King of quants: Face to Face with Eric Sorensen

Quantitative equity "guru" Eric Sorensen — a one-time flight instructor and professor of finance — has guided PanAgora Asset Management to renewed momentum and record assets under management

By Douglas Appell
Source: Pensions & Investments
Date: January 8, 2007

In the 2%BD; years since he took the helm at PanAgora, Eric Sorensen has led the researchers who power the firm's quantitative models in a takeover of the institutional asset management shop, with increasingly strong performance results to show for the effort. Previously, ownership changes and high-level turnover had left PanAgora's assets under management bouncing between $10 billion and $16 billion for close to a decade. Today, even with Marsh & McLennan Cos. Inc. poised to sell Putnam to Power Corp. of Canada, Mr. Sorensen says growing interest in Boston-based PanAgora's active quantitative strategies has lifted assets under management to a record $23 billion as of Dec. 31. With his 20 years as a quant guru at Putnam and Salomon Brothers preceded by a 12-year stint at the University of Arizona and five years as an Air Force officer, Mr. Sorensen says PanAgora's flat, collegial organizational structure suits him, allowing the CEO to stay involved in the collaborative efforts of the firm's growing lineup of academic refugees.

How is PanAgora positioned today? We are really a research firm. We're academics. We do practical research, (at a) very high level, and we love to do it. And oh, by the way, we manage money for fees so we can continue to do the research. That's really the way I think about our business.

And in terms of strategies? We have two areas we do a lot of work in. One is a macro area, the evolution of the old global tactical allocation group. There's a team of people that implements multistrategy mandates, almost like an internal fund of funds ... The other thing we do is equity (where) we have a couple of strategies. One is called dynamic equity, a process that I think is really on the leading edge. We decompose the entire universe of securities into risk buckets and we find the pools and pockets of inefficiencies in those different risk spectrums. The other thing we do on equities is a process of bottom-up stock picking, stock ranking, quantitatively, called stock selector. (Among PanAgora's stock selector offerings,) we have very good numbers in small cap, and large cap is beginning to catch on. (Among the firm's dynamic equity strategies,) we also have very good performance in small cap, midcap and increasingly global and international. There's a lot of mandates in that realm.

It looks like your core equity strategies have garnered the most interest. The small-cap core for stock selector is virtually full, and also the small-cap core for dynamic equity is approaching (that) point. We can run $1.5 billion roughly in one of these strategies.

And both are active strategies? Two and a half years ago, we had about $13 billion in assets, over half in index funds — very low-fee business. Today, of the $23 billion, almost all of (the growth) is in active strategies … so the mix of the business has changed here, and the growth — $6 billion in the last year, committed, not totally funded — is in equities. We have an emerging markets strategy that has received attention in the last year or two, and the dynamic equity is probably for the near term where we have more excitement from prospects and candidates for next year. We pride ourselves on taking a lot of time with specific, strategic relationships, not just mandates. We consult with them … we've even provided capability for some institutions that have in-house management as well as external, even to include (computer) code.

You've helped clients set up their own systems? We've done that in one instance. It was a very special case. We were benefiting from the relationship, and they were able to do something somewhat similar to what we would do except in a different space. It allowed them, rather than just run internal index funds, to run some quasi-active funds.

That's not giving away your feed corn? No, it was a partnership, and we would consider that sort of thing again. We're currently working with some other institutions to customize something for them that would allow them to better manage assets relative to liabilities, for example.

So you have deep ties to a relatively small number of institutional investors? That's a byproduct of what we do … because people that seem to be attracted to us, a set of them, are looking for those relationships. I mean, large institutions that have platforms looking to us to be subadvisers, pension plans that manage their money internally, large plans with a reasonable level of sophistication.

When you took over 2%BD; years ago, was PanAgora a research-centric firm? No, it had a reputation for doing research, (but) the research people were not leading the firm. Today if you look at PanAgora and you ask who are the leaders — and you can define leader in a number of ways, including compensation — they are all first and foremost great research people. To me that's what drives the firm. Anywhere along (my 30-year career in academia and Wall Street) I could have been one of those that went out and started an equity quant shop. For many reasons, which even I don't fully understand, I never did that, but if I did it would be a boutique: There'd be a set of people who basically drove the processes and we would build things around that. We've kind of reverse-engineered back to that. In a very real way, it looks and feels like a startup. There's a ton of excitement here about growth, and morale is very strong. We're kind of retrofitting this company to what you would do if you went out and started something.

Does Putnam handle all of your sales and marketing? Putnam people populate databases with PanAgora products and a number of senior Putnam marketing people were assigned exclusively to PanAgora. (When Putnam took a majority stake in PanAgora in 2004,) here were the goals: Don't lose any clients. We had a number of clients paranoid. You had Darth Vader — me — coming, and it was delayed nine months because of the (market timing scandal that roiled Putnam) … These businesses you can't outsource very easily. It's not a mutual fund. You can't sell a product without one of our senior investment people making multiple presentations.

Your performance looks great, but you're still gathering fewer assets than some rivals. I (only) started 2%BD; years ago. My concern is not about demand being there; I think it will be there. My concern is what can we methodically accommodate in the next year or two. We've grown assets at 15% to 20% a year. There have been a couple of months where we actually had to slow down …. Our rate of growth is fine, manageable.

So the yardstick shouldn't be firms pulling in $10 billion or $15 billion a year? If you went to a couple of major consulting firms and ask them what the best quant equity product is, (PanAgora's name will be) one of two or three that pops up. That doesn't mean we're perfect. It means we've done enough — in terms of track record, articulation, opening up this "glass box" — to excite clients. This is good. This is the fun time. It isn't necessarily the $50 billion in assets. That may be a goal, fine. You know, it's in the making of this stuff.

Is the uncertainty caused by Marsh & McLennan's effort to sell your parent company, Putnam, hurting your business? PanAgora comes out in a pretty good spot almost regardless of what happens to Putnam. I do think we need to recapitalize the firm anyway, and have a mix of ownership of senior people here as well as, if you will, external partners. The uncertainty has been a problem. It's been surprising to me we haven't had a complete shutdown. But it's interesting, from the last two weeks, we've had seven finals. We've kind of gotten the message out that we're an independent firm.

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