When we first wrote about alums and PNC mutual fund managers Doug Roman MS ‘89, Joe Jordan ‘78, Michael Coleman ‘12 and Mark Batty ’84, MS ‘89, in Market Street magazine in 2012, we boasted about their large cap funds’ performance: their core fund and growth fund both ranked in the top 15 percent of their respective categories.
They knew they had a great strategy, but three years ago they couldn’t possibly have imagined this: Their large cap growth fund was the No. 1 best performing fund of its kind (among thousands of funds) in the 12 months ending March 31, 2015, having registered a 22.9 percent gain, according to the Wall Street Journal’s latest Winner’s Circle article.
Roman, the fund’s managing director and lead portfolio manager, says his team’s key focus is on higher-than-expected earnings, because they believe earnings drive stock prices. His team has developed a model, the Large Cap Advantage Equity investment process, through which they successfully identify companies that will earn more than expected in a given quarter.
“I often say we can beat the market because we are strict in following our process. One reason it’s so hard for actively managed funds to outperform is analysts falling in love with the stocks.” He says this disciplined approach can help to negate the negative effects of behavioral issues.
Roman continues, “Every time, within an investment process, you can substitute a subjective decision with an objective decision, you should. I believe in checklists, not debates. Our strict process earns us more positive earnings surprises than the broad market. This results in less earnings disappointment.”
Coleman, an equity analyst, agrees that his team owes this stellar performance to dedication to their model. “We built a model that effectively predicts out-performance in stocks. The next step is making sure you implement it correctly. That’s what differentiates us.”
Batty, the team’s senior portfolio manager, says their formula also helps them to outperform the market with regard to downside capture. “Being strict and disciplined forces you to sell when things are moving downward.”
The Drexel tradition among this team continues to grow, as former co-op student King Lee ‘15 will join them full time as a trade coordinator later this month. They also currently employ a Drexel LeBow co-op, Aaron Hartmann.
Betting Against the Euro
The SEI Dynamic Asset Allocation Fund received honorable mention in this WSJ Winner’s Circle article. Drexel LeBow alum Jim Smigiel ’93 is the fund’s portfolio manager; he also serves as managing director of SEI’s portfolio strategies group.
Smigiel says this $2 billion fund is how SEI “implements our tactical asset allocation views for our U.S. institutional client base.” This fund actually outperformed PNC’s, but technically speaking it didn’t qualify per WSJ’s criteria, hence the ‘honorable mention.’
“We were only given an honorable mention because WSJ was looking for large cap stock funds, and this is not what we do. This fund is more global and macro-oriented. We are attempting to beat the S&P 500 by utilizing a broad range of capital market exposures,” Smigiel says.
The fund emphasizes themes. “In 2014, we saw capital markets being overly influenced by monetary policy. The European Central Bank (ECB) was really falling behind in our view, and needed to loosen monetary policy dramatically given the state of the European economy,” Smigiel says. “Several countries had employed monetary easing, and the euro had yet to do so. This clearly was an economic error, so we took a fairly significant position to short the euro in 2014.”
In August, their bet began to pay off, and continued to do so throughout the year. “It was inevitable that the ECB would have to take on these extraordinary measures, and the euro has fallen roughly 20 percent relative to the U.S. dollar over the past 12 months,” Smigiel says. (Noteworthy: his major at LeBow was economics.)
This is the second consecutive quarter that LeBow alums dominated the Winner’s Circle for large cap mutual funds. The PNC large cap team was first recognized for its performance by WSJ’s Winner’s Circle after the quarter ending Dec. 31, 2014, earning the second place spot with a 19.3 percent return. The fund that placed first, Glenmede Large Cap Growth Fund, is also co-managed by a Drexel LeBow alum, Vladimir de Vassal ’82, MBA ’87. It saw a 20 percent return.
Roman says it’s “really quite the statistical improbability” that Drexel alums have run all three of the funds recognized by WSJ as being the top performers in this category for the past two quarters.
According to WSJ, this quarterly contest recognizes “the U.S.-stock fund with at least $50 million in assets and a track record of more than three years that posted the best trailing 12-month performance.” It notes that “Index funds and exchange-traded funds don’t qualify, because they aren’t actively managed; leveraged funds also are disqualified.”
Pictured above is PNC’s Advantage Equity team. From left: Doug Roman (Portfolio Manager), Joe Jordan (Equity Analyst), Mark Batty (Portfolio Manager), Aaron Hartmann (co-op), King Lee (Trade Coordinator), Michael Coleman (Equity Analyst)