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It’s the Math: South Texas Money Management CEO/CIO Jeanie Wyatt is always protecting against the downside.
- December 1, 2017: Vol. 4, Number 12

It’s the Math: South Texas Money Management CEO/CIO Jeanie Wyatt is always protecting against the downside.

by Mike Consol

Jeanie Wyatt remembers the trauma of her first meeting with a high-net-worth client. She was at San Antonio–based Frost Bank at the time, young and exuberant about meeting with the organization’s wealthiest client, a mature woman who showed up with her lawyer, accountant and a very large diamond on her finger.

Wyatt figures the bank’s officials thought the client would appreciate working with another woman. Instead, when Wyatt was introduced as the client’s new investment adviser, the client was offended that someone so junior was assigned to her account, and she expressed that displeasure by standing and declaring, “I am not going to work with a young woman.” Then she strode out of the room, leaving Wyatt horrified and certain she was going to be fired from her new job for alienating “Mrs. Got Rocks,” as she mirthfully refers to her today.

“To their credit, they didn’t blink,” Wyatt says.

That turned out to be a good decision, for both Wyatt and Frost Bank. With the benefit of Wyatt’s contributions, and those of her many teammates, Frost Bank became Cullen/Frost Bankers and accumulated about $15 billion in client assets (now more than $30 billion, making it one of the 50 largest U.S. banks). Along the way, Wyatt amassed a small fortune in bank stock that she used as part of the capital required to make a longstanding dream come to fruition by starting her own wealth advisory firm. That came to pass in the year 2000 when she established South Texas Money Management, an RIA that now has offices in five of the largest Texas markets and about $3.5 billion in client assets under management. The firm, for which Wyatt serves as both CEO and CIO, turned profitable in just its fifth month of operation, according to Wyatt.

Suffice it to say that clients are not walking out on Jeanie Wyatt anymore. And, today — unlike the novice she was when Mrs. Got Rocks blew a gasket and stormed off — Wyatt has a well-developed investment strategy that holds tenaciously to the credo that downside protection is every bit as important as upside gain.

Put in football terms, think of an offensive coordinator who is fixated on gaining yards without paying sufficient attention to protecting the quarterback’s blindside, typically the left side of the offensive line (for a right-handed quarterback). A weak blindside leaves the quarterback especially prone to a pass rush he does not see coming, leaving the quarterback vulnerable to a momentum-changing fumble or, worse, a catastrophic injury that sidelines him for the game, or even the season. (My analogy, not Wyatt’s. Then again, Wyatt is a bona fide Texan and proud of it, meaning that football must have a place somewhere in her heart, given that the sport is considered religion in the Lone Star State.)

Which makes me wonder about another question. I ask Wyatt: “Are you a Texan first or an American first?” The query brings her up short, but only momentarily.

“Oh my gosh, what a question,” she replies, her honey-coated Texan accent rising. She pauses for an interval of consideration, before acknowledging that she is an American first, but that it would take “an awful lot” to get her to leave her native state. Texas does appear in the name of her wealth advisory firm, after all.

Football analogies and geographic fealties aside, Wyatt begins explaining the importance of downside portfolio protection with this simplistic example: If you have $10 and you lose $5, you have lost 50 percent, and that means you must earn 100 percent just to get even again.

“Earning 100 percent is pretty difficult,” Wyatt remarks. “Most people, when interviewing managers, want to know what their return has been over the past three or five years. But they should be equally as interested in what the investment manager’s downside has been. How did you do in those weeks or months when the market went down?”

She adds: “There’s this wrong impression perpetrated by advisers, quite frankly, that to make more money you have to be really aggressive. You have to take some risk, but it has to be calculated risk and you have to have an investment strategy that, yes, has the upside, but pays equal attention to the downside.”

One might call that an investment philosophy or strategy. Wyatt attributes her position to something more fundamental and empirical: mathematics.

“I do love math,” she says, and one of her favorite examples of mathematics at work are graphs of well-known indices, including the MSCI and S&P 500, and running some upside and downside scenarios. For example, if the indexes did 90 percent of their upside performance, rather than 100 percent, and performed 10 percent better on downside protection, they would accumulate more value. Yet, Wyatt points out that a fund manager who consistently runs 10 percent below the indices would likely be fired for lagging performance, without regard to how he or she is protecting investors during the inevitable downturns.

How exactly does Wyatt protect investment portfolios from the downside? Be patient, we will get there.

LIFE IS NOT CHILD’S PLAY

Becoming an entrepreneur and starting her own money management firm was not Jeanie Wyatt’s first ambition in life. She applied to the University of Texas theater department with plans to become a director of children’s stage productions. Her application was more than well received by the university, as the B. Iden Payne Awards Council bestowed upon Wyatt a full four-year scholarship to study theater production.

