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Exclusive Q&A: Shawn Egan, Chief Investment Officer At Antares Capital

by trusted insight posted 5years ago 7610 views
Shawn Egan is general partner and chief investment officer at Antares Capital, a single-family office with offices in Sarasota, FL, Greenville, SC, and Dallas, TX. Previously, Egan founded and operated Eamon Advisory, a New York City-based consultancy, in 2011.  Soon after he formalized a relationship with Antares Capital and joined the family partnership in 2012. Prior to that, Egan served as the director of investments at the family office of Milton Fine, as the director of research at Deloitte & Touche Investment Advisors and as a senior analyst at Aeltus Investment Management. Egan holds a B.S. in finance from Fairfield University, an MBA from the University of Massachusetts at Amherst and a CFA designation.
Mr. Egan was recently named to Trusted Insight’s ranked list of the Top 30 Family Office Rising Stars. He graciously spoke with Trusted Insight on June 20. The following interview has been edited and condensed for clarity.

Trusted Insight: You've been working with high net worth families for a little more than 16 years now in various roles, both on the research and investment sides. How have you seen the family office industry change over that time?

Shawn Egan: I began my career on the buy side. In that role, I worked with several portfolio managers gaining hands-on experience in active fund management. I was later recruited by a Big 4 firm that was building out its growing investment advisory business. That position proved to be very influential to my career as I transitioned from institutional to ultra-high net worth portfolio management. I was later promoted to director of research and began tailoring our research process to better serve family offices due to a change that I saw emerging in the industry around that time. Families were asking for more customized solutions, as they wanted to take advantage of deal flow and opportunistic investments not offered by traditional consulting models. They also wanted to see a greater focus on absolute returns and downside protection, and less of a focus on style box asset allocation and relative returns. They were asking for lower transactional costs and portfolio turnover and a much greater emphasis on portfolio tax efficiency. As our platform evolved, I co-authored an article in the Journal of Wealth Management titled “Evaluating and Classifying Taxable Account Managers” to provide further insight on this approach.

I was then recruited by a single-family office to work as their director of investments. I accepted the position to focus on the specific goals of one family and have the flexibility to freely invest without the restrictions of an outside advisor. This was typical of another change that was happening in the industry. An increasing number of family offices were hiring senior investment professionals to replace the role of the outside advisor and bring decision making in-house.  Despite additional regulatory hurdles and increased costs, this trend continues today. Many families are frustrated with the recent performance of hedge funds and other outside managers and are increasingly deploying more of their capital internally.  

Trusted Insight: Family offices are notoriously opaque to the general public and to the rest of finance, but they are very collaborative between other family offices. Do you find this to be true?

Shawn Egan: I think most family offices are open to developing collaborative relationships with others in the financial community. I find the mistake some make is in their approach toward meeting new families. Family offices value the same respect for privacy that we all do, especially when meeting people newly introduced to them. If you would not ask your friend at work how much he is worth at a cocktail party, that same rationale should apply when first getting to know family offices. I have personally found success slowly developing relationships with family offices and earning their trust over time. Once that is achieved, family offices can be some of the best relationships for networking, deal flow, philanthropy and specialized insight across many industries.

Trusted Insight: Tell me about the investment team at Antares.

Shawn Egan: Earlier this year, I moved to Sarasota, Florida, where I'm based now. I left New York City after 17 years. In conjunction with that move, I wound down Eamon Advisory, and now focus 100% of my time as chief investment officer and general partner for Antares Capital.  Antares is a three-generation, single-family office. 

Antares has four general partners: the patriarch of the family, his two adult children and me. We don't have any employees, and the portfolio is run exclusively by us as an investment partnership comprised of our capital. We work remotely as the four partners are all located in different locations, as are some of the grandchildren who are now young adults. 

Each of us has a defined role. My role as chief investment officer is to run the portfolio with the responsibility for its performance results. The patriarch’s two children oversee performance reporting, tax reporting, cash management, wires, filings, investment documents and other important non-investment related work that needs to get done for us to be successful. They also make valuable contributions as investment analysts supporting manager research and other direct investments. 

Although their father would say the three of us run the portfolio, he is very tuned-in to the decisions we are making and lends a very experienced voice to the process. He had a successful career as an entrepreneur, and started the investment partnership from proceeds received selling his first business in the 1990s. He currently owns a second company, which has been named one of North Texas’ Top Ten largest private companies by revenue. The track record of the investment partnership he began has been outstanding. Collectively, including the time that his children and I later became involved, the portfolio has produced a CAGR of 12% since August 1999, which represents a 600% cumulative return on investment after all fees and family office expenses, versus an S&P 500 (dividends reinvested) CAGR of 4.7% and cumulative return of 117% during the same time period. 

