The consultants that guide sponsors in choosing the investment managers to run their pension portfolios look kindly on small, new firms, or at least are willing to give them a fighting chance against the megaliths. "We like smaller equity managers because the whole organization often is focused on one approach, both on investment philosophy and incentives to the owners and employees," observes Roger Fenningdorf, Head of Manager Research at Rocaton Investment Advisors, consultants based in Stamford, Connecticut.
However, even when armed with a purity of purpose and a strong track record of their work for a prior employer, managers that leave big firms to start their own still have plenty to prove. "We like to see a [spinoff] be well-planned and -financed, with a cushion to support themselves as the firm gets up and running," says Brian Clark, a Principal in Manager Research with Mercer Investment Consulting in Chicago. His firm also will back small managers, but he says it is not a blanket view: "Founders of firms realize they will be busier and have to do a lot of hand-holding and selling to build their businesses. We like the situation better when the investment managers don’t have to give up too much time to non-investment parts of the business."
Managers setting out on their own thus need to prepare for years of 150% effort and trace amounts of reward: "This is the only business where you have to build and run a company successfully for five years before anyone will hire you," remarks Andy Wyatt, Founder and Chief Executive of Cornerstone Capital in Bloomington, Minnesota. (Cornerstone, another high-achieving young firm, is profiled for its acumen as a manager in the large-cap U.S. growth style in this month’s "Head of the Class" feature)
Two of this year’s class of PLANSPONSOR Best Managers run quantitative portfolios, while the other relies on old-fashioned detective work. All three of this year’s Best Managers class moved to a small-firm environment from large firms although, in one case, much of the pick-and-shovel work was already done, as the new firm was spun off from a large bank’s investment operation and is still owned by the same parent.