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Exclusive Q&A: Theodore Kokas, CIO At Roch Capital, A Single-Family Office

by trusted insight posted 3years ago 5107 views
Theodore Kokas, CFA, is the chief investment officer for Roch Capital, a single-family office located outside of Philadelphia, Pennsylvania. Previously, Mr. Kokas was the global head of alternatives for SEI Investments, a global macro trader at Rubicon Fund Management in London and the head of proprietary trading for the Abu Dhabi Investment Authority’s alternative investments division. He has more than 20 years experience working for a variety of hedge funds in quantitative macro roles.

Mr. Kokas graciously spoke with Trusted Insight on Oct. 22. 

Trusted Insight: Tell me about yourself and how you came to call Roch Capital home.

Theodore Kokas: My background is primarily in alternative investments, hedge funds specifically. I came up through the hedge fund side and once I went to SEI, I moved into the outsourced CIO space. I went from being a security selector to being a manager selector. 

After five years of working primarily with institutional investors, roughly evenly split between planned sponsors; public and private; and non-profits, endowments and foundations, I decided I wanted to move from an agency role into the principal investor role. So I looked for opportunities initially in the non-profit space. I looked at a number of foundations and endowments and came close to a couple of roles. Ultimately, I was offered the opportunity to join a relatively large single-family office in the Philadelphia area as their first chief investment officer. I've been here for nearly a year and a half now.

Trusted Insight: You’ve held positions at hedge funds, sovereign wealth funds and various other types of financial institutions, what was is the appeal of the family office area? 

Theodore Kokas: I wanted to have a broader exposure than simply alternative investments and absolute return strategies. Specifically, I wanted to move into more of a multi-asset portfolio management role encompassing both traditional and alternative investments. 

While I was at SEI, we did a lot of work on factor-based asset allocation and risk management. I really wanted to apply the principles that I had been working on and developing at SEI in a broader context, across a broader portfolio. 

That is most easily done in a family office where you are dealing with a much smaller group of constituents where you really only need buy-in from a single investor; as opposed to a foundation or endowment where there's so many different stakeholders and you have a very different governance structure. It's a little bit more difficult to implement some ideas in that type of environment than in the family office space.

Trusted Insight: Tell me about your investment team at Roche and what sets you apart from other family offices.

Theodore Kokas: The investment team here is relatively small. When I arrived, there were three of us and I have actually downsized to just two. I replaced both of the existing team members with one person from my investment staff. At some point I will probably add a second. 

When I arrived here, we basically had a portfolio that was over 50% cash. The bulk of the portfolio that was invested was invested primarily in equities, specifically U.S. large-cap equities. So we kind of had a blank slate in terms of the portfolio itself. Most of the family offices I met already have a relatively well-developed portfolio, and we started with a blank slate. 

Also, this family office is very active in private markets, both in private equity and real estate. So they already had a fairly well-established program in both of those areas and I know that's an area of considerable interest to most family offices. I think we probably have a greater institutionalized capability in that regard because that had been a primary investment focus for the family well before they began to address their liquid portfolio. I think that's one area that helps us.  

The family themselves, their operating entities, where they derived their wealth, was in banking and credit cards. So they already had a sophisticated outlook to begin with. As we moved into investments in other and unrelated industries, they had fairly open mind and broad base of experience to draw from as we moved from our private transactions into other areas. 

Trusted Insight: Family offices tend to be secretive and reclusive unless they are looking for exposure. What are your near-term and long-term goals?

Theodore Kokas: You are absolutely correct about the opaqueness of the industry. That was probably one of the biggest challenges when I moved into this sector: networking in this space is so difficult. 

Every family office is different. One of my former associates at SEI runs a similar family office, a slightly larger one, also in the Philadelphia area. When I talked to him, prior to taking on this role, his advise was "If you've seen one family office, then you've seen one family office." Everybody does things a little differently. 

One of the interests I had when I first arrived here was starting to network in the space. Not so much in the investment side, but we were also building out our infrastructure, our reporting capability, our risk management capability. I wanted to get a sense of what best practices were in this space. So I joined a few groups and started networking with other family offices just to get a sense of what they were doing not necessarily in the investment side, but in the infrastructural side. That's where you saw a great deal of variance in terms of different families and family offices were approaching their logistical needs. That was the area of interest for me initially. 

