FREQUENTLY ASKED QUESTIONS
- What is an “emerging investment manager”?
- Why invest with emerging investment managers?
- What are the risks associated with emerging managers?
- What barriers prevent emerging investment managers from securing significant assets?
- Why do emerging managers offer a performance advantage?
- Does LEIA function as a third party marketer?
- What factors promote manager selection by LEIA?
- Are the solutions managed by Leading Edge Investment Advisors “one size fits all” in nature?
- How involved are clients with the emerging managers that have been funded in their portfolios?
- Are portfolios actively managed?
- How are manager terminations handled?
- How are fees managed?
- Why invest with Leading Edge Investment Advisors?
What is an “emerging investment manager”?
Traditionally managers with $2 billion or less in assets and a track record of less than five years are emerging managers. Ten years of historical research conducted by LEIA shows emerging managers:
- Outperform their larger peers across all domestic equity categories
- Offer investors a better risk profile
Why invest with emerging investment managers?
Similar to small and micro capitalization stocks, emerging investment managers are excluded from mainstream consultant searches and plan sponsors due to their relatively small asset bases and short tenure in business. LEIA offers additional value to investors based on the following:
- Emerging investment managers are under-researched by large institutional pension fund consultants and, as such, provide investors with opportunities that have not been tapped by other investors.
- Emerging investment managers do not have to deal with the problems afflicting large firms, including, large-scale staffing issues, numerous competing investment products that drain financial and human resources, and large firm politics.
- Firm owners are seasoned investment professionals with established performance track records who choose the path of entrepreneurship to focus on their specific investment expertise.
- The interests of firm owners and investors are aligned because the personal financial resources of firm owners are at stake in their investment strategies, in the formation of the firm, or both.
Recent years prove that larger firms offer no additional guarantee of success than smaller firms. In fact, many of the largest firms have been involved in major market scandals, resulting in sizeable fines, market disruption, and firm closures, exemplifying the fact that past performance alone does not constitute future success.
What are the risks associated with emerging managers?
Risks generally fall into three categories: investment risk, operational risk, and business risk.
- Investment risk is borne by all managers and their clients irrespective of size.
- Operational risk is generally greater for firms that are scarce on people, systems, and resources. Trading scandals in 2004 provide a reminder that this risk is not isolated to small investment management firms.
- Business risk refers to the chance or probability that a business enterprise will run out of capital before it generates enough revenue to support its costs, growth, and development. Business risk is generally more prevalent among smaller firms and argues for a manager-of-managers approach to secure the opportunity represented by emerging investment managers.
What barriers prevent emerging investment managers from securing significant assets?
Traditional barriers have been established to exclude managers with:
- Little to no market exposure/notoriety
- Limited track records
- Perceived risks (business, investment, operational, and reputation)
- Small asset bases (capacity constraints)
- Too many emerging investment firms for traditional consultants to research and monitor
Barriers to securing significant assets are rooted in thinking that does not understand the advantages and misstates the risks associated with emerging investment managers. LEIA research confirms that:
- Limited market visibility has no bearing on quality of performance
- Limited track records are of lesser concern since many investment professionals who head investment firms are often experienced and seasoned, with extensive records of outperformance.
- Small asset bases translate into an execution advantage. Emerging investment managers buy and sell more efficiently and do not disturb the market due to their smaller size. Proprietary trading desks are not going to take positions in front of smaller firms because doing so will not produce “trading” profits. In short, smaller managers work with greater anonymity, which benefits clients.
- Small asset bases translate into greater portfolio flexibility, as portfolios can be quickly adjusted for up- and down-markets.
- Small asset bases often correlate with single-product firms. A focused research effort and management of a single product results in better performance.
- Emerging investment managers generally focus on a single discipline, which significantly increases the prospect for producing outstanding performance.*
- Firm management structure is flat and decisive.
- Emerging investment managers invest in best ideas, given smaller asset base.
- Emerging investment managers have an execution advantage due to flexibility of smaller asset base and are able to buy and/or sell positions more rapidly and covertly than the larger firms.
- The interests of emerging investment managers are aligned with those of clients, as owners have significant financial stakes in their investment disciplines, firms, or both. Emerging investment managers are, therefore, motivated to excel because of their substantial financial ties to their firms.
*Leading Edge Investment Advisors’ research confirms that more than 70% of all emerging investment managers, with assets of less than $500 million, manage single investment strategies.
Does LEIA function as a third party marketer?
No. Revenues are not collected from any investment managers. LEIA service to clients is to develop successful and prudent investment programs to meet client objectives.
What factors promote manager selection by LEIA?
LEIA has identified several characteristics associated with managers who achieve superior long-term results including:
- Independent thinking (Intellectual Capital)
- Nimble decision-making
- Personal discipline
- A constant, repeatable process
Are the solutions managed by Leading Edge Investment Advisors “one size fits all” in nature?
LEIA builds customized solutions that meet the unique objectives of institutional investors and prudently manages mandates against a variety of benchmarks, including the Russell 3000, 2500, 2000, 1000, and Best-in-Class, among others.
- LEIA prides itself on client flexibility and customizing portfolio investments for its clients.
- Clients have the opportunity to be as involved as they would like to be in the construction process. For example, clients supply LEIA with investment objectives, which allow the firm to construct portfolios that are easily funded. Clients may also take the opportunity to work with LEIA to identify managers that may be incorporated into portfolios.
- Additionally, clients have the same opportunity to be as involved in the reporting processes. Clients may opt to meet with managers for semi-annual updates, rather than depending solely on LEIA for updates.
Are portfolios actively managed?
Yes. LEIA will alter portfolio structure to capitalize of the strengths of newly discovered managers who represent opportunity. Managers will also be “sold” if there are prudent organizational disruptions, performance issues, and general non-compliance with LEIA recommendations for business planning, growth, back office system upgrades, and staffing. Finally, portfolios may also be re-aligned based on market conditions.
How are manager terminations handled?
LEIA re-balances all portfolios and manages the terminations of managers. LEIA is aware that the termination of emerging investment firms can become a sensitive public policy issue. The issue of termination is yet another reason for the manager-of-managers structure. The manager-of-managers structure ensures that institutional investors have a single point of contact for processes associated with the investment program, including ongoing manager due diligence, portfolio construction, manager hiring, manager and program monitoring, reporting, portfolio re-balancing, manager terminations, and managing development.
How are fees managed?
Fees are competitive and split with managers, who retain anywhere from 50% to 65% percent of the overall fee. LEIA is able to command its portion of the fee from managers based on its position as a “one-stop shop” for business development and enhancement for emerging investment managers.
Fees are inclusive of manager due diligence, program monitoring, manager hiring/rebalancing/termination, reporting, manager development and counseling, and overall service to institutional investors.
- LEIA has been established by the pioneers of the emerging investment manager marketplace. We have an extensive history working with the emerging investment managers and building programs.
- LEIA has been established on a body of research that spans over twenty years (three market cycles). The research highlights the value of emerging investment managers and clearly reveals that emerging investment managers produce greater excess returns (upside capture) and less risk (downside capture) than large investment management firms.
- LEIA is dedicated to working with emerging investment managers to reduce business, investment, operational, and reputation risks. LEIA counsels managers on a variety of issues, including, but not limited to:
- business management and development
- back office technology
- raising capital
- portfolio management
- risk management
Ongoing advice is provided to emerging investment managers by LEIA on:
- The LEIA team has more than 20 years history of constructing customized performing portfolios with strict attention on the changing risk environment.