The asset management industry widely assumes that asset growth in a fund automatically follows superior performance. In this paper, we illustrate that while there is truth to this, it is not as straight forward as many would imagine. Performance is important, but is not sufficient to guarantee the asset growth required for business success.
For plan sponsors and other allocators of capital, selection of managers who would provide excess return, is a key component of how they seek to meet long-term return objectives. We demonstrate that the best opportunities for gaining alpha within a given investment objective relies on successfully scrutinizing the smaller manager universe.
Finally, we confirm previous work which shows that as successful managers grow, their performance diminishes, creating the need for capital allocators to “do it over again”.
We propose that the optimal course for asset allocators to follow is a combination of manager selection and equity ownership in smaller asset managers. Further, we believe that as an equity owner, to the extent that one can influence and improve upon the non-performance related aspects of the asset manager’s business, the prospects of business success for the asset manager, and return for the investor would be improved.