“That was really what my dream was at the time,” Wyatt remarks.

But the dreams of the young have a way of transmogrifying pretty quickly. At the ripening age of 19, Wyatt started to fret about making a gainful living because children’s theater production did not have a reputation for minting formidable bank accounts. With impeccable timing, some university officials contacted Wyatt about joining the school’s actuarial science program, which she describes as the mathematics of finance. Though she was “kind of flabbergasted” by the offer, Wyatt accepted.

It was a fortuitous turn of events, as mathematics would eventually become the guiding principle behind Wyatt’s investment program at South Texas Money Management.

DEEP IN THE SOUTH OF TEXAS

One might reasonably argue the South Texas Money Management moniker is too regionally focused, too limiting. Remember, though, Wyatt’s pedigree in the banking business at Cullen/Frost, a dominant regional bank with a honking market share in all four of the state’s major metropolises.

“I could talk for an hour about this,” she says, noting that South Texas, including Houston, was dominated by just a handful of money management firms. “I knew that whole region was way, way underserved.”

Underserved and yet exploding with private fortunes. Wyatt obviously saw a distinct opportunity, though even Wyatt admits she did not foresee the exploitation and riches that would flow from the Eagle Ford Shale that spans much of southern Texas. “It’s not an overstatement to say it became one of the most important marginal oil producing places in North America,” she says.

Indeed, the Eagle Ford Play, as often called, was one of the most actively drilled targets for oil and gas production in the United States in 2010, though its output has declined sharply (along with petroleum prices) since then, with investment in the basin dropping from $30 billion in 2014 to an estimated $11.6 billion during 2017, according to Wood Mackenzie, an energy industry research firm.

What she did envision was a presence in all four of the state’s major cities — Austin, Dallas, Houston and San Antonio — which she has since achieved, along with an office in Corpus Christi. And when people suggest that South Texas Money Management sounds too regional, she points out, somewhat tongue-in-cheek, that Southwest Airlines is now an international carrier. Though her firm is “very predominantly Texas” at this stage, Wyatt points out that 15 percent to 20 percent of clients reside in other states, and some outside the United States.

“So, I don’t think the name is limiting.”

That position is also underscored by Wyatt’s most burning new ambition — to start acquiring other RIAs.

THE GATHERER BECOMES THE HUNTER

While the ascension of South Texas Money Management has been almost entirely organic — save the acquisition of two small, women-owned firms about 10 years ago — the firm has now reached a scale where Wyatt has decided to seek acquisition targets. She also emphasizes the deals need to be acquisitions as opposed to mergers, because her firm’s culture is “so unique” its preservation will require the imposition of its will, rather than the negotiated compromise a merger might require.

Of course, the imposition of the Wyatt Way would not require a headlock if the target firm has a simpatico culture, and that has been the issue. Jeanie Wyatt has been hunting for the right firms for a few years and is only now close to completing a transaction.

“That’s why we haven’t already acquired a dozen firms. We want to be very, very particular because our firm has a very unique culture,” she explains, and Wyatt and her management team know that combining organizations — be it through merger or acquisition — is always a risk, albeit a calculated risk. And it is a risk the firm is very serious about taking at this stage.

“We have a full-time attorney, internally, and that is her role,” Wyatt says. “We’ve looked at a lot of firms, predominantly in Texas, but some outside of Texas.”

The firm already has a pair of acquisition candidates in its sights. One is nearing completion, though Wyatt declines to divulge its identity or location. The other is currently involved in detailed negotiations.

“I am more and more convinced there are a number of women-owned firms out there that have reached a growth challenge, because of the complexity of the business, the technology that is needed and the regulatory environment,” she says. “Some of those firms would be interested to see how successful we were with the two women-owned firms we acquired in the past.”

In addition, Wyatt points to succession as another possible motivating factor for some wealth advisory firms, regardless of gender.

“In our industry there are many firms out there where the principals are in their 70s or 80s and are looking for transition plans,” she says. Though Wyatt is in her early-60s, most of her people are ages 35 to 40, and the firm’s president, James (Jim) Kee is 55.

BEWARE THE DOWNSIDE

Among the cultural necessities any acquired firm will need to adhere to is Wyatt’s credo of downside protection. This is one of the pieces of information the patient and alert reader has been waiting for — how South Texas Money Management goes about protecting its client portfolios from sustaining major loses of hard-fought gains. Wyatt dubs it All Cap Core, which is the strategic diversification in the stock portion of portfolios, incorporating a balance of both value stocks and growth stocks. Then there is sector diversification to take into account, ensuring that big bets are not placed on any single industry sector. Finally, capitalization must also be diversified between large-cap, mid-cap and small-cap stocks, as well as domestic and foreign stocks. In combination, by Wyatt’s telling, those three dimensions of diversification protect investment portfolios against the inevitable economic shocks. All told, the All Core Cap portfolio contains a relatively modest 45 to 50 stocks, keeping it manageable and transparent.

