Why we believe in the sub-advisory model…
October 25, 2010
It may seem that it is happening more frequently these days, however Portfolio Manager changes and defections have been quite common in the Canadian fund industry over the last twenty (or more) years.
Recently, Dave Taylor, Dan Bastasic, Patricia Perez-Coutts and others have made headlines with their defections.
In addition to providing a soap opera-like quality to the business, manager changes must illicit a response to 1) acknowledge the change; and 2) make the stay-or-go decision.
This recent article by Tom Bradley that appeared in the Globe suggests (and we agree) that this trend in portfolio managers setting up investment boutiques is likely to continue.
At Redwood, we have had the view that partnering with sub-advisors is the best avenue to top investment talent. There are a number of reasons for this, some of which were outlined in Mr. Bradley`s Globe Article.
We have given some of our views below:
In our view, portfolio managers aren’t making the move to establish their own firms for increased salaries or nicer offices. Many start their own firms to have significant ownership in their enterprises, and the potential that their efforts are directly linked to the creation of equity value for themselves and their team.
The `lift-out`of portfolio management teams in recent years has increasingly become popular as successful investment teams are often lured away, or start their own firms, after leaving investment management conglomerates.
Lift outs are interesting as you typically get the benefit of an experienced team managing a significantly smaller asset pool.
In addition, successful lift outs will typically include the majority of the investment team, meaning those responsible for past performance stay together.
All of our portfolio managers have significant ownership in their respective firms, eliminating, or vastly reducing the likelihood of defections.
Flexibility of Mandate
The other key area that makes a difference when dealing with a boutique, is the flexibility of mandate. I for one, know a number of PMs at large firms frustrated by their firm`s policies and views on things like off-index bets (ie. active share,) the use of option strategies, or derivatives or shorting to reduce volatility.
Removing the handcuffs and bureaucracy of a large investment conglomerate is also a huge positive in our view. Investment managers want to use all tools at their disposal to generate the best returns.
As we have previously mentioned, getting the incentives right for portfolio managers is very important. We think that ownership structure and ultimately the conviction and belief of investment professionals in the investment mandate they are managing are incredibly important in seeking positive investment returns.
The sub-advisory model gives us access to the best investment talent, those who are owners in their own firms, thus deriving direct benefit from investment success. We also believe that is fosters longer-term thinking and sustainability while minimizing agency problems and the chance of defections.