“survival of the nimble”
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Presented to: Atlantic Connection’s 6 th Annual Economic & Financial Conference “Fund of Funds: Where are the Opportunities?. “Survival of the Nimble” - PowerPoint PPT PresentationTRANSCRIPT
Tina Byles Williams, CEO & CIO December 10, 2008
MANAGER OF EMERGING MANAGERS STRATEGIES
“Survival of the Nimble”Why Smaller Investment Managers Outperformed Large Managers Despite a Challenging Five Years for Fundamentally Based Active
Management StrategiesBy
Tina Byles Williams, CIO & Portfolio Manager, Global EquitiesFIS Group
July 13, 2011
Presented to:Atlantic Connection’s
6th Annual Economic & Financial Conference
“Fund of Funds: Where are the Opportunities?
Macro Events that Dominated the Last Five Years Led to Heightened Volatility and Correlation “Bubble”
2
Heightened Correlations Have Diminished the Alpha Generated from Fundamental Stock Selection by Active Managers
3
Diminishing excess return troughed in 2009
What Forces Have Elevated Correlations and Will They Normalize? Structural Forces• Increased use of index based products (S&P 500 futures contracts or ETFs)• Increased use of high frequency trading
Cyclical Forces• Macro uncertainty encourages trading methods that heighten correlations (index trading and
arbitrage). • With greater macro certainty these trading techniques should also self-reinforce to push
correlations down
4
ANSWER – YES AT SLIGHTLY HIGHER LEVELS AND THEY HAVE ALREADY BEGUN TO DO SO
RESULT – ACTIVE MANAGEMENT STRATEGIES’ PERFORMANCE SHOULD IMPROVE AND HAVE ALREADY BEGUN TO DO SO
Correlations averaged .27 pre 2007; peaked at .7 in the fall of 2008, early 2009, May 2010 and December 2010 and have subsequently subsided
How Have Entrepreneurial Managers Fared?
5
• ENTREPRENEURIAL MANAGER defined as:
Asset Class Assets no more than:Large Cap Equity $2 billionMid/Small Cap Equity $300 million Global Ex-US Equity $2 billion
Over the last Five Years, Developing Managers have Outperformed Established Managers Without Incurring Appreciably More Risk
6
Entrepreneurial Managers’ Performance Advantage Most Pronounced in Down Markets
7
Portfolio Structure:
Investment insight amplified through more concentrated portfolios and “Best ideas” less diluted
With smaller AUM, Entrepreneurial Managers can more efficiently invest in less liquid segments of the market opportunity set
In certain cases, they can trade more nimbly with negligible market impact
Organizational Dynamics
Compensation more directly tied to alpha production; whereas managers at established firms have greater “safety net” from baseline fee income from large asset pools and the firm’s franchise value
Passion for success and focus unencumbered by bureaucracy and “Committee think”
What Characteristics lead to the Performance Advantage?
Entrepreneurial Managers Held More Concentrated Portfolios
• Most Entrepreneurial Managers employ active management strategies and tend to hold more concentrated portfolios
9
Tracking Error vs. Annualized Return – Large Growth Managers
10
-8.00
-6.00
-4.00
-2.00
0.00
2.00
4.00
6.00
8.00
10.00
12.00
0.00 2.00 4.00 6.00 8.00 10.00 12.00 14.00
Annu
aliz
ed R
etur
n %
Tracking Error %
Large Growth - 5 Years ending 12/31/2010
Established Managers Entrepreneurial Managers
Linear (Established Managers) Linear (Entrepreneurial Managers)
Entrepreneurial Managers Established ManagersMedian 5.49 4.44Mean 5.54 4.81
Tracking Error (5 Years)Entrepreneurial Managers Established Managers
Median 4.18 4.02Mean 4.08 4.17
Annualized Return (5 Years)
Tracking Error vs. Annualized Return – Large Value Managers
11
-8.00
-6.00
-4.00
-2.00
0.00
2.00
4.00
6.00
8.00
10.00
12.00
0.00 2.00 4.00 6.00 8.00 10.00 12.00 14.00
Annu
aliz
ed R
etur
n %
Tracking Error %
Large Value - 5 Years ending 12/31/2010
Established Managers Entrepreneurial Managers
Linear (Established Managers) Linear (Entrepreneurial Managers)
Entrepreneurial Managers Established ManagersMedian 6.08 4.52Mean 6.06 4.99
Tracking Error (5 Years)Entrepreneurial Managers Established Managers
Median 3.50 2.61Mean 3.36 2.59
Annualized Return (5 Years)
Tracking Error vs. Annualized Return – Large Core Managers
12
-6.00
-4.00
-2.00
0.00
2.00
4.00
6.00
8.00
10.00
12.00
0.00 5.00 10.00 15.00 20.00 25.00 30.00Annu
aliz
ed R
etur
n %
Tracking Error %
Large Core - 5 Years ending 12/31/2010
Established Managers Entrepreneurial Managers
Linear (Established Managers) Linear (Entrepreneurial Managers)
Entrepreneurial Managers Established ManagersMedian 4.50 3.66Mean 5.18 3.92
Tracking Error (5 Years)Entrepreneurial Managers Established Managers
Median 3.14 2.91Mean 3.59 3.24
Annualized Return (5 Years)
Tracking Error vs. Annualized Return – Small Cap Managers
13
-5.00
0.00
5.00
10.00
15.00
20.00
0.00 2.00 4.00 6.00 8.00 10.00 12.00 14.00 16.00 18.00
Annu
aliz
ed R
etur
n %
Tracking Error %
Small Cap - 5 Years ending 12/31/2010
Established Managers Entrepreneurial Managers
Linear (Established Managers) Linear (Entrepreneurial Managers)
Entrepreneurial Managers Established ManagersMedian 8.60 6.20Mean 9.19 6.44
Tracking Error (5 Years)Entrepreneurial Managers Established Managers
Median 4.14 1.32Mean 2.41 1.13
Annualized Return (5 Years)
Developing Managers Incurred Greater Tracking Error which Produced More Excess Return than for Established Managers
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15
Most Compelling Performance Advantage is the Opportunity Cost
Firm A Firm B Firm C Firm D
Assets Under Management $ 0 B $ 5 B $ 20 B $ 50 B
Invested Positions 50 50 50 50
Average percent of Float 2.5% 2.5% 2.5% 2.5%
Annual Portfolio Turnover 50% 50% 50% 50%
Investible Universe R1000V R1000V R1000V R1000V
Percent of Index Holdings accessible for investment 100% 100% 60% 30%
Opportunity Cost Zero Zero SignificantVery
Significant
Source: Huber Capital Management
Increased AUM Limits Access to Lower Liquidity Quintiles
Underlying assumptions:• White = 0%-5% of the float• Red = 5%-10% of the float• Yellow = 10% - 15% of the float• Green is >15% of the float
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0.0%10.0%20.0%30.0%40.0%50.0%60.0%70.0%80.0%90.0%
100.0%
0 5 10 15 20 25 30 35 40 45 50
% of n
ames
/Sco
res
AUM ($B)
R1000V % of Company Owned
UNABLE TO PURCHASE ZONE
EXTREMELY ILLIQUID ZONEILLIQUID ZONE
5% Co.
