REPRINTED WITH PERMISSION

March 07, 2024 

Intech CEO says 2 years after management buyout, embattled firm is poised to rise

Two years since Intech Investment Management's buyout from Janus Henderson Group, the quantitative equity shop would seem to be in a precarious place, with client assets down roughly 75% over that span to a two-decade low, against a backdrop of stubborn underperformance.

 

But CEO Jose Marques, the industry veteran who led the management buyout, said over that two-year period his team has put in place all the pieces needed to power a turnaround of Intech's business, with early signs of improved performance catching the attention of asset owners and gatekeepers alike.

 

Marques, in a recent interview, said since the MBO Intech has:

  • Refreshed an investment team that had been too hesitant in updating the "stochastic portfolio theory" models developed in the 1980s by a coterie of Princeton University mathematicians, led by E. Robert Fernholz — the intellectual foundation for Intech's 1987 launch. Marques pointed to Ryan Stever, a veteran of Acadian Asset Management and BlackRock, as a key hire, brought in to complement long-time CIO Adrian Banner.
  • Slashed trading costs by more than 12 basis points, or 70%, by introducing automated algorithmic trading, to the benefit of clients' bottom lines.
  • And most importantly, worked to neutralize its models' small-cap bias, a detractor from investment returns when market concentration is increasing as it has — spectacularly — since 2016, with the relentless rise of a handful of megacap U.S. growth stocks in leading benchmark indexes.

Growing market concentration — a challenging backdrop for most active managers — is doubly so for Intech's stochastic portfolio theory models, which look to differences in volatility among benchmark constituents as a primary source of alpha.

 

 

"The difference with Intech is really that its volatility-driven process requires you to pick higher vol stocks," which historically has meant focusing on lower cap stocks, noted Marques.

 

While a previous period of increasing market concentration, which ended with the March 2000 peak of the internet stock bubble, was difficult for Intech, it was followed by a 15-year stretch of declining concentration — a big tailwind for the firm's investment strategies, Marques said.

 

The highlight of those salad days was the three years through 2006 — a golden age for quant firms in general — which saw Intech averaging net inflows of roughly $12 billion a year and assets under management peaking at $72 billion in May 2007.

 

Marques said a lesson apparently learned from that experience was that market concentration, while clearly a headwind, was also cyclical. For clients capable of taking the long view, the best strategy could be suffering through the bumpy times and reaping the rewards on the other side of the cycle.

 

The length of time the current run of market concentration has continued is an argument against that "grin and bear it" approach, together with the loss of mandates that saw Intech's AUM plunge to $8.8 billion now from $38 billion at the end of 2021, just before the MBO.

 

New process

Then "in early 2022, new management showed up around here" with a different view, Marques said. "I come from an absolute-return world. If I'm not delivering the goods, regularly and consistently, I'm failing. That's the world I grew up in and I make no apologies for it," he said. Marques came to Intech from Entrypoint Capital, a New York-based hedge fund, and Bridgewater Associates, where he was head of trading.

 

The result? An all-out effort to make the Intech process "resilient to this market capitalization effect," Marques said.

 

Intech's historic processes had left the firm with no ability to extract yield from the megacap end of the market capitalization spectrum — making a chunk of the market anywhere from 30% to 60%, depending on the benchmark, a dead space for the firm's strategies, he said.

 

The mission was "let's figure out how we not ignore these things and then actually actively extract yield from them," Marques said.

 

The answer was to decompose volatility — which under the firm's traditional approach had relied on a single number for each security — into as many as a dozen drivers.

 

"What we did is take a step back and acknowledge that volatility is not this intrinsic property of a stock. It's driven by underlying factors," such as the effects around earnings announcements, which can account for something on the order of 70% of a stock's annual volatility, and so forth, Marques said.

 

"We decomposed that term into about a dozen drivers, looked at each one and then made some choices," he said. For example, if Intech's strategy is getting paid a lot for exposure to factor 4, "that's great. I want two scoops of that," he said. If other factors prove less important, the strategy won't make bets in that area.

