INVESTOR VIEWS Series features: Jeff Tumolo, Chief Investment Strategist, TAG Associates

(Click image to play video) In this episode of the Investor Views series, Chief Investment Strategist Jeff Tumolo talks about TAG Associates’ asset manager evaluation process, plus where they stand on blockchain technology, artificial intelligence and ESG.

Show Highlights

In this episode, Jeff and I talked about:

  • How this multi-family office is unique

  • TAG’s approach to qualifying new managers

  • How TAG sources new managers

  • How much TAG typically allocates to emerging managers

  • The most important thing an asset manager should do before reaching out to TAG

Quotes/takeaways

  • I think the most important thing in choosing any manager is (that) the process in which they generate excess return is a sustainable process and that the area, the capital markets that they’re trying to extract that excess return has a sustainable, definable inefficiency that they can continue to take advantage of.”

  • Depending on the strategy and the asset class, it always matters that our managers have some edge over the typical manager or an index, but depending on the strategy that would require differing levels of expertise and differentiation.“

  • “TAG has over 700 manager meetings a year throughout our research group. Some of those are just follow-ups with existing managers but the vast majority are looking at new managers, and in particular we like to find talent that has yet to develop a track record that would catch the attention of the broader competitive landscape, so we’re looking for managers who have a great pedigree and a process that we think is going to lead to differentiation…”

  • “…we have established a number of farm teams over the years to make small allocations to these new managers and get involved early and understand their process a little bit better. That’s been a very successful effort when taken in its entirety.”

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Interview Transcript

November 2019, Jeff Tumolo, Chief Investment Strategist, TAG Associates

JB: Welcome to Hedge Interview. I’m your host Jennifer Bruno, and today on the Investor Views series, I’m speaking with Jeff Tumolo. Jeff is the Chief Investment Strategist at TAG Associates, a multi-family office located in New York with more than $8 billion in assets under management. At TAG Associates, Jeff develops the firm’s firm-wide macro strategy and the firm’s tactical strategies. He is the portfolio manager for client accounts and he is the portfolio manager for TAG’s distressed debt funds. Jeff is also a member of TAG’s investment committee. He has been with TAG Associates since 2000 and before that, Jeff was a senior analyst at Schwab Investment Management for their fund of funds products. Jeff earned his Bachelor of Science (BS) from Cornell University and he earned his MBA from Cornell’s Johnson School. Thank you for joining us today Jeff. I’m really looking forward to learning about your experience at TAG and your insights on the capital allocation process.

JT: Thanks for having me.

JB: So, tell us about TAG and your role at the firm. Give us a feel for what type of firm TAG is.

JT: TAG is a multi-client family office formed in 1983, so we’ve been in the multi-client business for quite a while. I joined the firm in 1999. We are a full-service family office in that we do everything from accounting, taxes, estate planning, trust administration, as well as asset management. We have, as you said, a little over $8 billion in assets under management and we service over 110 clients.

JB: And what type of investments do you evaluate? What are your primary holdings?

JT: Well, one of the things that makes TAG a little bit unique is one third of our assets are invested in alternatives. That was driven initially from the fact that many of our first clients were first generation wealth and had large legacy assets that they carried over with them. We’ve developed a deep and strong and team and have a long history in alternatives, so one third of our assets are in alternatives. The other two thirds are in traditional stocks and bonds.

JB: For those alternative assets what would you say is your primary criteria for making an allocation decision? Obviously there has to be performance and track record, but what’s important to TAG as far as making an allocation?

JT: I think the most important thing in choosing any manager is (that) the process in which they generate excess return is a sustainable process and that the area, the capital markets that they’re trying to extract that excess return has a sustainable, definable inefficiency that they can continue to take advantage of.

JB: How much does it matter to you that they have sort of a unique or competitive edge?

JT: Depending on the strategy and the asset class, it always matters that our managers have some edge over the typical manager or an index, but depending on the strategy that would require differing levels of expertise and differentiation. So, if it’s a merger arbitrage strategy, that requires a high level of sophistication and a deep understanding of some pretty esoteric statistics and other measurements. If it’s a large cap growth manager, there’s gonna be less differentiation and sophistication maybe differentiation in terms of vision or views on the market.

JB: What types of alternative funds do you include. Do you have a broad array, or are there typical strategies that you tend to lean towards?

JT: A very broad array. The vast majority of our alternative investments is in absolute return strategies. The next largest would be hedged equity strategies. Although, across all of private equity I think those numbers might be somewhat similar. And then as we get into some of the more spicy things like biotech and venture capital, that’s generally going to be a much smaller piece of what we do.

JB: What (strategy) areas do you think are really saturated?

JT: Hedged equity is more and more difficult to find differentiated strategies and I think particularly in the United States there are too many managers in the long/short space.

JB: Do you consider emerging managers?

JT: We do.

JB: And how do they fit into the scheme of things, the portfolio? How do you evaluate emerging managers? Where do they fit?

JT: TAG has over 700 manager meetings a year throughout our research group. Some of those are just follow-ups with existing managers but the vast majority are looking at new managers, and in particular we like to find talent that has yet to develop a track record that would catch the attention of the broader competitive landscape, so we’re looking for managers who have a great pedigree and a process that we think is going to lead to differentiation, and we have established a number of farm teams over the years to make small allocations to these new managers and get involved early and understand their process a little bit better. That’s been a very successful effort when taken in its entirety. We’ve been able to demonstrate that it has added value and those that graduate to be full positions are often some of our best finds.