10% Co.
15% Co.
00.10.20.30.40.50.60.70.80.9
1
0 500 1000 1500 2000 2500 3000 3500 4000 4500 5000
% of n
ames
/Sco
res
AUM ($MM)
R2000V % of Company Owned
UNABLE TO PURCHASE ZONE
EXTREMELYILLIQUID ZONE
ILLIQUID ZONE
5
1
1
Source: Huber Capital Management
But Lower Liquidity Quintiles Have Generally Outperformed
17
--
5.00
10.00
15.00
20.00
25.00
30.00
35.00
<===Lowest to Highest Market Cap segment===>
% In
dex w
eigh
t
Market Cap Distribution of Russell 1000
--5.00
10.0015.0020.0025.0030.0035.0040.0045.0050.00
<===Lowest to Highest Market Cap segment===>
% In
dex w
eigh
t
Market Cap Distribution of Russell 2000
-10.00
--
10.00
20.00
30.00
40.00
50.00
60.00
70.00
% In
dex r
etur
n
Market Cap Return Distribution of Russell 1000
<===Lowest to Highest Market Cap segment===>-10.00
-5.00
--
5.00
10.00
15.00
20.00
25.00
% In
dex r
etur
n
Market Cap Return Distribution of Russell 1000Market Cap Return Distribution of Russell 1000Market Cap Return Distribution of Russell 1000Market Cap Return Distribution of Russell 2000
<===Lowest to Highest Market Cap segment===>
For Value Segments
18
--
5.00
10.00
15.00
20.00
25.00
30.00
35.00
<===Lowest to Highest Market Cap segment===>
% In
dex w
eigh
t
Market Cap Distribution of Russell 1000 Growth
--
10.00
20.00
30.00
40.00
50.00
60.00
70.00
80.00
90.00
100.00
<===Lowest to Highest Market Cap segment===>
% In
dex r
etur
n
Market Cap Return Distribution of Russell 1000 Growth
--5.00
10.0015.0020.0025.0030.0035.0040.0045.0050.00
<===Lowest to Highest Market Cap segment===>
% In
dex w
eigh
t
Market Cap Distribution of Russell 2000 Growth
-80.00
-60.00
-40.00
-20.00
--
20.00
40.00%
Inde
x ret
urn
Market Cap Return Distribution of Russell 2000 Growth
<===Lowest to Highest Market Cap segment===>
And Growth Segments
19
--
10.00
20.00
30.00
40.00
50.00
<===Lowest to Highest Market Cap segment===>
% In
dex w
eigh
t
Market Cap Distribution of Russell 2000 Value
-100.00
-80.00
-60.00
-40.00
-20.00
--
20.00
% In
dex r
etur
n
Market Cap Return Distribution of Russell 2000 Value
<===Lowest to Highest Market Cap segment===>
--
5.00
10.00
15.00
20.00
25.00
30.00
35.00
<===Lowest to Highest Market Cap segment===>
% In
dex w
eigh
t
Market Cap Distribution of Russell 1000 Value
-15.00
-10.00
-5.00
--
5.00
10.00
15.00
20.00
% In
dex r
etur
n
Market Cap Return Distribution of Russell 1000 Value
<===Lowest to Highest Market Cap segment===>
Conclusions
• Heightened macro uncertainty over the last five years as well as the increased use of index trading products diminished the relationship between security price changes and fundamental characteristics. Active long-only and long-short managers have struggled to generate alpha.
• Increased macro certainty should be more hospitable for active management strategies going forward.
• Even though most Entrepreneurial Managers offer active management strategies, they outperformed their Established Manager Peers over the last five years.
• Entrepreneurial managers exhibited more concentrated, higher conviction portfolios with higher tracking error than their Established manager peers.
• Entrepreneurial firms produced more excess return per unit of tracking error for 4 of the 5 major equity categories studied (Large Value, Large Growth, Small Cap and Global Ex-US Equity).
• The combination of large asset pools with commonly used guidelines that limit a manager’s exposure to a maximum percentage of the outstanding shares of listed companies likely constrained Established managers’ ability to take advantage of the higher returns generated by smaller and less liquid stocks.
• The structural performance advantage caused by Entrepreneurial Managers’ greater flexibility to access less liquid and higher returning segments of the liquidity spectrum is likely to continue.
20