Now that we've really developed the office and expanded our capabilities, now the interest is getting our name out there to other families that would potentially be interested in co-investing with us in private markets or had opportunities where they are looking for other family offices that have capital to deploy in the space. For us, it's raising our profile, given that we do have an interest in expanding our private capability. 

Trusted Insight: Roch invests in private equity and venture capital. Where geographically are you anticipating sustained growth and what sector(s) are poised to fuel that growth?

Theodore Kokas: We haven’t been active in the traditional VC space, at least not in any significant size. Initially, we've stuck close to our knitting. We have invested in some private markets in the financial sector and specifically in Europe. 

We were one of the founding investors in Metro Bank in the U.K. That really grew out of our family principal taking a trip to London and just seeing that the community banks were underserved in the U.K. Banking was primarily concentrated in a few money-center banks that really weren’t supporting their communities. So he saw an opportunity for a community-centric bank that was very retail-, depositor-friendly. We partnered with some individuals here that were looking to create that type of institution. In that time period, I think three or four similar banks have cropped up in the UK and at least one has IPOed. That was an opportunity that just presented itself. We recognized it because of our experience in the banking side. It was a niche that we thought we could add value in. That was specifically focused on Europe.

Our largest private equity deal is in the food services. It does have a European presence, but it is primarily supporting the U.S. hospitality industry. That's an area where we see growth. We are looking overseas for expansion in that particular enterprise. 

That’s a deal where we invested for control but increasingly we are looking to co-invest. There we were a little bit less industry-centric, but our focus has been less on the traditional VC, tech startups; as opposed to early stage investment in a relatively stable cash flow business that has discernable growth potential. We are relatively agnostic whether it is a domestic-centric company or one that has international aspirations, but that being said on the liquid-market side we have been very active in Europe. From a growth potential, if we were looking overseas, we would be looking at Europe primarily. 

Trusted Insight: What other international exposure do you have?

Theodore Kokas: On the liquid side, we did have fairly significant exposure in Asia and EM economies earlier in the year. That was really predicated on the thesis around declining energy prices being beneficial and simulative to certain economies.  We started exiting that position and have significantly reduced EM in general, and Asia in particular, after the Chinese devaluation. I don't expect that we are going to be very aggressive in adding exposure in that area. 

We’ve also reduced EM globally, partially in response to the dollar and partially in response to global growth declining the commodity markets. We feel that it disproportionately impacted that sector. I would say for the most part, we have a fairly North American-centric focus within the portfolio both in the public and private side. But we have been more opportunistic in Europe. 

Trusted Insight: This is a tough time to be an investor. What is your current investment outlook headed into 2016 and beyond? 

Theodore Kokas: I’ve been holding the position that the Fed is less likely to act this year than what most of my peers have been expecting. We've had some nominal duration exposure both in the U.S. and in Europe. By and large, we have focused the portfolio more on income, more so than capital appreciation. 

Within the fixed income space, we moved down the spectrum in terms of our exposure. We have a fairly heavy exposure in CLO mezzanine debt. We like the characteristics of that space, more so than high yield. We've also got a pretty high exposure in short-duration investment grade corporates. That's worked out pretty well for us on the fixed-income side.

On the equities side, we have overweights in mid- and small-cap this year, underweight large-cap and heavily overweight European equities. Within the U.S. large-cap space, we have largely indexed that exposure. To the extent that we've been taking active risk both within the U.S. and globally has been in activist strategies. Up until very recently, that's been a great place for us to be. I would say that our focus has been primarily on asset allocation rather than on manager selection. The active risk taking has been allocated to catalyst-driven, deep-value strategies, more so than in active long-only implementations. Those have worked out pretty well for us.

One area that we are starting to take a look at with more of a contrarian is commodities. Our view is given the sell off in commodities, there is that whole line: The cure for low prices in commodities is low prices. But we think that the fundamentals are starting the shape up, partially in the energy complex, but more so in the agriculturals. Particularly in agriculturals outside the U.S., where the strong dollar plays to their export markets. We are starting to look at ways to position ourselves opportunistically in the commodities space.
 
Trusted Insight: The trend of hedge funds converting to a family office structure has been widely reported by the media. Is this something that will continue, and is it a threat? 

Theodore Kokas: Certainly Steve Cohen was driven by the regulators. I don't think he had much choice in the matter. Also, returns have been muted in the absolute return space for several years. For some of them, the business model itself just is not as attractive as it had been. Perhaps the fact that the regulatory environment is becoming more difficult, it gives them a great degree of flexibility to operate as a family office, as opposed to managing client assets. The economics aren't as attractive as they had been before and the regulatory environment is that much more stringent.
 