Going forward, Antares will continue to evolve as the second generation continues to put its own ideas and ambitions into place. That could lead to building out the organization over time, seeding additional funds, partnering with entrepreneurs, investing in new opportunities, launching businesses, involving the third generation and continuing to run more of the family’s money internally.

Trusted Insight: Tell me about the portfolio and how you’ve changed it since taking since taking over.

Shawn Egan: As I shared, the portfolio was performing very well before my arrival, so there was not a pressing need for change. I had known the patriarch for many years and earned a high level of his trust sharing and discussing ideas. In 2012, he approached me to manage his family portfolio as he wanted to remove himself from the day-to-day investment process and enjoy retirement. In doing so, I would work alongside the second generation, and we would collaboratively determine how the partnership would look in the future.  

Prior to 2012, his approach was typical of an early investor in hedge fund strategies. He invested in young, smart, small hedge funds that had a high degree of alignment with their LPs.  As the industry has changed, and the number of hedge funds increased by the thousands, the industry became more institutionalized, and we reacted accordingly. As the CIO, I have implemented a focus on the portfolio and risk management of our underlying exposures, investments and funds. While we continue to diligence every investment on its own merits, we place equal importance on the relative performance contribution of each investment to our entire portfolio, how correlated each one is with our current investments, how adding or removing an investment impacts portfolio volatility, how the portfolio may react in a market downturn, how we can create long volatility exposures and constantly trying to build a portfolio that can achieve our objectives while limiting market exposure in periods where asset prices are rich.

The result is a portfolio that continues to seek to achieve competitive levels of total return.  However, optimizing expected risk-adjusted returns is now a priority, which allows the portfolio to better navigate through volatility and minimize drawdowns, yet still compound returns over full market cycles. This philosophy applies to our process of allocating to outside funds. We look for funds and strategies that can produce a specific type of return stream that will complement the current portfolio and increase our top-line Sharpe Ratio. It also leads us to consider managers coming off disappointing years, who may have promising outlooks and not just those managers with recent outperformance.

Trusted Insight: Family offices are inherently long term. To what degree do near-term macro factors affect your strategy? 

Shawn Egan: We start with our top-down call, and that translates into our asset allocation. This includes near-term and long-term macro factors. If needed, we react when certain events happen in between our more formalized meetings and discussions on asset allocation. This could be on a daily or weekly basis. I think we try to put the sail going in the right direction, but when the winds change, like Brexit, Fed announcements, seasonal weakness or a variety of other things, we do take a look at the portfolio and say, “should we do anything to offset a particular risk, or dial into a particular risk and take a contrarian stance?” For example, leading up to Brexit, I felt the market was mispricing the risk of exit by misinterpreting how the odds makers develop betting lines, and ignoring the polls, which showed a 50%/50% chance of Brexit. The day before the announcement, the market seemed to be offering little upside to position for “remain,” and appeared exposed to significant downside in the event of “exit.”  Therefore, I positioned our portfolio to be defensive, as the asymmetry seemed to be in our favor. It was the right call. However, as you know, the market quickly recovered, and although we were buyers at the trough, we would have loved the market to stay at those levels to further redeploy our dry powder to take better advantage of being properly positioned.

I work well with the family, and we have very healthy dialogues about the portfolio and the macro environment. In my role, I need to incorporate everyone’s thoughts, yet be sure we're not over-trading the portfolio, or reacting on emotion, as that can lead to underperformance.  We don't want to get whipsawed into making too many decisions, as market calls are tough to consistently get right. It's difficult to have a high batting average doing that. If it's a risk that is very specialized, in my role as a generalist for the portfolio, I can also dial into my network, whether it's a fund or an industry expert or just another smart investor. We're certainly not traders, but I do believe we are probably more comfortable with volatility than some other families, to my current partners’ credit. I benefit from that as I can be a buyer when others are selling in certain macro events and volatile markets.

Trusted Insight: What's the most important life experience that you've had that's been helpful to your current success? 

Shawn Egan: During the first five of years of my career, the S&P increased over 20% for five consecutive calendar years. It would have been tempting to chase those returns, so I'm glad I wasn't in a trigger-pulling capacity at the time, as that ended badly in the period from 2000 - 2002. Instead, as an analyst, it served as an important real-world lesson early in my career to have discipline in security analysis and learn that when markets get frothy, it is important to focus on valuations, and resist the relative performance return chase. 

That experience certainly helped in 2008, as I started asking questions about valuations and the housing bubble, which led to profitable ideas. I added a short subprime allocation to our portfolio in 2007 and actually recommended the idea to the family office I’m with now as we would often discuss ideas. This helped the portfolio perform extremely well in 2007. We also mitigated losses in 2008, and were able to hold on to a significant amount of capital that some other family offices, well-known endowments and successful investors weren't able to do. I was also able to make a lot of money coming out of that depressed period by aggressively putting money to work in 2009. I was able to do that having dry powder and, again, having the ability to be a net buyer versus a net seller.

