Portfolio management is not just about asset allocation and matching your tactical approach to the client’s investment objectives. It is also about a range of other issues: existing relationships your clients have (with private bankers, fund managers, etc), existing “legacy positions” and how to unwind them, allocation to illiquid holdings, security selection, etc. Our approach has always been to advocate that portfolio managers maintain as much control as possible over portfolio holdings, and the top down allocation decision. The more intermediaries there are, the less control the portfolio manager has.
Intermediaries come in many shapes and colors: alternative managers such as hedge funds and private equity shops, private bankers with typically expensive fee structures and a penchant for selling structured notes (a low risk way to collect a nice fee without doing much work), mutual funds that have great “track records” that mysteriously fizzle out as soon as you invest with them. Our response: why risk it? Your clients entrust you with their money. Your job is to protect capital. The more control you have, the higher your chances at doing just that. Diversification out to intermediaries may seem like an appropriate way to diversify risk. But in the end, it simply complicates your life because now in addition to having to worry about markets and how to position portfolios, you have just added a slew of other variables you must now track: managers tracking error, operational risk, private equity sub company holdings, etc etc.
We love global, liquid, capital markets. Why entrust your money to a Private Equity manager that makes a killing off your client’s hard earned capital for them to sit back in a comfortable Manhattan office and allow an army of employees to make a living doing the groundwork. We suggest you cut the fat. Why worry about your mutual fund manager’s stock picking ability when in a declining equity market, 200 bps of outperformance still could mean a decline of -25%! You see why our emphasis is on global (because opportunities in investing are NOT limited to the US), and liquid (because why risk illiquidity when more often than not the vehicles to get access to illiquid assets are way too costly) capital markets.
