Location, location, location doesn't apply to small firms

U.S. boutique money managers are finding it easier to garner substantial foreign assets without setting up an overseas satellite office or hiring an executive with boots on the ground.

Because institutional investors are becoming continually more comfortable in using independent performance databases, which in turn are improving their offerings through consolidation, the ability to win foreign mandates is no longer the insurmountable challenge it once was for smaller money managers.

“Clients are focused on getting the right manager and are willing to be flexible as to where that manager is located,” said Richard Dell, London-based principal and global head of Mercer LLC's equity boutique unit.

A number of U.S.-based small money managers have been successful in garnering assets from clients outside the U.S. without establishing overseas offices or hiring local sales professionals. Roughly half of Waltham, Mass.-based DDJ Capital Management LLC's $7 billion under management is from overseas investors. Stralem & Co. Inc., New York, manages $3.4 billion in assets, 16% of which is from non-U.S. institutions. And about 20% of Mount Kisco, N.Y.-based DSM Capital Partners LLC's $5 billion in AUM is from non-U.S. sources.

“Is it necessary to have an office overseas? Not necessarily. But they need to have a staff in tune with the cultural nuances of the pension plan,” Fernand Schoppig, president of FS Associates, a money manager consultant in West Orange, N.J., said in a telephone interview.

Mr. Schoppig added that, while winning non-U.S. clients can be done without a physical presence in the region, money managers need to be committed to raising capital overseas, which means they need to be focused on learning the language, customs and intricacies of the region.

Smaller managers have technological advances to thank, in part, for their improved ability to win overseas clients.

“The business has changed considerably. Boutiques have access to global markets in a way they hadn't before,” said Judith H. McKinney, an executive vice president at Callan Associates Inc. and manager of the San Francisco-based consulting firm's institutional consulting group in Chicago.

Ms. McKinney noted that advancements in technology have not only enabled data to be proliferated everywhere, but accounting methods from multiple countries have been standardized.

“Five to 10 years ago you couldn't look at apples-to-apples data,” Ms. McKinney said. Now, with the Global Investment Performance Standards, “we can look at (performance) data from different countries through the same lens.”

“Information is disseminated more rapidly today than it has been in the past, and there are greater ways to slice and dice the (performance) information,” said David J. Breazzano, president and chief investment officer of DDJ Capital, which in December was chosen to subadvise two high-yield bond funds from Danske Invest, Copenhagen. “There's more of a trend for investors to look at the empirical (performance) data to make an informed decision as opposed to being schmoozed by someone with boots on the ground in a less scientific manner.”

With performance databases available from Morningstar Inc. and eVestment LLC, both of which have been expanding in leaps and bounds over the past few years, institutional investors don't need to have a money manager nearby to see how their strategies are performing.

“Sometimes (money management) firms don't need to do anything,” Mr. Schoppig added. “They sometimes win overseas mandates because institutional investors use the Internet and databases” and find managers on their own.

“If you have strong investment capability in a product area without many competitors, you can find yourself generating strong business,” regardless of where clients happen to be, added Jeffrey A. Levi, a director at Darien, Conn.-based management consulting firm Casey, Quirk & Associates LLC.

This used to not be the case. As recently as three or four years ago, many industry insiders believed that, in order for a U.S.-based manager to be successful overseas, it needed an overseas presence. The turnaround was driven by the increased globalization of the money management industry, sources said.

Not everyone believes that boots on the ground aren't essential for winning non-U.S. assets. Stone Harbor Investment Partners LP, which manages $62 billion in assets (60% of which is from non-U.S. clients), established a London office upon its formation in 2006, and subsequently opened an office in Singapore after the firm began conducting more business in Asia.

“You can get so far from one location, but as you scratch deeper, you need to get localized,” said Paul Timlin, head of global business for Stone Harbor, New York.

Mr. Timlin believes boutiques that have non-U.S. clients eventually will have to set up overseas offices. And some manager and consultant sources agree that clients do like the idea of being able to call someone in the same time zone who knows local laws and customs and who can answer questions immediately.

However, an investor's desire for having a manager physically nearby does appear to be a roadblock that a number of small- to midsize money managers are maneuvering around. In fact, Mercer's Mr. Dell said European clients aren't put off by a U.S.-based manager lacking a local office.

“We see a number of our (European) clients investing with U.S. boutiques,” Mr. Dell said. “If the client feels like they or the consultant has done the due diligence and they think the strategy's a good fit, there's no need for (the manager) to have a presence nearby.”

Investors are looking to go global in their allocation and are becoming more aware that the best manager isn't necessarily going to be in their backyard. Also, many European institutional investors, according to Mr. Dell, are looking to managers in North America to run a portion of their assets and see no reason to exclude them if they don't have a local presence.

“Clients do like having someone in the same time zone to answer questions, but we find that most boutiques in the U.S. have the technology to overcome that and are open to communicating to their clients regardless of the time zone,” he added.

Rather than establish a permanent presence in the region, some firms can partner with local companies to attract clients. For example, Kopernik Global Investors LLC, Tampa, Fla., which was created about six months ago with $300 million in AUM, has partnered with London-based Heptagon Fund PLC as a third-party marketer.

“Boutiques are also successful in a subadvisory presence because they formed a relationship with either an insurance company or bank distributor and have gained distribution through the partnership,” Casey Quirk's Mr. Levi added.

Also, many U.S. money managers use Undertakings for Collective Investment in Transferable Securities to win European assets. Under the terms of UCITS directives, money managers can run pooled investment funds throughout the European Union on the basis of a single authorization from one member state.

With performance databases improving and accounting and reporting methods becoming standardized globally, it's no longer mandatory for smaller firms to have satellite offices, said Callan's Ms. McKinney.

“We don't necessarily need to schmooze,” Mr. Breazzano said, referring to a need to be physically present in the region in which DDJ has clients. “Our results speak for themselves.”