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more new account, $100 million with a $500,000 fee, it goes right to the bottom line? Well, growth ought to cause leverage. It does exactly the opposite.
P&I: Is there an optimum asset size?
MR. EAGER: Yes, probably somewhere in the area of $5 billion. So the business is not geared toward being a better business with size. It comes back to the performance issue. Running large amounts of money is a tough job.
MR. SCHWARTZ: I was going to pick up on the issue of size as it relates to performance, but also as it relates to how one could consider classic defined benefit firms relating to their clients. Clearly there's been a push away from relationship management and into the pooled product management that's become important.
Ten, 15 years ago when we conducted a search for an adviser for a plan sponsor, in 99% of the instances it would have been prohibited to consider any sort of pooled vehicle that might ultimately meet their needs. Today with the proliferation of large pooled vehicles under the auspices of one or two key portfolio managers at a firm, you can't prevent the client from examining those, nor would you want to, nor do they restrict as much as they used to.
We haven't seen any confirmation of size adding any benefit to the client in terms of return. Certainly we're concerned where it's diminished the alpha opportunity in various segments of the marketplace.
MR. EAGER: By the way, I think everybody agrees size is beneficial to the client in the service and communication capability. There is definitely an enhancement there with many firms.
MR. PEYTON: If you look around today at the senior investment principal in a successful medium-sized firm, they all came out of what was then a large institution. So you don't see people who are interested in making investment decisions clamoring to work for large institutions. At their first opportunity, they're anxious to go out on their own.
MR. EAGER: I would really challenge the Goldman thesis that the small firms are going to have trouble competing for talent in the future. I would take a completely opposite view of that.
The psychic and economic rewards that small firms offer for a lot of people outweigh those of large firms.
MS. DEBATIN: When we talk about consolidation and large multiproduct firms, we all recognize that every time one of those megabusinesses merge there will be a new boutique somewhere that will attract enough money to make a good living. You don't have to manage that much in assets to make a decent living and to have those other benefits and rewards that come from doing your own thing.
MR. SCHWARTZ: In the (investment management) community it becomes harder to distinguish who actually is controlling the decision. It's really been through the efforts of a lot of the larger firms to try to wrestle with the question of whether portfolio management is an art or a science.
It's been tilted, I think, in the last several years more toward the scientific end, more toward the procedural, the process, the statistical. It makes it harder for portfolio managers to leave those organizations and put forth as strong a story as they historically could have to say: this is my track record, here is the team that put it together, because it's really now a team embedded in a process.
MR. EAGER: I think the issue of tactical asset allocation should be put back on the table as a major value-added component. My position has been severely damaged by this person out there that once upon a time did a study that said no one has ever added value by market timing. It's ludicrous to think that nobody can add value through market-timing or asset allocation. But that's kind of the common wisdom in the industry.
I think we have to break that notion down because we're really robbing the investor of potential opportunity for value added, as long as the constraints are controlled and the risk is controlled by the decision-making. We've taken that decision away from the manager.
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