ValueWalk’s interview with Lyle Minton, the Chief Investment Officer of Keel Point. In this interview, Lyle discusses his and his company’s background, high net worth individuals and late-cycle investing, concerns with traditional equity and fixed income investments pushing investors to private equity and private credit, the death of hedge funds, and net returns generating risk-adjusted alpha.
Can you tell us about your background?
I am the Chief Investment Officer at Keel Point. Prior to joining Keel Point, I was a Managing Director at HSBC in New York in the Structured Credit Products group and a Senior Vice President at Alcentra (a global asset management firm managing approximately $37 billion of AUM focused on credit products), where I managed structured products trading. Throughout my career, I have focused on structured products trading, managing risk and global macro strategies.
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Can you tell us about your firm?
Keel Point is a wealth management firm with approximately $2.1 billion of assets under management as of December 31, 2018 and approximately $1 billion of assets under advisement. The firm serves clients through four lines of business: 1) private client discretionary asset management, 2) family office services under the multi-family office brand of Horizon, 3) institutional investment management under the brand of Keel Point Asset Management, which includes discretionary asset management and outsourced CIO consulting services, and 4) corporate services, which includes retirement plans and employee benefits.
You work with high net worth individuals what trends are you seeing in the space?
Keel Point’s clients include private clients, institutional investors and ultra-high net worth families. The investment trends we see are mostly related to “late-cycle” investing objectives. These trends include repositioning long-term strategic portfolio allocations to respond to lower return expectations related to traditional equity and fixed income investments and sourcing differentiated trading strategies that have demonstrated the ability to generate risk-adjusted alpha during periods of elevated equity volatility.
Are alternate lending and private equity a growing interest in that area?
While we have long been an investor in private equity and private credit, we have seen interest increase in both asset classes as clients become increasingly concerned about future returns related to traditional equity and fixed income investments. Last year we partnered with iCapital Network to launch a private credit fund comprised of diversified credit strategies. We also think it is important to continue to periodically allocate to private equity investments in order to diversify vintage exposure. We are currently focused on private equity that provides exposure to businesses that are less sensitive to the economic cycle.
How do you evaluate the risk for those more illiquid types of investments?
We make two important decisions regarding illiquid private investment risk. First, we make a determination on the public market equivalent risk we bear in the investment based on historical downside characteristics. For example, we determined that our private credit fund is roughly equivalent to 50% equity / 50% fixed income risk. This discipline ensures we sell the appropriate assets to fund the private investment without altering overall portfolio risk. Second, we evaluate idiosyncratic manager issues – such as track record, use of portfolio-level and investment-level leverage, and fee arrangements – versus peers to make a qualitative decision on whether return expectations adequately compensate for both asset class and idiosyncratic risks.
A lot has been written about the death of hedge funds, what are your clients saying about "2/20 funds"?
Hedge fund strategies specifically, and actively managed strategies generally, have struggled in recent years, especially during protracted periods of historically low equity volatility, higher correlation between equity and fixed income returns and lower dispersion of equity returns. However, we continue to see interest in actively managed strategies, including 2/20 hedge funds. We have been particularly focused on quantitative equity trading strategies that, in some cases, charge lower fees. Our interest in active management is, in part, founded in a belief that the economic cycle is evolving and will increasingly become more conducive for differentiated strategies. The objective is to find strategies that can provide reliable performance characteristics that diversify traditional capital market risk.
Is the biggest issue fees or returns?
The most important issue is returns net of fees relative to investment risk characteristics. We care about net returns generating risk-adjusted alpha.
What about some recent high profile IPOs - is there an interest in that sector?
We do not see significant interest in IPO’s, when it comes to our clients.