I saw the latest research analysis by Callan Associates, “Aspiring Managers: Negotiating the Dual Realities Facing Diverse and Emerging Managers,” about the distinct challenges facing today’s emerging managers. Given my years researching and investing with emerging managers, the topic was especially relevant. The extended Q&A features Callan’s Chairman and CEO Ron Peyton and Callan Connects Manager Lauren Mathias. My favorite quote from this research piece is Callan saying that “One last thing to remember is that all managers were once emerging managers.” At the end of the day, we have to back new talent.
In the article, Peyton presents an insightful overview of the “dual realities” swaying the outcome of success for emerging managers, saying:
“On one hand, institutional investors are increasing their interest in diverse and emerging managers as they seek diversity and new talent for their rosters. On the other hand, these managers contend with mounting client demands, distribution limitations, declining mandates, and an overall downward pressure on active managers and management fees.”
Despite several barriers that emerging managers experience when trying to enter the market, they also have a unique “competitive advantage,” says Peyton.
“[They] can be willing to take on more investment risk than established firms because they are more ambitious to demonstrate their talent,” Peyton explains. “An established firm is not going to take a lot of business risk because it doesn’t want to lose what it has. There are two sides to this issue, of course. A small firm can get too ambitious and blow up. But if you pay close attention to governance, have smaller mandates, and multiple diverse or emerging firms, you can spread out that business risk.”
Trends Among Emerging Managers
As for the noticeable trends in the product offerings of emerging managers, Callan’s executives point to “the alternatives side” as one of the greatest areas of growth. “We’ve noted a lot more direct hedge funds and real estate funds—even some private equity, as well,” says Mathias.
Surely, the subject of emerging managers or diverse managers isn’t new to any of us. Over the years, we’ve heard the media’s assertions that “emerging investment fund managers consistently outperform large and brand-name investment firms, and they do so with less volatility of returns.”
Yet as often as we use the phrase “emerging managers,” there’s a discrepancy about what the term even means. For some, it’s any new investment firm with a small (under $2 billion) asset base. For others, the term alludes to firms that are owned by minorities and/or women. Callan extends its definition to include disable-owned firms as well.
Peyton, for one, says that he hopes “the term ‘diverse manager’ becomes a thing of the past.”
“That is a very long-term hope and there are miles to go,” he tells the study’s interviewer. “But I think obsolescence of that term is the end game. We are hoping for an industry in which every manager is diverse.”
To read the full Callan Associates research article, Aspiring Managers: Negotiating the Dual Realities Facing Diverse and Emerging Managers, visit www.callan.com/research.