Declares Wyatt: “That is the discipline with which we build our core portfolio.”

AN ENDOWMENT MODEL ADVOCATE, WITH RESERVATIONS

Alternatives and real assets also play an indispensable role in client portfolios, consistent with the endowment model theory of portfolio construction, for which Wyatt says she is “absolutely” a proponent. Still, caution is required, she says. Conservative projections are important.

For starters, Wyatt insists, investment products that qualify as alternatives are too broad and varied to be considered an asset class.

“My name for alternatives is illiquids, period,” she says. “I definitely believe in alternatives and illiquids, no question, but you can’t put them in a kitchen sink. You can’t say they are a homogeneous asset class.”

Something interesting has happened with illiquids during the past 20 years. Hard assets such as timber, real estate and commodities have been securitized and can be bought through liquid funds, rather than strictly through direct investing as illiquids.

It is a gift,” Wyatt says. “That gift may go away, but we have had the very good fortune having so much liquidity in market instruments that I have elected not to give up that liquidity.”

Why? “Illiquid alternatives have been a very disappointing asset class. I have some very interesting charts that show how much money, how many trillions of dollars have gone into alternatives over the last several years, and the total return relative to liquid securities has continued to come down,” she says, “and now it’s at its lowest historical point. Maybe that’s the opportunity, but pension funds, endowments, high-net-worth investors that have gone into ‘alternatives’ have had huge opportunity costs — it has cost them a lot of money that they could have made investing in those same assets through liquid securities.”

Wyatt concedes that is not necessarily always going to be the case, and she labels herself as open-minded on the matter, particularly because alternatives have paid off in the past, including successful investments in real estate for her clients, and for her personally. She also has made a couple of commitments to venture capital funds.

BANKING ON GOOD RELATIONS

Seventeen years ago when Jeanie Wyatt made the decision to leave her banking career at Cullen/Frost and pursue her entrepreneurial ambition, it was not lost on her that no non-compete agreement existed between her and the bank, meaning there was no prohibition on her actively trying to poach the bank’s extensive roster of well-heeled clients. It was a golden opportunity for Wyatt to start accumulating a client list that ensured her new firm’s survival — at the least — and perhaps its prosperity. Wyatt passed on the opportunity.

“It was personally important to me that I didn’t burn those bridges,” she says. “I did not solicit anybody. I wanted to keep Cullen/Frost’s goodwill and I’m thrilled I did, because today they are one of our larger custodians.”

It was also the place where several mentors contributed to the development of Wyatt’s career, deepening her loyalty to the organization. One who stands out in particular for Wyatt is the late Vernon Torgerson, whom she recalls as a “very tough boss and he never ever cut me any slack because I was female. I had to be successful and do what was required to lead our department.” Eventually, Wyatt succeeded Torgerson in the job.

Though Wyatt declined to poach from Cullen/Frost, some of the bank’s clients who had pre-existing relationships with Wyatt decided they wanted to continue working with her and made the move to South Texas Money Management of their own volition. Interestingly, some of Wyatt’s earliest and largest clients were men who came to the firm under the assumption it would be a good fit to handle their wives’ finances when they passed away.

“I never modeled the business that way and never planned for that,” she says, “but it continues to be the case today.”

New clients, in return for a minimum annual fee of $10,000, go through a lengthy interview process that typically runs two hours and includes Wyatt, someone from the firm’s investment team and the new accounts relationship manager.

“Our goal in that two-hour meeting is to get an overview of the client’s financial situation and a good idea of what their appropriate asset allocation should be,” she explains.

ONLY THE BEGINNING

Looking back in time, there was nothing particularly auspicious about the start of Wyatt’s career. By her own account, when she joined Corpus Christi National she was on the bottom rung of the ladder and had to climb her way up in the business. She was inspired by the positive impact professionally managed assets had on people’s lives, and she wanted to do the same one day for her own clients. That came to pass for her at Cullen/Frost Bankers — until yet another ambition superseded that.

“The stars lined up” in 2000 and Wyatt struck out on her own with South Texas Money Management. There were all of three people in the San Antonio office when the doors were opened, and today there are 62.

Where will its plans for acquisitions take the firm?

“Our management team had a very serious offsite meeting,” she says, “and we definitely feel highly confident that we can hit $5 billion within the next three to five years.”

If only Mrs. Got Rocks could see Jeanie Wyatt now.

Mike Consol (m.consol@irei.com) is editor of Real Assets Adviser. Follow him on Twitter @mikeconsol to read his latest postings.

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