 

The result is a more complex but more effective rebalancing regime, Marques said.

 

Churchill Franklin, the former Acadian CEO who was part of the MBO team and currently serves as Intech's executive chairman, in the same interview said "the simple story is there was historically an embedded, small-cap bet in the portfolio. It bit us badly" and has now been neutralized, allowing Intech's alpha engine to operate again.

 

While the new approach, announced in May, has been in place for less than a year, Marques said early results have been promising, with key Intech strategies putting up top-quartile returns for the past nine months.

 

"We're seeing the performance shift," said Marques. "I see it day to day, I see the holdings. I see the internal dynamics, the reaction to this market concentration effect. It's all awesome."

 

Anyone noticing?

But after a long stretch of underperformance, the question is how many people in the industry are noticing.

A handful of gatekeepers, including manager research veterans at investment consulting and OCIO firms, said they have dropped coverage of Intech, with one — who declined to be named — saying the firm just hadn't been proactive enough in addressing the challenges its models and processes were encountering in recent years to remain on the OCIO firm's radar screen.

 

Marques insists that progress is being made on that score, with more consulting firms looking at Intech again and the firm coming off watchlists.

 

"All the right stuff is starting to happen," he said, adding that the Sept. 30 end of last year's third quarter — when Intech's client assets settled at $8.7 billion — could prove to be the point where "we bottomed out."

 

Assets under management ended 2023 up slightly at $8.8 billion and around March 18, Marques said, Intech will announce an institutional mandate of roughly $125 million — the firm's first new institutional mandate in over three years — to manage 100% of a European asset owner's non-domestic equity allocations. He declined to name the prospective client.

 

That win could prove a modest first step in rebuilding what had been a stellar roster of overseas institutional clients that included Japan's Government Pension Investment Fund, the world's biggest pension fund with 226.41 trillion ($1.5 trillion) in assets and South Korea's 1.04 quadrillion won ($780 billion) National Pension Service.

 

The loss of those chunky overseas mandates, amid what Marques called an industrywide review of equity allocations prompted by the sharp rise in global interest rates starting in March 2022, contributed to net outflows of $5.9 billion in 2023 and $2.8 billion in 2022.

 

Whether Intech's remaining clients will give the firm the time it needs to prove its revised models can return Intech to its alpha-centric ways remains to be seen.

 

Marques and Franklin expressed optimism on that score.

 

There's no guarantee Intech won't lose further clients because sometimes portfolio-level decisions are made for reasons other than performance, Marques said. But in the last nine months, "I've literally seen, in person, every last client we have on the roster" and "they are here, they're committed, they understand the story," he said.

 

The average length of time Intech's current clients have been with the firm is 15 years, which hopefully translates to their "giving us more runway, because they were there for the good times, they've lived through some tough times and now it's coming back," Marques said.

 

But one institutional veteran familiar with Intech’s business, who declined to be named, said clients terminating the firm over the past year or two were likewise “very loyal clients who just could not hold on any more,” making the central issue now just how quickly and by how much investment returns can be improved, and whether they can lift longer-term, three-year results. Intech, he speculated, may have until the end of this year to make that case.

 

One organizational development that could better ensure the firm’s continued focus on delivering results: all 41 employees of Intech own equity in the firm. Employees, in fact, own 100% of the firm now — up from 3% held by employees and founders when Intech was part of Janus Henderson Group, or closer to 14% if phantom equity were included.

 

With the first comp cycle at the end of 2022, 25% of Intech's equity "was distributed to every last employee here," to drive alignment and establish a particular type of culture at the firm, said Marques.

 

It's "relatively hard to turn around an organization," said Franklin, adding "it takes a little bit of spunk, a little bit of alignment of interests to make it all happen so … kind of fun," he said.

Reprinted with permission from Pensions & Investments. © 2024 Crain Communications Inc. All rights reserved. 
Further duplication without permission is prohibited. Visit www.pionline.com. PI24013