Executives of smaller money management firms with sizable institutional assets and top investment performance usually have one thing in common: years of industry experience before opening their own firm.
After that, tales diverge, some firms are only a few years old, others have been in business for decades. Some are battling back from severe asset losses suffered during the financial crisis and still haven't had enough inflows to get past the dark days, while others are seeing all-time record asset level highs from inflows and strong financial markets.
But the key theme that emerged from a Pensions & Investments analysis of 60 top-performing firms with $3 billion or less in total assets under management across 12 separate investment strategies is that running your own firm — even if it is small — isn't a game for newcomers.
For one thing, institutional consultants who help determine whether money managers will get contracts with institutional investors are looking beyond solid investment performance. They want prior institutional roots.
“We consider an institutional pedigree important,” said Troy Saharic, a Seattle-based partner for institutional consultant Mercer. The pedigree can help identify managers with an understanding of reporting and risk management requirements essential to institutional investors.
Granite Investment Partners LLC in El Segundo, Calif., was only founded six-years ago, but “most of us have been in the business for 15 or 20 years,” co-founder Geoffrey I. Edelstein said of his management team.
Mr. Edelstein was a portfolio manager at Transamerica Investment Management LLC before co-founding Granite.
The $825 million AUM firm's small-cap growth equity strategy was the second best performing product in the small cap growth category for small managers reviewed by P&I for the five year period ended Sept. 30, with returns of 19.6%.
Likewise, Harry W. Segalas, managing partner and chief investment officer of New York-based HS Management Partners LLC founded the firm in 2007, but his two-decade investment career before then included holding the post of chief investment officer at W.P. Stewart & Co. Inc.
HS Management's only strategy, the $2.1 billion concentrated quality growth equity strategy, was the top the performer among the large-cap growth segment for the five years ended Sept. 30, with returns of 15.7%.
The firm only had $172 million in assets in its first year of operation. Mr. Segalas said solid investment returns helped generate inflows. Mr. Segalas said he also was able to build on his existing relationships with institutional consultants in getting clients.
Another positive that helped the firm, making a substantial pre-opening investment (he would not say how much) to have in place when the new firm opened a marketer and operations systems to meet the needs of institutional investors.
P&I's analysis, based on data from eVestment LLC, Marietta, Ga., covered managers with at least a third of their total AUM coming from institutional assets. Eleven of the categories were equity strategies, the 12th was high-yield fixed income.