Q&A: CIO Of Parker Global Talks Investment Strategy, Fund Manager Selection

Mar 1 2011 | 10:12am ET

Stamford, Conn.-based Parker Global Strategies was established in 1995 with a mission to provide alternative investment solutions to global clients. The firm is both a fund of hedge funds and a manager of managers and has advised on the placement of over $2.5 billion over the past 15 years. These days, PGS is particularly involved in energy, foreign exchange and emerging markets. FINalternatives spoke recently to Ginny Parker, the firm’s founder and CIO, about why PGS’ approach to risk management hasn’t changed since the financial crisis, what factors it considers when choosing a fund manager and how it goes about investing in the energy sector.

First, could you tell me something about Parker Global Strategies?

Certainly, we specialize in custom designing alternative investment strategies for, primarily, institutions and their clients (mainly high net worth clients) and we are active in the areas of energy and global natural resources, foreign exchange, fund of hedge funds and some of our investments are regionally focused, like Brazil.

Risk management seems to be of real importance to PGS—has your approach changed in wake of 2008 financial crisis?

Our approach really hasn’t changed, it’s been the same approach since we started business, it’s one where we require a high degree of transparency from underlying managers…We need to know where the assets are and have confirmation that that’s where the assets are; [and to] know that there’s an independent group that’s doing the NAVs and that there are high-caliber service providers working with the manager and the fund. We have also developed proprietary tools to help us recognize style drift. So…our approach really hasn’t changed, but, what I would say is a lot of people have really come around to our way of looking at the world now.

How do managers respond, generally, to your requirement for position-level transparency?

It varies from manager to manager. There are certainly some firms out there that don’t provide much information. Nonetheless, there are enough good firms out there that we’ll just move on and find one who will give us what we need to be comfortable.

When choosing firms to invest with, do you start with an idea of where you want to invest and find a manager or does it start with a manager approaching you?

Most often what takes us to a new strategy [is] a client inquiry. So, to give you an example, some years back we had a client that was very interested—and this is probably going back about seven years now—very interested in investing in hedge funds and long-only funds that were focused on environmental investing. And so we literally identified nearly every manager around the world that was running an environmentally focused strategy for outside clients. In doing our homework on the managers and the strategies, we came across water as a place of environmental investment. As we began to recognize both the importance and future growth of the water sector and shared our research with a client, the client soon requested that we build a multi-manager water fund. So, we worked on developing the fund, created a water manager index as part of the process, and began investing with water managers in several of our multi-strategy funds. We never actually launched the water fund, as the first phase of the financial crisis started not too long thereafter. But really, it is often clients that will send us in a direction. We’ll come across an area that we think is quite interesting and then do a lot more work and eventually develop a product in that area—like our current focus on Brazil.

In terms of where you’re seeing opportunities right now, is there anything in particular that’s got you excited?

Well, certainly Brazil is a place that has us very excited. When we look at the BRIC countries, we feel for many reasons that it’s the most comfortable country for us to invest in on behalf of our clients. I think that Brazil is much more transparent than some of the other countries. As everyone knows, Brazil is independent from a natural resource perspective, the country has become very fiscally and monetarily responsible over the past decade or so and they’ve got some really world-class companies there, very large ones, and then you look below the largest companies and you’ve got another whole group of very interesting companies.

We also found, as we started doing work on managers who invest in Brazil, that there are approximately 100 hedge fund managers and some of them are very, very impressive….A number of the managers were around during the crisis period in Brazil. We believe that makes them much, much stronger managers as far as being able to handle a very volatile market environment.

And one of the things that we think is really interesting about Brazil now is that last year it really underperformed, which is nice, because a lot of the markets had such strong performance. You don’t want to feel like you’re chasing a market that’s already gone a long way...

What opportunities is PGS seeing in the energy sector right now?

Well, our big focus more recently in the energy area (and when I say recently, I mean over the past, probably, five years) has been in the MLP space. These are publicly traded partnerships in the U.S. About two-thirds of them are traded on the New York Stock Exchange and about one-third are traded on the NASDAQ.

Most of the energy MLPs are what is called ‘midstream’ and that means that they own the midstream assets in the energy area—so, pipelines, storage tanks. Some of the MLPs provide services such as gathering and processing from the pipelines. For example, in a gas well you may have some natural gas liquids, and the gathering and processing MLPs will break the natural gas liquids into the liquid components and then deliver to their various markets.

The midstream segment of the energy market is interesting because it really is much more like a toll road type of business, with the pipelines. Many of the pipeline customers enter into long-term contracts with the pipeline companies, often 10-year, and many times these are take-or-pay, so the owner of the pipeline knows that they’re going to have a very consistent cashflow for some years off of that pipeline. It’s a way to participate in the energy market without necessarily having to own the E&P companies or owning the commodities directly. And these companies have been growing at about 6-8% a year over many, many years, so they’ve got a lot of very visible earnings history, and fairly visible earnings in the future, so we find it very appealing. Currently, the MLPs are yielding on average about 6%, that’s about 2% higher than REITS, and in a situation where everyone is looking for yield, it’s kind of an interesting place.

I would imagine investments like this require significant research, what size research staff do you have?

We’ve got nine people, full-time research, between fundamental and quantitative research and our risk manager also helps out a bit with some of our quantitative research. And then, we have people outside of Stamford, we’ve got a senior person based in each of Sao Paolo, Chicago, Tokyo and Mumbai. They will all assist with some of the manager due diligence work and research in their local area for us.

When you are doing manager due diligence, what are some of the factors that you consider?

One of the things that we’ve said for many years is that we invest in people not in numbers. Somebody has to have had a good track record, a strong track record in the first place for us to consider them, but we have to really, then, do the work on who is the person? Who is the organization? Is this a team of people that we believe, if things go wrong, will be there to fix them or are these people who, if they get into a difficult situation are just going to run the other way, not answer the telephone, that sort of thing. We believe, at the end of the day, everything begins and ends with the people involved, so we have to have a high degree of trust.

Editor's Note: Ginny Parker’s colleague, Caroline Bentz, a managing director at Parker Global Strategies, will be speaking at the FINforums event, Global Macro and Geopolitical Risk, on March 23 at the Princeton Club in New York.

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