I don't think this is a structural shift in the industry. I think this is more of a cyclical phenomenon that ultimately may change. As the markets become more fertile, you are going to see some these managers that have converted to family offices more willing to take on client assets as the opportunities arise. 

That being said, I think the hedge fund industry in general has been long over due for a shake out. We've seen so much assets that had exited during the financial crisis return to the space, and of course returns have been muted for a number of reasons. The industry has been ripe for a downsizing and a shake out, but ultimately you'll see some of these managers returning to manage client assets as the environment proves more attractive.

Trusted Insight: Roch is located in Pennsylvania, which is relatively disassociated from Wall Street, albeit you’re not that far. What effect has your geographic location played on your investment decisions?

Theodore Kokas: I would say it has an impact in the private markets, particularly real estate. We tend to focus on markets that we know. We have little exposure on West Coast. Our exposure is primarily on the east coast and some central properties. We kind of stick to what we know. 

From liquid markets perspective we are agnostic geographically. We are willing to invest where opportunities arise wherever in the globe that they are. That's partially because of my background as a macro trader. I've always been agnostic to the location of local markets. We will go where the opportunities lie. That being said, we also have the currency risk to consider with the dollar appreciating significantly. That constrains us in terms of some of the investments that we may want to consider, simply because the currency effect will render them far less attractive. 

Our proximity to Wall Street really isn’t an issue for us. I travel to New York fairly frequently anyway, and I would whether I was in Philadelphia, Chicago or California. That's not an issue, but within segments of the portfolio, it does have an impact.

Trusted Insight: What is the biggest challenge to family office investing, as opposed to other types of investing?

Theodore Kokas: The tax consequences. I've been institutional asset manager my entire career, and moving to the family office side, where taxes have an impact on investment decisions, has forced us to become far more strategic in terms of our positioning. I can be quite as opportunistic as I'd like to be in the markets, because I just don't want to generate a high degree of current income. I would say that has been the most limiting factor for us.
 
But there are also benefits to being in the family office side. We can be far more creative and far more flexible around the opportunities that we pursue, given the constraints of tax implications. I would say on the whole, moving from a non-taxable to a taxable environment has been by far the biggest challenge I've faced. 

Trusted Insight: What’s the #1 lesson you’ve learned during your career as an institutional investor?

Theodore Kokas: The single rule that has served me best through my career has been: When in doubt, do what feels most uncomfortable. 

That comes to play numerous times. Holding on to a positon when the market moves against you, where you feel the fundamentals simply aren't being reflected in the marketplace. Having that strength of conviction to hold when the markets are down. The simplest thing to do is blow out a position and get back in at a later date.

As a manager allocator, one of my best investments was in 2009 when a hedge fund was down about 30% from the peak. I recognized after talking to them that the challenges they were facing were environmental, as opposed to some fundamental flaw in their investment process. I ended up buying them on the low, even though it was a really difficult decision to put money in a fund that was down 30%. We did and it was the best performing hedge fund we had over the next three years. It's around having the courage in your convictions and having the discipline to stick with the thesis. Until you recognize something structural has changed in the thesis, sticking with it when the markets are moving against you is really challenging.

Trusted Insight: What have I failed to ask that I should know about you, Roch Capital or family offices in general?

Theodore Kokas: Every family office is different; each has its own unique challenges.
 
One thing that I find is that this is not as competitive an environment as I found in the hedge fund space. In the hedge fund space, people just don't want to talk to you because they don’t want to give away their secret sauce. I worked for Millennium Partners for a while where we all managed carve outs of capital. It was the quietest trading room I've ever been in. Nobody spoke to each other. 

In the family office space, what I find is people are more than happy to exchange ideas and share opportunities, because we are not in direct competition with each other. We are not competing for capital. I've found that this is a much more collegial environment than I expected it to be. That was a surprising positive of moving to the family office side. 

When I was looking to move from outsourced CIO environment and into a CIO role, I had been focused on almost exclusively on the non-profit space. The family office space was one that I really hadn't considered and hadn't explored and this opportunity literally just fell in my lap. It's been a very satisfying experience. It's been a little different from working for an endowment, but I think it has its own attractive elements to it.