Unlocking Real Value Blog

The Growing Emergence of Emerging Managers

It has traditionally been hard for emerging managers – here defined as having AUM under $3 billion – to convince institutions to hire them. Their shorter track records and relatively low level of assets have excluded them from the minimums set in the search/hiring parameters of many firms. But this trend seems to be changing.

Not only have these managers performed well –¬†emerging managers outpaced the S&P 500 in 5 of the 8 bear quarters over the past five years by a cumulative 3.7% – but as consultants and institutions have looked for new ways to find managers that can add value in the wake of the financial crisis, they have been more willing to consider such managers.

Along with performance, there is now a greater recognition that smaller size may actually present an advantage in some cases; for example, emerging managers may be able to more effectively reduce risk because they can change market positions more easily (given their lower asset levels). In addition, as firms grow, marketing and asset gathering become more important – maybe at the expense of investment execution.

So, given these trends, how does an emerging manager take advantage of today’s environment and succeed? As outlined in a presentation I recently prepared for an Investment Management Institute (IMI) conference entitled¬†Emerging Managers – The Foundation to Growth, if consultants and institutions are willing to “forgive” a shorter track record and lower AUM, then managers must concentrate on the other traditional pillars of due diligence – the strength of the investment discipline, the quality of the investment professionals and the stability of the organization.

Communication and persistence is still as important as it has always been. And for all managers – even those with longer track records and proven success – an important component of success is making sure that consultants and clients are never taken by surprise. Managers must be upfront about changes to their organization or poor stock picks. Honesty is still the best policy. And over-communication is always the best policy.

In some cases it still may be an uphill battle for emerging managers, because regardless of the strength of the discipline, for example, the only real proof of success is in reality longevity. But the playing feel has definitely leveled to some extent, a positive for emerging managers.

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