Claire Madden, partner at Connection Capital, believes a 'radical' new approach is required to move investors away from large 'branded’ funds and towards smaller and more esoteric private equity funds
This approach is often seen as the 'safe' option, and often it is also generally the only option. But are investors’ interests being well served by managers always sticking so closely to the mainstream?
Portfolio diversification may be a core tenet of investment strategy but in reality it can be hard to achieve. The tendency to recommend larger, well established mainstream funds rather than smaller ones to investors has very little to do with performance, as the idea of a correlation between size and success is tenuous at best.
Recent research from Cass Business School commissioned by Gatemore Capital Management has shown smaller private funds outperform large ones – even in times of economic turbulence.
A radical new approach is required. After all, institutional investors are recognising the value of small or niche, yet highly-performing, funds that are offering innovative strategies.
Brand security
There are several reasons why smaller, non-mainstream funds can offer attractive returns potential. So why are there not more advisers offering them to clients?
One reason is big brand security as it is true, "no one ever got fired for buying IBM". Well-known, well-established names provide a sense of confidence, even if performance is not top quartile.
Another reason is advisers are not required to exercise anywhere near as much in the way of judgement or intensive analysis when recommending a large fund manager who has been around for some time. Therefore, smaller, more esoteric funds simply tend to go unnoticed.
"A radical new approach is required. After all, institutional investors are recognising the value of small or niche, yet highly-performing, funds that are offering innovative strategies."We feel a radical new approach is required. After all, institutional investors are recognising the value of small or niche, yet highly-performing, funds that are offering innovative strategies ranging from private equity liquidity funding, mezzanine debt, or commercial litigation.
Why should experienced private investors with the right risk appetite and profile be locked out?
The answer is for private investors to become institutional investors themselves. That might sound like a contradiction in terms, but they can aggregate their investment power and act as a single point of contact through businesses effectively acting as an institution on their behalf.
This is not a fund of funds model – the layers of fees associated with that approach often kills returns. This is about direct access to top performing funds who have no desire to become the next BlackRock or Invesco and therefore keep a low profile.
"Private clients need to be represented by experienced and proactive investment professionals who have the expertise and industry connections to spot value."Niche area
In order to be successful in choosing the right funds to place capital with, a similar approach is needed to sourcing, negotiating and managing investment opportunities to that of a pension fund or sovereign wealth fund.
Private clients need to be represented by experienced and proactive investment professionals who have the expertise and industry connections to spot value as well as the reputation and track record to be taken seriously as an institutional player.
This is still a highly niche area in itself, but one that is growing to fill a clear gap in the market. Our experience is there are many experienced, sophisticated private investors out there who have a higher tolerance to risk than your average retail investor and who are frustrated that their requirements are not being served.
Small, uncorrelated non-mainstream funds should all have a place in a well-rounded investment portfolio. It is time the industry started to help private investors achieve true diversification. - Investment Week
No comments:
Post a Comment