THFJ visited Campbell’s new offices in midtown New York and talked to its Chief Executive Officer, Will Andrews, to hear about the veteran CTA manager’s growing ambitions. Having been with Campbell for 18 years, during which time he has held roles including Co-Director of Research, and Chief Operating Officer, Andrews has a broad perspective on Campbell.
Hamlin Lovell: So why did you decide to open an office in New York and what functions does it carry out?
Will Andrews: Baltimore is still home – that is where we have the main facility, but we always strive to be more accessible and transparent to our client base, and to our business partners. The reality of it is that if you are coming to New York for three or four days, getting down to Baltimore – while it is only a two hour train ride – is essentially a full day out. So having an office here is a convenient way for people to be able to visit us.
Via video conference we can also make our staff in Baltimore available to visitors to our New York office.
The office will be home to our institutional distribution team. We have three people there now, including Richard Johnson, our Global Head of Institutional Sales, and have plans for a couple of additional roles related to distribution and investor relations.
Being in New York has also helped us with our recruiting efforts. When you are looking for roles in New York, your universe is vast. As soon as you say you have to move down to Baltimore it narrows pretty dramatically. While we do like the diversity of being in Baltimore we also want to be realistic about where we need to be located to continue to attract top talent.
HL: You have made at least two high profile hires in the last year. In 2014 you hired Katy Kaminski – a renowned academic author, speaker, fund manager – how is she driving the business forward?
WA: Katy has increased the visibility of Campbell because of the nature of her experience, as well as her focus on educating people about managed futures at large. We were very lucky to be able to find her and it worked out synergistically for her – Baltimore happens to be an easy plane ride to where her family is in Nashville and we were able to offer her an environment that she was going to be able to do well in. By leveraging her prior experience in education she has been able to elevate Campbell’s visibility from the get-go by working with our clients to help them educate their teams and committees on many concepts associated with investing in managed futures.
We plan for her to travel 40% of the time in that role of a being a resource for our clients and the industry- she has certainly got the quantitative skills as well as the experience to be able to communicate about managed futures – and she is also going to spend about 60% of her time in the research department, focused on portfolio research.
We bifurcate the portfolio role; there is the production portfolio, which is where our clients are currently invested, and we need to continually monitor and evolve that portfolio to make sure that is operating according to its investment objectives and the parameters we’ve set. Dr Grace Lo oversees the production portfolio and works daily with our full Investment Committee. Katy works closely with Grace on forward looking portfolio innovation. We were looking very specifically for that role to reduce some of the travel demand upon the rest of our portfolio management team. We have six people at Katy’s level who are all working under Chief Research Officer, Dr Xiaohua Hu. He has been here for more than 20 years and has been instrumental in building the team we have now. That team of research directors are all very capable quants and very strong communicators, but the reality of it is, there was an enormous time demand on them from participation at conferences and addressing our clients’ needs. Having Katy come in with a dedicated focus on supporting those efforts on behalf of the research team, reduces the burden. We still want to get our team out and about and provide transparency for our clients, but Katy’s role has reduced that burden somewhat. They can be here and focused on improving the portfolio.
HL: And is Katy authoring the thought leadership papers or is that more a team effort?
WA: As Katy prepared to formally join Campbell and was in the process of working out the logistics of moving her family overseas, she also worked on some white papers that were essentially a continuation of some of the themes in the book that she’d recently co-authored; Trend Following in Managed Futures. For those initial pieces where she didn’t yet have an opportunity to work with the full research team, she would be the primary author. Those pieces went through our normal peer review process with the research team but didn’t have as much collaboration during development as we’d normally have.
Since Katy’s now made the move and is in the office we’ve migrated back to our normal approach with a team effort throughout the white paper development and review process.
HL: One of her recent white papers has been quantifying CTA risk management, and how to identify four risk management factors: liquidity, correlation, volatility and capacity. How have these factors been manifested in the volatile sector in the course of 2015 when some CTAs have seen quite big drawdowns?
