Near my desk in 1977, a time when Modern Portfolio Theory was still modern, were the offices of our legends of research: Madelyn Smith (equities), Don Hardy (fixed income), Blake Eagle (real estate), Dr. Peter O. Dietz (R&D and my first boss), as well as Gary Shinkoskey (fund manager for Bondstock mutual fund) and Jeannette Kirschman (head of client reporting). Office doors were rarely closed, so I was in the middle of the action. Over 40 years later, our research analysts remain specialists in their coverage responsibilities and are located around the globe, closer to the markets they research.
The most impressive element of Russell Investments in 1977 was our 40 clients that engaged the firm for consulting advice. They were household names - several of which continue to be clients today - a testament to the value of our advice and the team supporting the work. That team ranged from the senior executives who were writing our strategy reports to our mailroom managed by Lynn “the Colonel” Bush. Rain or shine, those reports needed to be delivered on time.
That notable client base came to us because corporate pension plans were required to show they’d made prudent decisions based on professional expertise. The need was real due to the recently enacted Employee Retirement Income Security Act of 1974 (ERISA). The typical practice at the time was to simply employ the organisation’s banker to manage retirement assets. ERISA changed that practice and required plan sponsors to employ better ways to allocate assets to money managers.
George F. Russell, Jr., the grandson of our founder, Frank Russell, understood that need better than anyone. In 1969, George signed up our first pension consulting client, JCPenney, by pitching the idea of manager research. Legend has it that George personally did the work in preparing the list of managers, so, from my perspective, manager research started at the top with GFR, Jr.
The quantitative side
My first role was supporting our quantitative research effort led by Dr. Dietz. Gathering and analysing the data - basically the performance and holdings of a money manager’s portfolio - was a manual but important process. The process generated our manager universes and was presented in our Performance Charts & Statistics reports. Those universes became industry standards, used by both our consulting clients and the money manager community themselves.
Our manager universes allowed for apples-to-apples comparisons of results - basically style universes that were designed using both performance statistics and portfolio holdings. Our clients could then use those clearly defined style universes to combine complementary managers for a richer level of diversification. These style universes were among the earliest expressions of investment process types and gave rise to a general recognition of growth or value investment approaches as distinct and definable categories. Russell Investments’ status as style investing pioneers was confirmed 10 years after I joined, when we launched the industry’s first value and growth indexes, drawing on our experience researching managers. We developed further universes for bond portfolios, international equities and real estate. We went global, too, in countries where we were opening offices - the first being manager universes in the United Kingdom.
The qualitative side
From the very beginning, our manager research team understood that quantitative data only shows past performance. In addition, managers never stand still. They’re constantly changing org structure, personnel, process and systems. To confidently understand a money manager’s ability to outperform would require qualitative assessment of all of these factors, alongside strong quantitative analysis. How was the money manager firm structured? Were they reliant on a single superstar manager? What if that individual left the firm? How was the morale? Were there any underlying issues the performance numbers masked? To get that forward-looking insight, George knew he would have to conduct in-person meetings and interviews.
The first manager researcher George hired was Helane Grill, in 1969. The second and third were Madelyn Smith and Joan Sobba. From my experience, they were, without exception, warm and engaging individuals, very easy to talk to and willing to spend time helping me learn the business. Sometimes the superior rapport they built made managers very open to discussing more sensitive topics, such as issues with key personnel.
In the early days of consulting, clients were provided with our approved list of managers, based on our conviction and consensus. As Madeline Smith would say, “These are managers that we would put our own money with.”
In research meetings, we were granted top-to-bottom access - including with the head of the firm, the portfolio manager, the assistant portfolio manager and analysts - in order to understand how decisions were being made. These discussions helped us understand how ideas found their way into the portfolio. Today, the discussions are often at the security level and also include looking behind the curtain, with a desktop demo of the manager’s underlying models used to evaluate the securities. Our analysts are now also armed with an array of proprietary research tools that we use to evaluate portfolios. As a result, the meetings still last multiple hours.
