Institutional CIO Who “Rarely Invests in Emerging Managers” Has Now Become One

Why This Is Not The Contradiction That It May Seem…

When he told me the news that he was stepping down from his position advising well over $100 billion in portfolios for a mid-sized consultant to go back to running an asset management firm, I actually wasn’t surprised. After all, he had been managing risk for 25 years prior to taking on the CIO role of one his former investors.

What surprised me was that this decision entailed launching an entirely new strategy from scratch. I had fully expected that any move he would make would be to a senior role at an established firm. After all, it was just last summer that we published this piece following a conversation with him on his investment approach. At the time, he made it very clear that not only was he uncomfortable investing in “unproven managers” (his term), he hardly focused on them at all.

So, when we caught up with him recently, I was expecting some sort of mea culpa or even an explanation as to why “this is different.”

To his credit, he didn’t say that at all.

Eyes Wide Open

“First off, I am under no illusion, JD – we are assuming a totally different profile with respect to career risk.”

He then laughed and said, “Look – the last thing the world needs is more funds charging 2 and 20. Sitting in that seat, it quickly became clear that few managers offer meaningful differentiation or add value in excess of their fees. There is a hole in the market that we aim to fill between high-priced active funds and low-priced passive funds with a product that I have yet to see in the market.”

His other tips on positioning for success as a start-up manager:

Know your audience

He reiterated a point made in our previous conversation that just because it didn’t make sense for his former firm (along with many other institutions) to invest in emerging managers executing strategies largely similar to existing managers, it may fit well for other investors. He was advising very conservative “sleep at night money.” As he had said previously, taking operations and other non-investment risk simply made him “short an unhedge-able put.”

Launch with momentum and be “all in”

“Planting seeds” with investors long before (and long after) fund launch is critical. Building a track record is not the only requirement in the first year – nurturing relationships matters. Patience and regular dialogue early on improves your chances of attracting new money by giving investors the opportunity to monitor performance from day one.

He emphasized the need to get to critical mass as fast as possible. “Flow begets flow” – investors are momentum-driven creatures. If managers wait too long, they can easily find themselves stuck on the shelf long after their “sell by” dates.

Solve a real problem

There is way too much choice out there. Simply applying the word “unique” to your process doesn’t actually make it true: you must have a value proposition that addresses a need, a want, or a fear among your potential investors.

Think S-I-M-P-L-E!!

Complexity is the enemy of the quick allocation. Liquid, transparent and systematic strategies are much easier for potential investors to get their arms around and therefore, easier to invest in early. This is particularly the case if the fees are justifiable.

Putting in the time up front to develop a clear brand and a concise message will save far more on the back-end.

I had a feeling when we spoke last year that despite the hard outer shell, there was some compassion for the little guy in there somewhere. Now that he is back to being the little guy himself, hopefully others will share that compassion and give him a closer look. Like the tip of an iceberg, that short track record may belie a great depth of talent and experience.

By JD David