August 2012

Cover:Best Managers You Never Heard of

Illustration by Marcos Chin

Investment management is an activity based on confidence, even arrogance—the belief of a firm’s principals that they can consistently outwit the hundreds of professional managers in a given style. But, even in light of recent market outcomes, there is no shortage of confident, entrepreneurial people, and the industry grows every year—in early 2012, the Securities and Exchange Commission (SEC) reported 12,622 investment advisers registered in the U.S., an increase of 21% from 2008, and of 61% from 10 years earlier. Each year, PLANSPONSOR sorts through the new names, hoping to find a few that are ready for the rigors of the institutional market.

Investment consultants and researchers have long examined the relationship between firm size and results; most conclude that superior results come from smaller strategies. Ted Krum, an investment program manager at Northern Trust in Chicago, has posed the question every few years since 1995. His latest update, as of August 2010, again finds that for active large-cap core strategies, small firms—i.e., those managing the last 1% of assets—have beaten those advising the top 99%.*

For the five years ended June 2010, Krum reckons that the median small manager—a firm with less than $3.6 billion under management—delivered an annualized return 0.72% greater than the median large firm. He also notes that smaller firms outperformed in down markets but lagged in up markets. In his earlier research, small firms’ performance advantage was even greater.

There can be a downside, however, to organizations that are young and building. But because few newcomers are entirely new, most investment teams being seasoned and their strategies and track records established, the risks tend to be on the business side, says Lauren Etcheverry, equity investment consultant and vice president at Callan Associates in San Francisco and leader of Callan Connects, the firm’s emerging manager initiative. “We take a closer look at firm structure and the business’s break-even point. A firm might have just one strategy, but a diversified client base and a solid business plan are positive factors.” She also prefers to see firm ownership distributed to the team, to increase the attraction of staying with the organization.

Both of PLANSPONSOR’s 2012 Best Managers have experienced investment teams and solid track records established at larger organizations, and have built an institutional following in just a few years.~

*“No Contest: Emerging Managers Lap Investment Elephants”; www-ac.northerntrust.com/content//media/attachment/data/reports/1010/document/em_research_2010.pdf

~All investment-return information in the two case studies comes from the manager database of eVestment Alliance in Marietta, Georgia.