Small funds that have been in existence for a number of years with good track records are what I call Truffles, or unearthed special treats. And you do not have to have a pig to find them – rather a dogged approach with a well-trained nose for sniffing them out.
The issue is the obsession with emerging managers and financing them, i.e. trying to identify the winners of tomorrow. As a result, investors and seeders tend to ignore the many smaller funds that have excellent and proven track records.
Truffles are complaining that it is difficult to attract new money. A major reason is that they are considered too small and many investors do not want to be the major investor in a fund. They want security in numbers insofar as there are other major investors.
Actually, emerging managers face the same issue. Large investors do not want to be the dominant investor. Neither do they want to make small investments that lead to a proliferation of funds to monitor in a portfolio.
How then should Truffles go about seeking additional money? This is not an easy question to answer, but the following are some common-sense suggestions that may help a little.
Firstly, approach your current investors. If they are happy, they need to be reminded of the success and asked if they would like to add to their current investment. In most businesses, getting new clients is the most important and existing clients are ignored. Existing investors are actually a top source of business and the most cost-effective way to obtain additional investment. Consider offering a reduced fee class for new money, i.e. reward them for their loyalty.
Secondly, review investors approached at the launch of the fund who did not invest. Show them your track record and find out why they were sceptical at the beginning and did not invest. These are not easy things to do as investors do not like being reminded of missing out on good investment opportunities, so a sensitive approach is required.
Thirdly, review your marketing material and presentations. There is nothing worse than stale marketing material. Get investors to assist you in the review of your material. We all have what I call the “dreaded emotional involvement” with our products. This can cloud the presentation of the fund and sometimes make it difficult for the investor to understand. We leave out things that to us are immaterial or believe that the investor should easily understand. Remember the investment adage- “if you do not understand what you are investing in, walk away”. Make sure this does not happen with your potential investors.
Fourthly, look to having added-on services, risk reporting and a host of new information tools that are now available. Talk to your administrator as to additional services that they can provide. But be careful, there are a lot of “cosmetic” add-ons that do not add value but are punted as essential. As with motor cars, you pay for more and more gadgets in new cars and many of them one never uses or knows how to use. There are ways to avoid this by asking your current investors as to what additional services they would like and need before offering them. I have found that investors like to be considered and consulted. But one needs to ensure that they understand the difference between what is nice to have and what is essential to have. If combined with the first suggestion and third suggestion, one often walks away with additional business. After all, investors also want the fund to grow, providing them comfort in the herd, as long as it will not dilute performance.
Fifthly, review current service providers. There is nothing more irritating to investors than having prices coming out late in the month. Funds of funds need to get their prices out to their investors as soon as possible. Some service providers are tardy and neglect the smaller funds. One of the pieces of advice I give to fund of fund managers is to also ask for a track record of the reporting times of the funds they invest in, as a possible means of avoiding angry investors in their own fund. Pension fund investors also need to have prices as soon as possible after the end of a month. If you have an excellent reporting track record, put this in your presentation. This will show that you also consider this to be important and it can also counter the issue of using a smaller and not brand-name administrator.
Sixthly, segment the target market of possible investors. Everybody approaches the big investors and fund of funds. This looks like easy money but it is not. They are more cautious and tend to make decisions in committees and are becoming more and more risk adverse. The smaller investment houses and funds of funds are willing to invest smaller amounts as they do not have big cash to splash around. Do research and find out more about them. They want to make a name for themselves and also grow like you want to.
Finally, there is a need for publications to highlight Truffles as opposed to just the emerging managers. There is a need for fund of funds that invest in Truffles. It is maybe something a couple of the funds of funds houses should consider. After all, in the long-only market there have been a number of successful funds that invest in small-cap companies, which is a similar concept.
Hopefully these suggestions are taken up by some in the market place. I believe that this could be a great market opportunity for both Truffle hunters and Truffles themselves. And while I have not reserved the name Truffle for a fund of funds, I am tempted!
Ian Hamilton is the founder of IDS Group, which provides fund administration services in Africa and Europe through Malta. He is also the founder of Scotstone Investments, a company that has fund structures and services for global emerging new managers. The views expressed in this column are his own.
This article was first published in Opalesque’s New Managers monthly publication.