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Money Management

Fisher hoping hybrid approach will lure more institutional fans

Kenneth Fisher believes his strategy is good for diversification.

Fisher Investments isn't typically the first choice among institutional investors, but founder Kenneth Fisher says there still are plenty of opportunities — even as a runner-up.

The Camas, Wash.-based active manager employs a hybrid approach to picking stocks: using a top-down macroeconomic view of equity markets combined with views on market sectors and fundamental research on individual companies.

The model can seem strange to asset owners, acknowledged Mr. Fisher, who in July relinquished the CEO title at the firm he founded in 1979 and continues to serve as its executive chairman and co-chief investment officer.

“An institution will set out and do a search in a standard way, and if they've got a fair amount of money, their first pick of an asset manager will either be a passive or a bottom-up, and sometimes they'll get a second or a third manager in the category,” said Mr. Fisher, who shares the co-CIO role with Jeff Silk, a longtime Fisher employee.

“So we're often not picked as the first one because the top-down seems a little weird to people. But sometimes for a second, third, or fourth manager in any given category, we become a nice style diversifier.”

That distinction seems to make good business sense at Fisher, which is seeing net inflows at a time when other active equity managers are struggling with net outflows.

Assets under management reached $71 billion as of Sept. 30, up 33% from three years ago, with institutional investors the biggest growth engine for the equity-oriented firm.

Institutional assets reached $34.6 billion as of Sept. 30, up 45% from the end of 2013, the majority of the increase fueled by $8 billion in net inflows, show company data.

Not standing pat

Still, Mr. Fisher has ambitious plans: He wants to more than double assets under management in the next few years. Increased size gives the firm cost and other advantages, he said.

“Size allows you to bend vendors to your will,” he said. “Size allows you to beat up on custodians, beat up on anything we need to beat up on, changing things, innovating, all of it, size gives you power. BlackRock (BLK) has a lot of power we don't have, that they can use any way they want.”

Growing its international presence and building business among defined contribution plan sponsors hold the key to future growth, Mr. Fisher said. As of Sept. 30, almost 51% of the firm's $34.6 billion in institutional assets were from overseas investors, up from 31.3% at the end of 2013.

Fisher opened its first international office in London in August 2012, which houses both sales and investment staff, followed by sales offices in Sydney in February 2013, Dubai in February 2014 and a sales and investment office in Tokyo in July 2015.

New CEO Damian Ornani, who previously was Fisher's president of client acquisition and service, said having physical offices overseas has helped convince international institutional investors that Fisher is committed to operate internationally.

Fisher statistics show that the asset manager's biggest international AUM comes from the Middle East, $5.782 billion as of Sept. 30, surpassing Fisher's second-biggest AUM concentration in Europe, which is $5.066 billion.

Fisher's latest efforts are in Japan, a market that Fisher entered about 18 months ago. So far, its AUM in Japan is small, around several hundred million dollars for four institutional clients, but Mr. Ornani believes the country can fuel large institutional growth for Fisher.

He said the decision by the $1.2 trillion Government Pension Investment Fund, Tokyo, in 2014 to invest in overseas equities has caused other pension funds in the country to follow and look for managers with overseas equity strategies.

“We think it's going to be a big market for us,” Mr. Ornani said, acknowledging that Fisher faces other established U.S. managers that have had a longer presence in Japan.

Domestically, Mr. Ornani said Fisher believes it can build assets among smaller 401(k) plans with assets of $25 million or less. The firm opened a separate division aimed at that segment in 2014 but Mr. Ornani said operations only got under way in full force about a year ago. So far, AUM is small, around $150 million.

Mr. Ornani said the business is still new and the opportunity is big, more than $1 trillion in assets, much of it being handled by broker dealers or insurance agents without specialized knowledge of retirement plans.

“Nothing is standing in our way, it's a big market and the competition is fragmented,” he said.

While it works to build its DC presence, Fisher and its active equity-oriented strategies are growing at a time when other managers with active equity strategies have seen net outflows. Statistics from eVestment, Marietta, Ga., show institutional active equity strategies saw net outflows of more than $900 billion in the three-year period ended Sept. 30, 2016. During that same period, Fisher saw $8 billion in net institutional inflows.

Seattle-based institutional investment consultant David Emerson, a senior vice president and principal at LCG Associates, said several of his clients invest in Fisher's international equity and emerging market strategies.

He said over the three-year, five-year and 10-year periods, the strategies have outperformed other managers and their benchmarks, a fact that Mr. Emerson attributes to Fisher's combination investment approach of using both top-down and sector views with fundamental research.

The emerging markets strategies, Fisher's largest institutional overall with more than $11 billion in assets, had a 2.5% annualized return for the three years ended Sept. 30, compared to the MSCI Emerging Markets index benchmark of -0.6%. For the five-year period, the institutional strategy returned 5.8% vs. the benchmark's 3%, and for the 10 years the strategy returned 6.6% compared to the benchmark's 3.9%.

Fisher Investments has three levers to pull in picking stocks,” Mr. Emerson said. “This has helped them in a most challenging environment for active managers,” he said.

Growing more institutional assets for Fisher Investments will mean convincing consultants that the firm is of institutional quality despite its aggressive retail efforts, said Russell Campbell, CEO of Las Vegas-based Your Second Opinion LLC, which advises money managers.

Fisher is well known for its retail online marketing, with ads touting phrases such as: “Want to Retire Comfortably?” and “The Truth About Annuities,” efforts that are aimed at wealthy individuals. Such ads don't always sit well with institutional investment consultants.

“It's a struggle because once consultants make up their mind, they don't change their view” regardless of Fisher's capabilities, Mr. Campbell said. He said consultants generally tend to favor managers that are strictly or strongly institutional.

One long-term domestic client for Fisher is the $19.5 billion Los Angeles Fire & Police Pension Plan, which hired Fisher in 2004 to run a core international equities strategy. Tom Lopez, the retirement system's CIO, said in an interview that the $426 million separate account strategy has outperformed its benchmark over the long term.

For the year ended Sept. 30, he said the strategy returned 9.85%, compared to the MSCI All-Country All-World ex-U.S. index's 9.67%. On a three-year basis, the strategy returned an annualized 2.6% compared with the index's 0.64%, and for five years, the strategy returned 8.26% vs. the benchmark's 6.52%.

Mr. Lopez said Fisher's combined top-down and bottom-up investment approach is also a complement to the plan's other active managers, which use a more traditional fundamental approach. “The investment approach does not guarantee success, but has added value to the plan, net of fees.”

This article originally appeared in the January 9, 2017 print issue as, "Fisher hoping hybrid approach will lure more institutional fans".