM: Are investors’ expectations shifting between capital preservation and growth? If so, how do you deal with this?

BW: We are well positioned to discuss and balance these two objectives. We did an outstanding job of preserving capital during the economic crisis in the second half of 2008 and were down 0.69 per cent for the year net of fees. Our performance up to the end of July compares very favourably to the standard equity, fixed-income and alternative benchmarks.

We are starting to see an increased appetite for risk. Our absolute return orientation and lack of correlation to traditional markets or other alternative strategies remains appealing throughout various shifts in investor expectations.

GFM: What differentiates you from other managers in your sector?

BW: Our target investor focus, vehicle structure and strategy set us apart. Bandon is a leader in delivering the attractive investment characteristics of alternative investing – absolute returns with low correlation – to the mass affluent and small institutional investors while minimising or eliminating many structural negatives including high minimums, high fees, long lock-ups, poor risk management and lack of liquidity and transparency.

Delivered through a separately managed account or unified managed account structure, our strategy provides structural benefits compared with a limited partnership structure. In addition, our directional interest rate strategy is unique with few peers providing consistent absolute returns, with negative correlation to traditional investments, an attractive component of a liquid strategies allocation, the potential to perform well during rising and falling interest rate environments and a complement to credit exposure.

GFM: How do you view the environment for fundraising in 2009? How does this affect your funds?

BW: We believe 2009 will continue to be an excellent environment for investment strategies that are liquid, transparent and provide performance characteristics that are different from what is traditionally available.

GFM: Do you have any plans for other product launches in the near future?

BW: We have a few products incubating but do not anticipate a launch in the near future.


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