TONY ELAVIA, RECENTLY APPOINTED chief investment officer and executive vice president at Toronto-based Mackenzie Financial Corp., sees two major transformations in the investment fund business.
First, the aging populations in Europe, the U. S. and Canada is increasingly demanding investment income for their post-retirement lives. This trend, he says, is leading fund companies to augment their shelves of stable, income-producing products. The second trend, which he says hasn’t started yet, will be an emphasis on products that provide some protection against downside risk as investors increasingly find they do not want equities-like volatility in their income-producing assets.
“How these income-producing products will be constructed will depend on the skill and innovation of the fund firms,” says Elavia, 56, whose broad investment background includes both retail and institutional experience. “The simple way is through funds holding bonds and dividend-paying securities, and demand for these products will increase.
“However,” he continues, “with interest rates low, fund firms will have to reach up the risk ladder to provide income. That may mean more emphasis on higher-yield bonds, which are close to equities in their risk profile and must be treated that way. I’m not sure that all investors understand the bargain – that they are taking more risk for higher returns.”
To address some of these concerns, Elavia says, Mackenzie is planning to develop products to minimize downside risk by using hedging techniques. A portion of the return would be eaten up by the costs of the hedge, but downside risk would be limited. Elavia views part of his job to be preparing for negative events that might happen, even if the probability is small, as there can be painful ramifications. But with proper preparation and protection, there is already a plan in place when market-shaking events occur.
“You don’t have to reach for the stars every time,” Elavia says. “But there are times when there is greater need for hedging than at other times. The skill is in identifying when there is good value in putting the hedges on, as there is a cost involved. Those decisions will be an integrated part of active management.”
Elavia, who once had co-managed three funds with total assets under management (AUM) exceeding US$25 billion while he was with Mackenzie’s sister company, Boston-based Putnam Investments Inc., is no longer choosing individual securities for portfolios. Instead, he is overseeing Mackenzie’s investment teams, including seven equities, one fixed-income and one asset-allocation team, as well several external subadvisory teams that manage Mackenzie products. Altogether, Elavia is in charge of 60 portfolio-management professionals and some $60 billion in AUM.
“I am not currently assigned to any particular mutual funds,” Elavia says, “but I view my job as an investment job as well as ‘people management.’ I provide strategic guidance to the portfolio-management teams. That may involve helping them stay with certain positions when times get difficult. You can only do that when you understand their approach, as well as what markets are doing.”
Elavia is leery of group thinking, which, he says, is pervasive and results in the crowd rushing into the same idea, causing securities to swing to extremes of overvaluation and undervaluation. At Mackenzie, he encourages a culture of independent teams pursuing their own strategies. Elavia deliberately avoids scheduling a morning meeting that includes everyone, and instead schedules regular but separate meetings with individual teams.
“We are being bombarded by financial information; it is not in short supply,” Elavia says. “But what is in short supply is the analytical framework to understand the information and figure out what it means to portfolios and investment strategies. What I find exciting about asset management is that you compete against large numbers of intelligent and motivated people, and progress is measured every day. Small advantages can add up to big results and set you apart from competitors over time.”
In addition to developing Mackenzie’s teams and making sure the product shelf is appropriate, Elavia spends much of his time examining which investment strategies are being rewarded by the financial markets and which are being punished – and why. He assesses various risks, and what proportions of those risks are being priced into the value of securities. When risks are fully discounted in the market, says Elavia, that can be a buying opportunity – even if the immediate economic outlook is negative. If particular circumstances arise, he assesses which portfolios at Mackenzie are likely to be under stress and why, based on historical patterns.
“If it’s an unfavourable environment for certain portfolio characteristics,” he says, “with some distance from the portfolios and an understanding of how things are priced in the market, I can provide some support and comfort to portfolio managers. You can’t predict events, but you can determine how certain portfolios are expected to react to events.”
Elavia has practised the gamut of equities strategies over the course of his investment-management career, including growth, aggressive growth and value. He also has done a lot of quantitative work involving statistical research on company yardsticks such as earnings, book value and cash flow, as well as their relationship to stock price.
“Quantitative research involves the examination of statistical measures and historical relationships, while fundamental managers take a more subjective viewpoint,” Elavia says. “You want to find stocks that are undervalued but with attractive price momentum.”
Elavia had worked in academia prior to joining the investment industry and he combines a scholarly perspective with wide-ranging practical experience. Born in India, he had followed up an accounting degree with a master’s in economics from India’s University of Baroda and a PhD in economics from the University of Houston.
Beginning in 1982, Elavia had taught economics for five years at Wake Forest University in North Carolina. Then, like many professors who were being lured by the bull market from academic positions in finance to asset management, Elavia joined the investment industry – just in time to experience the dramatic market crash of October 1987.
His first job was as a quantitative analyst with a trust company in St. Louis. In 1989, Elavia moved to Minneapolis-based Piper Capital Management Inc. and then, in 1995, to Voyageur Asset Management Inc. in the same city, expanding his responsibilities to include the management of equities and balanced funds. In 1999, he moved to Putnam in Boston, starting out in quantitative research and ending up as a senior manager on the growth equities team.
Elavia’s next move was to take his equities-management skills to New York, where he joined Madison Square Investors LLC, a subsidiary of New York Life Insurance Co. until 2010. He subsequently became involved with a hedge fund, but was attracted by the managerial position at Mackenzie, where, he felt, he could bring all his skills and experience to bear.
Upon joining Mackenzie last March, Elavia moved to the Yorkville area of Toronto with his wife, Swati; the couple is relishing the excitement of living in the city’s downtown core. They have three daughters living in the U. S., two of whom are working and one who is a student.
Elavia likes the long-term focus that Mackenzie takes on business development, with its strategies for the next few years as well as much further out. Although demand for investment products won’t go away, he says, there will be changes in the product mix and the types of investment vehicles demanded by investors.
“The goal is to assess the big trends and capitalize on them,” Elavia says. “It’s important not to get caught up just in today’s stories, but to take time to position the firm for the next 15 to 20 years.”
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