Trusted Insight: What is your outlook for the markets, both public and private? 

Shawn Egan: I believe risk assets are expensive. Going into August, the S&P 500 was hitting all-time highs, yet earnings remain unspectacular. Central banks continue to provide a safety net for investors on market pullbacks, and the lower rates they are inducing are providing justification for increased multiples as investors drive equity markets higher despite lackluster fundamentals. Many investors are buying equities to enhance yield as bond substitutes despite yield being only one component of total return. These dividend yields could be quickly negated with a slight adjustment in multiples, and much more so in the event this slowdown leads to a recession as the global economy continues to struggle with growth. Central Banks have less and less ammunition for further productive monetary stimulus. In the U.S., much needed fiscal solutions appear hopeless given the divisiveness of the upcoming presidential election.  

Going into August, we are more defensive than we have been since 2008. As with 1999 and 2007, we know markets can overshoot and that we may be early in our positioning. As single-family office capital, with no outside investors to consider and no fees to justify, we are able to run risk defensively and sacrifice a portion of potential future short-term market upside. That approach seems prudent in the eighth year of a bull market with mediocre fundamentals and macro and monetary headwinds.   

I don't want to imply we are so defensive that we have the opportunity cost of, if markets keep heading higher, not making any money. That's certainly not how we're positioned, as we do have a portfolio of investments supporting our market view and complementing our current outsized cash position. These are not necessarily dedicated short equity, long volatility or tail-risk positions. Rather, what we're trying to do is to continue to increase exposures into investments that can generate attractive returns without taking market exposure either way.  Unfortunately, building these exposures is a difficult thing to do, but we maintain discipline using a “show me, don’t tell me” process of selecting funds that market their strategies as uncorrelated. We need to have high conviction in their process and risk management, not just a limited data set of monthly returns, that a strategy can make money during a market drawdown. These are the funds we are adding to our portfolio, and are examples of funds we believe justify hedge fund fees.  

We do realize our top-down positioning may go through periods where the market disagrees with us. Therefore, we choose to own a limited number of funds, despite our current outlook, that have high correlations to the market and would likely drawdown during a market correction. These are funds in which we have high degrees of conviction, usually from a long history as an LP. We are committed to owning these funds over a full market cycle, allowing them to manage through volatility. We often deploy additional capital with these funds, rather than redeem, during market drawdowns.  

When I look at public versus private, in terms of liquidity, I don't necessarily think we're currently being compensated enough, in general, on the private side to tie up our capital for any lengthy period of time. We are working off a small number of positions we committed to in previous years, but at this point in the cycle, this current vintage, we are not recycling capital into new private funds. However, we are always looking on a deal by deal basis and have the cash position available for compelling situations. 

Trusted Insight: What's the most challenging aspect of working with a family office?

Shawn Egan: I have many peers outside of the family office space who run money for endowments, insurance companies and pensions who share with me their portfolio performance objectives. I find single-family offices often have the highest return expectations. Family offices are typically comprised of very successful people who have run their own businesses. They built their wealth making the right decisions for their companies, have grown their businesses in good times and have skillfully navigated through the bad times. They expect the same from their investment portfolio and CIO.

I find another challenge is the degree to which families personally feel the pain of drawdowns and losses in the portfolio. In institutional management, CIOs speak of gains and losses in basis points and in relative performance terms versus their peers. With families, the conversation is typically framed as percentage gains on the upside, but dollar losses on the downside.
Therefore, considering the size of ultra-high net worth portfolios, a 5% drawdown translates to a large dollar amount. Fortunately, the family and I are completely aligned, as we all have complete skin in the game. As their CIO, I feel the pain in good and bad times as well. I think this is different from my CIO peers who represent other forms of capital, sometimes for the benefit of people they may never meet and who may not have their own money invested in the portfolio.

Trusted Insight: What did I fail to ask that I should know about you, about single-family offices or about Antares in general?

Shawn Egan: I have spent most of this interview discussing the challenges of running a successful family office portfolio. I would also note that it can be an extremely stimulative, interesting and entrepreneurial place to work. Many of the family offices I know typically have access to proprietary deal flow, provide access to successful and knowledgeable people in and outside of the family office, are willing to be creative and smart, are eager to listen to new ideas, are not bureaucratic and reward success. As a CIO, the access and influence you have with the family office’s balance sheet is very empowering and can lead to a seat at the table in many instances. The key is finding the right opportunity and the fit for both sides. At Antares, we all work well together and have complementary skill sets. I believe this leads to better decision making and improved results. We also enjoy spending time with one another, including the matriarch of the family, and vacationing together, which deepens relationships and trust and adds to group chemistry.

To learn more about family office investing, view the full list of Top 30 Family Office Rising Stars.