While the title of this section sounds like a folk singing group from the 50s, these are the five questions essential to understanding whether we believe an asset manager is ready for the world. Satsifactory answers are needed to move forward in our process.
1- Are you exploiting inefficiencies in the market? It sounds like an obvious question and yet there many managers that are still around today that provide a service that was needed many years ago, but perhaps is not needed to today like large and mid cap domestic stock portfolios that in many cases own the same stocks as an index but charge an inflated fee and many times just hold public traded stocks at the same time or different times, but at the end of the day don't outperform an index and perhaps more importantly are correlated to the stock market.
2. Are you ready to educate your investors on your niche in the market and not not just "pitch product"?It takes time and manpower to build a business positioned for the longer term. Institutions, Consultants, HNW RIAs, Family Offices, and HNW Individuals should not make decisions based on an display of an arbitrary number of years track record, a slick fact sheet and sales guy. Some do, but the smart ones do not. Smart investors appreciate managers that know their niche better than most and can exploit opporutnities better than most.
3- Do you have skin in the game? There is nothing more frustrating than hearing from a manager that their strategy is better, that they are exploiting inefficiences in the market, That they believe in what they are doing, and then find out that the investment team members do not have some of their personal money in the strategy offering. That should make potential investors feel a "guinea pig" even if the returns are great. Over the long term, an investment team member will ultimately be more focused and have their interests aligned with the investors if they are invested right along side their client.
4- Are you willing to proactively tell the whole story, not just the most attractive points? This is a more difficult question for managers. It is very diffcult to say their are downsides to your strategy when you are seeking to educate the investing world on your strategy and attract investors. Smart investors know there are risks to every investment. If you proactively bring them up, it shows confidence in your strategy, you gain credibility, and you avoid short-term "quick buck" and usually "high maintenance" investors.
5-How big of a firm do you want to be? The obvious answer is " as big as we can get", or "very big", or until we are all rich and can retire". While we should put aside the fact that not many people do manage money for charity, a manager that knows how big they can get before they no longer can exploit efficiences. A manager that doesn't know how big a strategy can get before they start to provide less value, will be even more susceptible to downside risks outside of normal investment risks encountered by all managers. Managers should have an approximate number in mind for their strategy and be ready to close it if they are fortunate to get there.
We represent boutique asset management firms that we believe provide value, understand the needs of independent firms, appreciate that a long term partnership mentality is beneficial to both parties, and offer relevant strategies. The Asset Management firms’ principals further confirm their belief in an investment’s viability and value by investing in the product themselves. They have “skin in the game”.