Churchill G. Franklin co-founded Boston's Acadian in 1986. He tells Nick Fitzpatrick what the firm did differently and how its international outlook led to a Ucits business based in London.
In an academic city such as Boston, where thinking about investment has always reached stratospherical heights, it must have brought Churchill G. Franklin down to earth to deliberate about divestment in fossil fuel stocks. But that’s students for you.
A one-time student himself at Middlebury College in Vermont, Franklin is now the chief executive of Boston-based Acadian Asset Management. But as an extra curricula activity, and among other existing ties with his old college, Franklin is a committee member for the nearly $1 billion (€737 million) Middlebury endowment fund.
Lately, students have been campaigning for divestment in fossil fuel companies. Franklin disagrees with the motion. Unfortunately, his entire immediate family agrees with it, including a daughter, who is also a Middlebury post-grad.
“The right way to engage Exxon Mobil is to be a shareholder and vote your proxy,” he says, taking the line no doubt shared by many investment luminaries from academic centres of excellence like Boston.
With a benign smile, Franklin says he’s pleased that at least the student body has a view on these matters, and adds: “I’m a student of the Sixties. I believe in shareholder activism.”
Acadian Asset Management has $55 billion of assets under management and Franklin, who graduated from Middlebury in 1972, is a founder of the company, which started in 1986.
Institutional investors come in two types: those who lead asset managers and those who follow them. What Franklin relishes about working with the former kind is that they challenge asset managers to be creative.
“Institutional investors are becoming more sophisticated. We have a client that put together an entire programme around risk rather than return.
“That’s distinctive thinking,” he says.
It is also this type of investor that is more likely to draw on academic expertise as they search for funding solutions, for ways to counter volatility, or to gain yield. These investors are, as Franklin says, “reading the leading academic journals and looking for new ideas”.
Some of the high-brow ideas that fill these journals come from Boston. As well as Boston University, there are Massachusetts Institute of Technology and Harvard University – seats of learning from where research over the past 50 years has helped shape asset management.
In short, Boston is a prime city for asset managers to flex their intellectual muscles – certainly about more things than fossil fuel divestment.
In Acadian’s case, its early thinking centred on the diversification benefits of quant-based, non-US all-cap equities.
“We were underpinned by the notion that if you were a US equity investor, you were missing the diversification benefits of international equities, and not realising that you could get a higher return with less risk.
“International equities were at the top of our belief set. We wanted to be different and quantitative international investing was non-mainstream then.”
Franklin adds: “All throughout our career we’ve thought globally. Our first two clients were US clients but today 40% of the assets we invest in are for clients outside the US.”
During these early years, Acadian’s small-cap strategy was also unusual in the market, he says.
“It was a great strategy return-wise but few others were doing it and so there was not much competition – yet some competition is important because it is very hard to convince the market of a new idea.”
It took 18 months for Acadian to win its first client, says Franklin.
He adds: “Being early in a strategy is uncomfortable, though it is frequently where you make the most money.”
But global investing has been adopted relatively quickly over the past two decades, Franklin says, and adds that the home-bias in the US is not especially stronger than elsewhere.
Since 1992 when Acadian introduced its “core” strategy that covers global equities, the firm – which has been owned by Old Mutual since 2000 – has periodically rolled out other strategies. These are long/short, managed volatility and fixed income.
Franklin says that it is sophisticated clients who have driven much of the firm’s innovation.
For example, it was a client that asked Acadian to turn its global equities data to emerging markets investing, and then another client that wanted the data to be streamlined to gain exposure to frontier markets.
“When you work on something like this with a sophisticated client, they tend to pull you… clients do not want to be sold off-the-shelf products. They want you to bring intellectual depth.”
Similarly, he thinks that Acadian’s next development will come out of a similar client demand for customisation, particularly around quant investing. He suggests that emerging market small caps and concentrated emerging market portfolios will be the focus.
And he adds: “There’s a lot of customised implementation for managed volatility.”
Saying that Acadian is working hard to bring new ideas, he adds: “It’s very clear that you cannot stand still.”
At times, it might be better if asset managers did stand still. The 130/30 product was one of the most marketed asset management strategies of the years before the financial crisis and it leveraged off the interest in hedge funds. It also features in Acadian’s long/short offering.
“Some people perceived that there should have been a hedge-fund aspect to 130/30 funds, meaning downside protection, but there wasn’t. The industry did not make this clear at the point of sale,” says Franklin.
He adds: “We love it when an idea catches fire, but there’s always the risk it will be over sold.”
And he cautions about managed volatility.
“Managed volatility does well when equity markets are going downwards but will not do so well in times of surging irrational upside, but people tend to forget that.”
Acadian gained its first non-US client in 1995. When it came to physical overseas expansion, Asia came ahead of Europe. “We went to Asia first particularly because Asia was cheaper.”
The firm opened its first overseas office in Singapore in 1999 and then London in 2007. It also has a joint venture in Australia.
“Because we were offering a global capability we wanted to go places where there was less competition. The whole mindset was that we wanted to travel and talk to investors around the world and find out how they thought about currencies and how they derive returns.”
Currently, the London office has 10 people, 40 clients and sub-advises six Ucits funds. Asset under management are $11 billion.
He says clients and prospects in the UK, the Netherlands, Switzerland, Norway and Sweden are showing interest in managed volatility and emerging markets, including small caps.
Meanwhile, the students at Middlebury will not be getting their fossil fuel stock divestment yet, though the endowment will increase its environmental, social and governance activities.
©2013 funds europe