JB: It’s sort of a needle-in-the-haystack to find a rising star that’s really worth the allocation. How do you typically find those rising stars?

JT: (Managers) are sourced from a number of different places. I would say the most successful (manager) sourcing mechanism is through existing managers or others in the investment world whose opinions we respect and we are introduced to a young rising star. That said, we are also combing the (performance) databases all the time to look for something that’s a bit unusual and might be worth our (time) digging a little bit deeper.

JB: How much do you typically allocate to an emerging manager?

JT: Generally between $1M-$5M (is allocated to an emerging manager) depending on the strategy and the size of their fund.

JB: Do you, shifting gears a little bit, how do you approach ESG or impact funds?

JT: Our efforts in ESG are largely client driven. It’s really up to them to determine how they want to approach ESG. I think in general there’s two approaches: one is to make money in the most effective way possible and decide on how one wants to allocate their charitable giving. Some clients have expressed interest in ESG. I personally work with a number of clients who’ve divested from fossil fuels and we’ve come up with an interesting alternative strategy to get that energy exposure in their portfolios.

JB: Do you think, in your experience, is (ESG) a growing area or has it been sort of maintaining interest?

JT: I think it is a growing area and as we have taken on younger and younger clients it’s come up more and more in conversation.

JB: And what about other newer spaces like blockchain technology and crypto-currency? Are you looking at any of those funds, or is it still too new yet?

JT: Blockchain uses up quite a bit of bandwidth for a very, very small part of the investment universe, I think. I am definitely of the belief that blockchain technology is revolutionary in some sense. There’s those who say it’s as revolutionary as the internet and I think that’s a little bit of an extreme view. On the other hand, crypto-currencies are very very difficult to analyze or value. There aren’t any fundamental inputs to really assess whether something is inexpensive or properly priced. So our efforts, which have been fairly modest to date, have been investing in private equity funds that are focused on businesses that use blockchain technology to make advances or to disrupt existing industries.

JB: And are there any other areas that you are researching or evaluating that would be new for TAG?

JT: I think we’re always looking at things are off the beaten track. There aren’t any that come to mind right now.

JB: What about AI (artificial intelligence)?

JT: AI is a difficult thing to invest in because the definition is different depending on which industry or area of the market you are looking at. With respect to quantitative strategies we do have one investment in an AI-driven equity strategy and it’s been very successful. We’d love to develop that relationship more but it’s so early in the onset of artificial intelligence that it’s kind of difficult to rely on a short track record and make assumptions about future performance.

JB: Tell us about an investment pitch success story where you were truly impressed, so that asset managers can get a feel for what it takes to impress you. What did they do differently or just in general that would make you feel impressed.

JT: I think a lot of that comes out of the dialogue you have with the individual, but at the general point, those that have documented their process clearly in their existing efforts to run money but (also) in their previous positions and can demonstrate a long history of having a consistent, proven process for identifying good investment. Those managers give us a lot of comfort, particularly if it’s an emerging manager where we don’t have a lot of track record to rely on. It’s all about the consistency and repeatablity of the process.

JB: For an emerging manager, what would be a minimum track record that you would consider?

JT: We have considered…we have rarely, and I’d have to think hard if we’ve ever done a brand new fund, but we will consider track records of less than one year, but we do require absolutely and positively that there be a first year audit. So if it’s a partial year track record but that partial year track record has been audited, then that’ll be the first step for us to take a look at a particular manager. So long as we are comfortable, once again, with the process, we’re comfortable with investing in managers whose track records may not be as long as the average holding at TAG. 

JB: I’ve had emerging managers ask me, “What if I have hypothetical results?”

JT: There are ways to audit hypothetical results, and if they’ve been audited in that manner, we’ll look at them and if not, we’ll dismiss them completely.

JB: Conversely, tell us about a million-dollar mistake, somebody who blew it. What did they do that made you just say, ‘Nope, not gonna happen.’

JT: There’s an easy answer to that. We do background checks on all of our managers and one manager had lied about their educational history, and that was thrown out immediately. Turned out that saved us from a poor performer as well, but certainly you know integrity is an important piece of the due diligence puzzle and that didn’t pass the test. That’s one that comes immediately to mind.

JB: What’s the one thing you would advise an asset manager to do before they contact you? Obviously if somebody has been referred to you, that’s a little easier. But if someone’s reaching out, what’s the number one thing you would advise if they were a ‘cold’ outreach to you?

JT: That’s a very good question. I think (the most important thing a manager should do in an initial communication is) to somehow define (1) what the distinguishing aspect is of their strategy in a very clear, concise manner, (2) why they’re different than others in their particular space and (3) how they are going to prove that to me in a meeting.

JB: Ok, great.

JT: Again, it comes back to the process.

JB: Lastly, this is my last question…what are you looking forward to next year or as this year comes to a close. And to some of my guests, I say answer this with whatever comes to mind. Could be something with your kids or something professionally.

JT: I would say, what immediately comes to mind is some sort of resolution or clarity on the trade war mess that we’re currently in. I think that’s been a real headwind for both people in the operating business side of the economy as well as those of us in the investment community. That uncertainty is a large cloud over the future, and I hope we can get some kind of a resolution or at least some kind of clarity in the next 12 months.

JB: I hope so too. You’re not the only one who has answered that question with that answer, so it’s definitely on a lot of money managers’ minds. But thank you so much for your time today. Your insights are very helpful and I know that asset managers watching this episode will appreciate understanding these insights and taking them to heart as they try to raise money. So thank you so much for your time today.

JT: Thanks very much for having me.


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