Why institutions are embracing up-and-coming investment managers


By Sanjoy Ghosh, Covestor Chief Investment Officer, and Rich Gockelman, Covestor Business Development Manager

We recently attended Opal Financial Group’s Emerging Managers Summit South Conference in Austin, Texas, and the hottest trend was the tremendous amount of interest in up-and-coming portfolio managers from pensions and endowments.

At the conference, we heard from institutional investors who are hungry for managers with smaller asset bases who can deliver alpha, or incremental outperformance. They feel there are investment and informational benefits of working with managers before they become big. Pension funds and endowments also like the fact that emerging managers tend to invest in their own strategies, or “eat their own cooking.” Also, it’s usually easier for these investors to get emerging managers on the phone to answer questions from their union members or investment board, for example.

Representatives from university endowments discussed why they consider investing in smaller managers, and some of the challenges they face when presenting the case of emerging managers to their board. Some endowments even have formal emerging manager programs. Yet currently, the research and intelligence-gathering process on emerging managers is largely based on referrals from peers, and conferences like the Opal event.

Institutional investors are keen to identify rising stars and discover hidden talent. They are convinced that emerging managers can generate significant alpha due in part to their smaller size.

However, endowments are also worried about reputational risk, lack of track records and the fact that the traditional consultants that they rely on for advice often don’t have stables of emerging managers. Some institutional investors also voiced concerns that emerging managers may not be able to scale operationally, adhere to their stated strategy, and exercise discipline regarding accepting new money.

Large investors commented that building a formal emerging manager program was very labor-intensive, since performing diligence on these managers is cumbersome.  However, if there existed a platform where they could monitor manager actions and gain confidence that the manager could scale operationally, then they would be more likely to invest in these managers, both directly as well as in a fund-of-funds portfolio. Access to managers and transparency of investment decisions were important criteria.

Clearly, there is need for a platform where managers can be seeded, and incubated for a period of time, and their process and performance tracked and monitored against their peers. This standardized framework would provide a transparent apples-to-apples comparison of promising managers – in terms of strategy adherence as well as execution. This form of due diligence is an essential step in building confidence in managers.

In fact, Covestor is already providing these capabilities to individual investors who can use sophisticated performance metrics to monitor and track the emerging portfolio managers they choose. We see Covestor as a meeting ground of investors looking for diversified alpha, and talented managers looking to acquire clients and build a track record.

Photo Credit: timdonar