And we listened. It was our job to absorb information and report our analysis in our manager research database. I still remember my first manager research meeting in 1990, with Kim Metta, a senior research analyst on our real estate team. At the end of the meeting, I had half a page of notes. Kim had five pages. After she gave them to me, she said “Dave, you talked too much, didn’t ask enough questions, and you didn’t take enough notes.”
Another a well-known tendency of the team was to not write manager “fluff”. Duncan Smith, who joined the firm in 1983, and eventually co-led our research effort with Madelyn Smith, famously told managers, “If you see a Russell research analyst put down their pen in a meeting, that’s a bad sign.”
Duncan was also involved with implementing formal ratings of manager products, going from 4/Hire, 3/Retain, 2/Review and 1/Terminate. Duncan didn’t want an analyst to sit on the fence with a middle rank, so a 2/Review rank needed to move up or down within a year. A great deal of emphasis is placed on the hire rankings, since research analysts are evaluated on how those managers perform after that top rating is made. In that sense, we need to eat our own cooking with respect to the ratings.
Another key investment has always been in human talent. One of George’s core principles was: “Hire people smarter than yourself.” This insistence in hiring was linked to George’s desire to bring rigor to all business processes.
Many of George’s early hires became industry leaders, including Dr. Dietz, who developed one of the first holistic methodologies for measuring portfolio return. Peter was a great boss and working for him was like working for your favourite university professor. I still get a kick out of seeing the Dietz Method footnoted as the calculation methodology in a manager’s presentation book.
Another key hire was Kelly Haughton, who led the development of the Russell indexes in response to the need for better measurement tools to complement our manager research universes. While the value and growth factors were critical, the small cap Russell 2000 Stock Index was an industry breakthrough.
In manager research, intellectual curiosity is a must. However, it can take years to evaluate and rate managers with confidence. This is both because of the need to understand and adopt our philosophy and practices around research, and because it takes time to understand the often-subtle differences between the smart investors (most of the market) and the truly superior ones. When we hire new analysts, we warn them, “The first 50 investors you meet will all seem brilliant. It’s only when you get to your 150th or 200th meeting, do you start to see who is really a step ahead.” This is one reason we have so many career analysts - our senior researchers average 19 years of experience. So, I am not alone in viewing the role to be a destination.
The source of innovation
Manager research has continued to evolve, with improvements in data and systems combined with increasing diversity of investment approaches. As we sought to find the best investors and deliver superior returns to clients, our focus on manager research has also been a source of ongoing innovation and new investment opportunities:
- It’s now commonplace to think of institutional investing as a global undertaking. But in 1971, international investment was rare among U.S. funds. Nonetheless, we began interviewing money managers in the UK and continental Europe in 1979 and advocating for international diversification throughout the 1980s. Eventually our clients caught on and benefited accordingly.
- Research in traditional assets naturally led to interest in the investment opportunities in alternatives and private markets. George hired Blake Eagle in 1971 to start our efforts in documenting the characteristics of commercial real estate as an asset class as well as the development of the “FRC Property Index” (now called the NCREIF Property Index), which helped support the subsequent explosive growth of institutional real estate investment.
- Our clients were attracted to the return potential of independent, diverse, highly specialised money managers, but they didn’t always have the ability to hire them individually. This led, in 1980, to Russell Investments launching our first manager-of-manager funds as a way to package and deliver our best research ideas in a holistically managed portfolio. These multi-manager funds were a cost-effective way for clients, regardless of size, to invest with a sophisticated investment approach.
The innovations have continued right up until today. Managers still open their doors to us and we’re grateful. The insights we gain from our unique relationships with independent managers around the globe still permeate everything we do. Research reports - such as our equity manager report, fixed income survey, and ESG manager survey - show the perspective and insight to be gained from an informed cross-sectional view of the active management world.
I’m personally proud of how manager research has continued to evolve and how we’ve committed to further innovation on behalf of our clients. But I’m also proud of how we keep following those early principles of a qualitative and quantitative approach.
And it’s still just as important to listen.
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