WA: The initial data set for the white paper ended around the end of the first quarter of this year, so I’m not sure if the white paper included any data from the second or third quarters. However we do believe the findings can be applied to those periods and have some ideas on how they would have manifested. In that vein, of those four factors the correlation factor is probably one that under-performed in the second and third quarter. In periods where there are low-trend signals, following a period of strong trends like we experienced last year into the first quarter of 2015, you may see short term strategies wanting to be long and short across different markets, but you still have strong correlation between some of those markets within the same asset class. This can lead to exaggerated positions, so I would suspect that anybody who had risk exposure to that particular factor probably under-performed in the second and thirdquarter. On the other side, I would expect that anybody that had exposure to the capacity factor are generally going to be the larger groups that are out there, who typically have a longer time-horizon allocation, simply because they are so large they can’t operate in the shorter time frame. The longer time horizon has done quite well thus far this year. So I would suspect that with high exposure to correlation, maybe you under-performed, but with higher exposure to the capacity factor, you probably out-performed.
That perspective has yet to be validated by our research team, but we are going to be updating that information continuously as we evolve this concept that Katy established in the white paper.
HL: Do you have any views on the SEC’s recent proposals for liquidity risk management in mutual funds, and in exchange traded funds? Are the proposals practical and fit for purpose?
WA: The SEC is looking more broadly at liquid alternatives. We don’t believe that managed futures are in that crosshairs when it comes to liquidity risk, which is something that the proposed rules are really focused on. The spirit of their investigations appears to be focused on identifying derivatives masquerading as liquid instrument when they really are not. We are trading the most liquid exchange-traded markets in the world, added to which 80-90% of the assets are actually sitting in cash or cash equivalents.
I think we will probably end up with some additional reporting requirements and that is something that we are going to be able to meet readily which we don’t expect to have any issues addressing. One of the benefits of having operated in some of the most highly regulated markets for many years is that we’re generally well prepared to meet new requirements.
HL: Katy Kaminski has also done a paper on the return dispersion among CTAs, and this year it feels as if we have seen unusually wide dispersion amongst the CTA universe. But is this in fact the case?
WA: I think for the first quarter of the year, you wouldn’t have seen a whole lot of dispersion because there were very strong momentum signals in the market place. Subsequently, in the second and third quarter, there were a lot weaker signals from the underlying momentum alpha strategies. It is during those periods that the differences in the risk and portfolio management framework at any management company is demonstrated. In these periods you will often see large deviations in the performance across managers, because the underlying signal is weak and it is really all about how they might have set up their risk and portfolio framework.
Just as an example. We maintain a constant risk target in our portfolio. In terms of time horizon, we have a substantial allocation across one to three months, three to six months, and six month and beyond time horizons, and we also target a long term equal allocation amongst the asset classes that we have in the portfolio. That is not typical, and is because of our asset level, as well as the strategy set we have deployed, that we have the ability to do this.
I suspect, over the second and third quarter of this year you have dispersion amongst managers because weak momentum signals at different time horizons and performance dispersion across time horizons. Within our portfolio shorter term strategies have underperformed while longer term strategies have outperformed. It is actually fairly similar to 2013 – in particular, it had a lot of variation amongst performance, probably for a similar reason.
HL: Will CTAs continue to diverge from each other as they plough different furrows? For example some of them are more esoteric markets, including over the counter markets, and others are moving away from momentum models.
WA: Yes, I think that is definitely going to be happening as managers try to differentiate themselves. Campbell has had exposure to momentum, carry, mean reversion as well as global macro components in our portfolio since as early as 2000. We are still labelled as a trend follower but we have had exposure to those components for a long period of time. I know that some of our larger European counterparts have exposure to equities and cash equities, so the more that managers try to differentiate themselves and make their value proposition more prominent, the further the deviation will become. It is one of the challenges of there not really being a fixed benchmark for active managers.
HL: Would you like to highlight any other thought leadership that you feel is particularly relevant to late 2015 markets?
