CEF Insights: Liberty All-Star's Multi-Manager Equity Strategies for Income

Robert Milas:

Oh, it's very good to join you. Looking forward to speaking.

Robert Milas:

Our multi-manager approach is meant to promote consistency of performance while we leverage each of the manager's unique abilities, processes, and style. It's a portfolio construction process that Liberty has really employed for over 37 years and has really turned out to be very successful for us. So, for ASG or the All-Star Growth Fund, this is an all-cap growth portfolio, so large, mid, and small all blended. And then for USA, it's an All-Star Equity Fund. So, this is a large-cap investment portfolio, so we have both growth and value managers.

So again, ASG, three managers, one large, one mid, one small. USA has five managers. For that it's two growth managers paired with three value managers. And we think that this blending of styles is very favorable in that these styles come in and out of favor through the market cycle.

And we don't expect each to perform the same during the four phases of a complete market cycle. And the goal really is blending these managers, again, as I spoke earlier, was consistency and really, it's meant to support the overall philosophy of both growth and distribution policy, which is obviously the income portion of the portfolio for the end investor.

Robert Milas:

We start with the five Ps, which I think most people will recognize as being people, process, philosophy, parent organization, and performance. And I'm not going to go into a lot of detail on all of those, but philosophically for us, we prefer stock pickers. Those with as little distraction from that stock picking process as possible. And so, we generally gravitate towards boutique managers, institutional money managers who run concentrated portfolios.

We want them to allow their ability to generate alpha to shine. And then finally, as we think about the managers that we're hiring and putting together, we're really trying to put together a glove and not a mitten. And so fit is very important. We don't just go out and select great managers and throw them together in a portfolio and hope it works.

We're really looking at the managers, who we think are all great, but they also have to complement one another. In other words, just fit together. So, when we are looking for a manager, we're testing each prospect in terms of the five Ps, but also how they complement each other in the portfolio stylistically. And we do this through deep fundamental qualitative and quantitative analysis.

So, at the end of the day, we expect all of our managers to perform over a full market cycle, but we know that each strategy will perform differently during the four different phases of a full market cycle being expansion, peak, contraction, and the recovery phase.

Robert Milas:

Here we're back to the five Ps again, and what we're looking for is has there been a change? And it's almost the four Ps. We look at performance as being a symptom of a change to one of the other four Ps, again, being the people, the process, the philosophy, and the parent organization. So, we think of it as Hotel California, hard to get in and hard to get out, just because of the amount of diligence that we do on our sub-advisors before hiring them.

So again, back to the glove analogy, if I have a glove with one finger, that doesn't happen to go in quite right. You tend to keep the glove around because of its great qualities of warmth and durability. But at some point, you know it's time for a new pair of gloves. We've been doing this for a long time as a team and we know when a change is necessary and whether sub-advisor or one of the five Ps has changed and the finger in the glove is no longer functioning as it should.

As we go through the history of our manager changes in the two funds, there have been 10 manager changes in the ASG Fund since 1995 when we assumed the management of that fund. There have been 19 manager changes on the USA Fund. And again, remembering that there are three managers for ASG and five managers for USA, but 19 manager changes for USA since 1986.

And we've had two sub-advisors for over 20 years. So, we make changes when necessary, but we don't really have an itchy trigger finger. But we also are aware that the dynamics of the business, the dynamics of the market change over time. And so, at times this can necessitate a change in sub-advisor. So, we systematically monitor changes to the stocks in each of our manager's sleeves, the risk exposures, positioning, and characteristics.

We're testing these changes against our understanding of the manager's philosophy and process to avoid style drift from a manager that could adversely impact one of the funds.

Robert Milas:

Again, ultimately, the goal of the multi-manager investment discipline is to support the distribution policy. And our returns over the long term need to be strong enough and consistent enough to support that policy. While it is occasionally necessary for us to return capital, that's not our goal to do on a regular basis. We're constantly looking at a number of areas that will determine our support of the distribution policy, including looking at things that we do around portfolio turnover, rebalancings, and replacing of managers.

So, the two funds have distribution policies. USA is to pay 2.5% per quarter or 10% annually. For ASG, that fund pays 2% per quarter or 8% annually. The multi-manager structure, again, is designed to blend the performance engines and therefore smooth the investment returns relative to each individual manager and their single philosophy and process and style.

So again, as we know, the market cycles and, like my bell-bottoms, come in and out of style. And manager replacements typically result in the realization of capital gains, and so their policy has a systematic mechanism for distribution of these gains to shareholders.

Robert Milas:

So ASG, we blend the Russell benchmarks for the small, mid, and large cap, again, as that's the way the management is structured. And so relative to that blend, we are currently overweight in financials, in healthcare and underweight in technology. So, the 35% average weight in tech for our managers is a high hurdle for them to be able to meet, and so that's the reason for the underweight in technology.

And they're finding growth both within tech, but also outside of tech as well. And again, that dictates that allocation. Overall, that fund is smaller in capitalization and higher in quality and the fund sports an 80% active share. For USA, we really look at that relative to the S&P 500, and there we're overweight financials and underweight technology. Here, again, 32% of the S&P 500 benchmark is in technology.

So, we're a bit underweight relative to that, a little bit more diversified. So not only are we more diversified, we're lower in cap. And the mega cap growth rally has really distorted that composition of that S&P 500. On this fund, we're 61% active share for our managers, and therefore our portfolio will look different than the S&P 500. And we really welcome that profile over the long-term.

Robert Milas:

USA and ASG utilize the closed-end fund structure to provide equity like returns along with a steady distribution stream. So, I see that as being ideal for investors looking for income in a vehicle that differs from other structures that produce income, including annuities, open-end mutual funds, bond ladders, et cetera. So, we think investors will find the liquidity, transparency, distribution policy, and growth potential provided in this closed-end structure to be competitive with these other structures.

And while it's not exclusively a retirement vehicle and 2024 is now the peak of the boomer generation hitting age 65, and so we think these funds fit well within a retirement portfolio. As for specifics to USA and ASG, we think that unique multi-manager structure... And again, only a third of closed-end funds have the equity backing. And so, we think that within that structure, this multi-manager structure is unique.

And we think that whether you choose either the large cap version or the multi-cap version, provides the investors with not only income, but the growth potential of principal that will help them to retire comfortably. And so, as the managers of the funds, we're trying to provide manager selection, due diligence, rebalancing, ongoing monitoring, and an occasional replacement of portfolio managers.

And we think this allows investors more time to spend with the ones that they love, doing the things that they love to do and that are important to them. So, we think both USA and ASG should be considered by investors seeking income and growth. And the final point I'll make about multi-manager structures is to emphasize why consistency is so important. In my mind, it's for three reasons. The first we spoke about with regard to supporting the distribution policy.

The second is that we never know what the holding period of our investors are. And so, we strive to achieve satisfaction amongst the maximum number of shareholders at any time. And then the final reason is behavioral. We know retail investors underperform the holding period returns because they sell low and buy high. Our selection evaluation of managers seeks to avoid those actions.

Robert Milas:

Thank you so much for having me.