Q&A with Omar Kodmani, CFA, a Senior Executive Officer and Global Head of International Business Development of EntrustPermal. Interview by Ole Rollag, Managing Principal of Murano.
Q. EnTrustPermal has been in the allocation business for a long time and at the forefront of alternative investing. How has the business evolved and are there any new challenges you are facing?
A. We have indeed been in the allocation business for a long time and as you know, EntrustPermal is the end product of two firms with a long and successful history in hedge fund investing; Permal with over 45 years, Entrust with over 20. Bringing that experience together has deepened our expertise much further.
Having said that, the industry is in a state of flux, and is being disrupted and challenged by a number of forces. As a consequence, our business has evolved. We have become a diversified “alternatives” firm and not just focused on hedge funds. A lot of institutional and High Net Worth clients that we work with are expecting a lot more than the old style multi-manager, multi-strat FoHF. They want portfolios that are more targeted, more liquid, more high-performance solutions instead of the run of the mill, moderate-risk, moderate return objective.
The combination of the two firms has really enabled us to sharpen our focus in those new, higher value areas.
Q. How many managers does the business see and how many make the cut?
A. We have an invested list of around 100, and we try to keep it under 100 so that we are focused and do not have duplications in exposures or over-diversification. We like to have a targeted list that isn’t static. We see 200 managers a year on average that we consider for investment. However, our selection rate is very low. We are averaging about a 10% selection rate of those managers of those managers that we have met with.
Q. Do you allocate to new or small managers? Under what circumstances?
A. We are very open to new and smaller managers for a couple of reasons. First, they tend to be nimbler and more flexible. For example, we like long/short credit managers under USD1 billion because they have an easier time shorting high yield bonds. On the equity side, we like sector specialists who don’t need to be large, they just need to know their sector intimately and be able to add alpha; healthcare, energy, tech sector funds are a good example of this. We believe that the best returns in the equity allocation tend to be in sector-focused managers.
Q. With regard to DD, if the manager doesn't pass, do you tell them why?
A. Often it is clear to the manager what has gone wrong; so generally, no. Most of the time, the manager doesn’t ask because it comes up during the process. Part of the reason is because it is also not a definitive “no.”
We usually want to keep the dialogue ongoing and keep the relationship because we might invest at a later date or do business in another capacity. For example, at our firm, a large part of our business has become doing co-investments which are single ideas that we source from managers. We do, on occasion, construct high performance seeking strategies with managers that may not have satisfied a certain operational aspect of our DD process with regard to the flagship fund, this would isolate or negate any of our concerns. We typically don’t want to burn any bridges.
Q. You have heard the phrase, "You don't get fired for investing in large managers." Is this true?
A. It is a phrase that we have heard people live by, but we don’t because there is very little value-added for a firm like ours to invest in household names. Especially in this new world where household names in our industry are increasingly, visible, easy to get information on and accessible.
Q. What makes you want to redeem from a manager?
A.It is any number of factors:
• Clearly performance that doesn’t meet expectations.
• Not taking enough risk is another one.
• Getting too big for the strategy or too small to be viable
• Or, other operational reasons
Q. Is performance the most important aspect when allocating to a strategy?
A. No. It is not the most important. Although performance is clearly important, there are other factors need to be considered beforehand. For example, the manager’s edge is probably number one. The manager’s edge comes with a number of considerations, i.e. what makes them different? How did they get that point of differentiation? Is the strategy easy to copy or replicate?
We are also very focused on the manager’s infrastructure, by that we mean the depth of the team, the structure of the organisation, checks and balances in the firm. Our operational due diligence is extremely lengthy and thorough.
Another crucial for us ahead of performance is whether the idea make sense within the current context. You can be excellent in the energy markets and have great infrastructure, but if there is no context for your strategy then there isn’t much point.
Q. What do you think EntrustPermal does differently?
A. I think what we do differently is that we cut through the clutter and really try to find the edge in the manager. It is crucial that the manager’s edge helps improve our investment process and investment outcome. That may sound abstract, but if a high-quality manager made it into our approved list, it is usually because they do something special. We may have identified a way to further optimise the strategy through a managed account where we target the manager’s expertise in a certain sector or individual opportunity. It could be a single idea that our co-investment program can on-board. It could be our expertise in translating their flagship fund into a daily, liquid UCITS product (because we are active in that market, as well). What we do differently is identify the best attributes of the manager and then translate these attributes into an attractive portfolio for our clients.
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