WA: We are spending a lot of time asking clients what they want answered – they are asking good questions and we need to keep focusing on taking their perspective and building the white papers from that particular point. We don’t have anything specific that I could talk through at this point. For the moment we are focusing on the continuation of the theme of trying to understand why CTAs diverge from each other, understanding a little bit more about how to better provide transparency and some understanding about the risk and portfolio frameworks that everybody has got around these fairly well understood signals. We have got lots of ideas but I think our focus is to go back and make sure that we are answering some of the questions that investors are having.
HL: You also hired Richard Johnson to handle institutional business development, so what types of institutional investors are looking at your systematic strategies now? Would it be pensions, endowments, foundations and insurance companies? Other types?
WA: I think that after last year’s performance in particular, there is a wider variety of investors that have a growing interest in managed futures. Richard basically brings a lot of energy, very good processes, as well as a number of good relationships to Campbell that we can leverage. We have had a substantial private wealth distribution channel for a long period of time at Campbell – it is well established. Our institutional client base has been a large part of our business for many years but is still less diverse than we’d ultimately like. One of the things that we want to focus on expanding our institutional investor base across all of the types of investors that you mentioned. We can’t be everything for everybody, but we are focused don building out the access points our clients have to our strategies. We have offered large institutional clients managed-accounts and comingled fund structures for a number of years and of course we supported private offerings for the private wealth side as well. We want to be able to provide access to our strategies through ‘40 Act vehicles as well as a number of other things, for a variety of clients. Unfortunately that is not a succinct answer because of course we need to take advantage of wherever the interest comes from.
We are currently looking to fulfil a couple of other institutional sales roles, in particular focusing on the consultant channel and making sure that they are getting the answers and support that they need, while making ourselves as accessible as possible to them. We are also looking at utilising some third party distribution to be able to better access the RIA (Registered Investment Advisor) channel. We need to make sure that we have got touch points in a lot of different areas to continue to diversify our client base.
HL: And where do you see most of the growth in your business coming from in terms of strategies and deals? So, for example, the strategy side, are you seeing more growth of the managed futures or on the equity market neutral?
WA: Managed futures is primarily what we are known for and what we are going to continue to focus on. Our flagship managed futures portfolio contains the lion’s share of our assets, and our focus is going to be continuing to provide the diverse strategy set in that portfolio through vehicles that suit our clients. This is not a new concept for us. We have had public funds, private offerings, managed accounts, onshore, offshore vehicles and ‘40 Act vehicles for a number of years. We opened a momentum fund in January of this year and plan to launch a fund that provides access to another portion of our portfolio at the end of this year.
HL: Mike Harris is speaking at the Managed Fund’s Associations inaugural London summit next week, so how long has Campbell been involved with the Managed Fund’s Association?
WA: Campbell has actually been involved pretty much since the inception. Five executive members from Campbell have served on the board at various times. It hasn’t been continuous because we like to let others have an opportunity. Campbell has been involved for a long period of time, and will continue to be interested and be involved.
HL: Do you have any view on the recent announcement that the MFA and AIMA will be collaborating in terms of a steering committee to deal with various policy initiatives?
WA: I think that what they are doing makes sense – we have more and more clients who are European based, and a lot of the constituents that AIMA is servicing have more and more clients in the US. Both regions have regulatory bodies that are collaborating and making sure that they are aligned.
As a result there are a lot of things that overlap, and it makes sense for both trade associations to partner with each other and share information.
It is quite refreshing for us to be able to take advantage of AIMA’s research and reciprocally they are able to take advantage of the Managed Funds Association, and make it a bit more efficient, hopefully make it a little bit cheaper. It makes a lot of sense to me. When I was looking at the points that AIMA CEO Jack Inglis and MFA CEO & President Richard Baker were making, the focus was always about efficiency but making sure that education takes the front seat, along with the development of sound industry practises. It makes much more sense to be self-regulatory and making sure that have you got your best interests of your clients in front of you at all times. That is the kind of thing that we make sure that we interact with. Our regulators make sure that they understand our perspective, we understand we have to respond to what they want us to do.
HL: That is all very encouraging to hear. Thanks very much for your time.