The inflection point for money management firms is when their asset flows suddenly increase, giving the business solid credibility in overcoming concern about operational risk and feasibility of its investment capability and business. Reaching it provides new momentum, means to achieve even stronger results and access to the wide range of marketing channels, especially consultants and larger plan sponsors that will start paying attention now that a firm has reached minimums in terms of assets under management and track record.
But that inflection point is becoming harder to achieve. As competition has increased and the markets have institutionalized, it has become more difficult to cross the inflection threshold, which continues to drift higher now around $500 million in assets depending on strategy.
Data show that more than 70% of asset flows are now being directed to the largest players. Even though the money management industry, particularly hedge funds, continues to grow with many new entrants and asset flows, the percentage captured by the largest asset managers is growing. Institutionalization of the investor base gives rise to an appetite for funds that can absorb hundreds of millions of dollars at a clip.
Yet, investors remain interested in discovering managers. Investors discover a firm as a great manager that has been building an enviable record quarter after quarter. I call this the Cinderella moment, when an unknown firm jumps from relative anonymity to become the belle of the investors' ball.
Standout performance used to be sufficient to achieve commensurate asset growth. Today, not only do managers need to possess a definable investment strategy edge delivered in an institutional, repeatable investment process, but they also must meet the higher due diligence and compliance requirements of professional business and operational management.
Investment advisory firms must marry alpha generation capability to operational ability. To achieve the success most fund managers want, it is now imperative to dedicate significant resources to design and execute a long-term strategic growth plan customized to the strength and capabilities of the firm. Professional business management not just a notable investment record has become essential to cross the inflection point. The critical factors to cross this threshold will be strategic thinking, capital and marketing. Consider the following:
•Scale matters. Particularly in times of volatility and uncertainty, investors seek to minimize risk. Larger firms offer scale and resources that are perceived to provide greater stability in terms of product offerings, strategy execution, retention of investment professionals and so on. Smaller firms will need to prove that not only are they focused and nimble but also that they can compete on an operational basis. They can mitigate questions about operational risk by having a business model that is feasible and capable organizational structures and systems in place.
•Differentiation is in demand. In this competitive environment of depressed returns, investors are seeking alpha and are happy to pay for it. Likewise, market returns have become commoditized. Even in the hedge fund arena, beta replication products are starting to acquire market share. Differentiated, specialized products the appealing characteristic of smaller firms remain in demand. This differentiation includes emerging managers such as those that qualify as female- or minority-owned.
•Don't neglect consultants. Consultants have a reputation of being uninterested in smaller managers, but in reality are motivated to differentiate themselves. One way of doing this is to discover emerging managers. A key to cultivating consultant relationships is addressing operational and business stability issues up front as well as demonstrating a methodical approach to conducting business.
•Marketing matters. Correctly solving the distribution challenge is critical for the success of any firm. Executing a strategic, long-term sales strategy can be more difficult and costly for firms than actually creating the product. Internal marketers are expensive and hard to retain, especially when there is limited product to sell. Third-party marketers can be expensive and do not have a long-term strategic interest in the business. No matter what path is chosen, investors typically prefer to meet with managers rather than marketers.
Mona Aboelnaga Kanaan is president and CEO of Proctor Investment Managers LLC, a New York-based firm that invests in money managers and provides assistance in institutional marketing, client services and organizational structure.