Jeffrey S. Coons lists his interests as economics and running, and both have served him well in his role as co-director of research at Manning & Napier Advisors Inc. His economics background has helped guide the firm that Morningstar Inc. last autumn called “one of the best fund companies you've never heard of,” probably because it is located far away from Wall Street near Rochester, N.Y. With $31.1 billion in total assets as of March 31, including $12.6 billion in mutual funds, the company is just a “blip” in the mutual fund world, according to Morningstar. (Manning & Napier also has $16 billion in separate accounts and $2.5 billion in collective investment trusts).
Mr. Coons' running — he does about 40 miles a week — helps clear his head so he can better analyze data. “Running gives you a lot of time to think,” he said. “Being analytical means you have to determine what is important and what needs be ignored. Running helps focus on what's important — and it keeps me healthy.”
Mr. Coons describes Manning & Napier's investment approach as “bottom-up, analyst driven.” He and fellow co-director of research, Jeff Herrmann, oversee a staff of 70 analysts, economists and research assistants. Pursuing his goal started early. “I knew economics was for me when I took a class in high school,” he said. “I knew what I wanted before I entered the University of Rochester (as an undergraduate). I liked the mathematical rigor. I liked how people made rational decisions. It's been a passion for my whole life.”
How do you view the general economy from the standpoint of investors and your company's prospects? Our belief is that high levels of debt at the consumer and government levels are likely to dampen the trend of growth in much of the developed world following a rebound from the credit crisis lows. A slow-growth environment forces investors to think through the idea that “for every winner, there has to be a loser,” because there is not enough top-line growth to float every boat in the harbor. This also has implications for the investment strategies that investors use, since an environment like this makes active, flexible management more important. We simply can't assume that a market-cap-weighted index has captured the “winners and losers” of this dynamic, slow growth environment. In the short-term we're pulling back on our risk level.
How has the market downturn affected institutional investors' behavior? We have seen some evidence that they are willing to stick with the program. They're not jumping the gun. Institutional investors are willing to be more creative than in the past. That's why we have grown in the past years. We've always been a benchmark-agnostic manager; we've never been tied to benchmarks. Institutional investors are now more willing to take a benchmark-agnostic approach in their allocations to managers. It reflects the slow-growth environment. You can't just rely on the S&P 500 to meet your return goals and needs.
What do you like? Think about the idea of consolidating industries. Let's take the airline industry as an example. We've seen the number of flights get squeezed dramatically. Every time I get on a plane, it's a relatively full plane. We haven't yet seen demand pick up. If you get demand picking up with full planes already, you're going to start seeing pricing power. Eventually you need to start buying new planes — hopefully more fuel-efficient planes because energy costs are going to be an issue. So the suppliers to the industry ... are good examples of the beneficiaries of this cycle that will eventually occur. What you want to avoid are industries that have zombies — industries that are being propped up. Any industry where you have a lot of government involvement to prop up competitors is an area that we think you want to avoid because that will suppress return on investment.
What's an example of a “zombie”? Banking is a tough area. You would think there was enough consolidation in terms of sources of capital that there would be opportunities. You really have enough of these institutions being kept alive, and you don't have those with capital really stepping up and taking advantage and gaining market share. We're a little bit skeptical of the banking industry's ability to work through this. We never really saw that shakeout and we never saw the strong survivors taking advantage of that consolidation. ... There are a lot of opportunities at the local level for banks to gain market share if they have a pretty good balance sheet and a lot of equity. But we're just not seeing a lot of activity; we're not seeing a lot of institutions taking advantage of what is really a capital-starved system especially in the small business side.
Do you see industries where the stock prices have gotten ahead of themselves? We feel that global commodities have a pretty good premium to them. We saw a global economic downturn; commodity prices got very low in areas like copper and oil and iron ore. The stock prices never fully reflected that full downturn. But then these commodity prices have snapped back even before demand has truly soaked up a lot of the excess supply. So you still have a lot of supply sitting out there for a lot of these industries. Global demand really hasn't picked up that dramatically, but investors are seeing the developing world growing and they can picture a few years down the road when that demand is going to soak up that excess supply. So these stock prices are reflecting a lot of that. We think that over time there are going to be disappointments in the growth in the developing world and that will give us an opportunity to buy. But right now, we're relatively modest in our allocations in emerging markets and likewise some of these global cyclical stocks that are benefiting from emerging markets growth.
What challenges or opportunities do you see for the industry in general or specifically for Manning & Napier? One challenge the industry faces is the talk of a regulatory push toward low fee index fund approaches to target-date lifecycle funds, and the loss of flexibility and active management that will result from it. We believe lifecycle investors are looking for professional management ... (and) active adjustment to the changing nature of investment risk, especially in volatile periods like we have experienced recently. A push toward passive index fund allocations undercuts this basic goal and leaves us with diversification as our sole risk management tool. As an active lifecycle manager, this challenge is of particular concern to us.
Why did you wait until March 2008 to offer target-date mutual funds? We felt that the adviser channel was less interested in target-date funds. They wanted to have a risk-based portfolio so they could work with the individual participants and put them in the right risk portfolio. Now with the push toward target-date funds after the bear market of 2000-2003, we felt that we needed to have a mutual fund version as well. Our collectives are really for the large institutions that we market to directly but the target-date mutual funds are as much as anything targeted for the adviser channel. We have institutional shares for target-date funds.