When it comes to choosing investment managers, one of the most critical decisions you’ll face is whether to work with an emerging or established manager. Each type of manager has its advantages and disadvantages, depending on your investment goals and preferences.
To make the right choice, you’ll need to evaluate several factors, including the manager’s track record, investment approach, and risk management strategies. Additionally, you should evaluate the manager’s investment philosophy to determine whether it aligns with your goals and risk tolerance.
Ultimately, the decision you make to work with an emerging or established manager will depend on your investment needs and preferences. Let’s delve deeper into some of the key factors you should consider when making this decision.
Benefits of Emerging Managers
Let’s look at the benefits of working with emerging managers. These managers are relatively new to the industry and hungry to prove themselves. In many cases, they will offer reduced fees and more favorable terms to encourage you to invest.
As newcomers (often of diverse backgrounds), they have spent less time working in ineffective firms and have probably learned fewer bad habits than more established managers. They can also offer you a fresh perspective on how they invest. The new generation typically has more nuanced experience leveraging technology to enhance their investment thesis and risk controls, including using data analytics and artificial intelligence to take advantage of current market conditions.
In addition to their fresh perspective, emerging managers are also well-positioned to leverage technology to enhance their investment strategies and generate alpha. In its 2023 Investment Management Outlook, the Deloitte Center for Financial Services highlighted ways technology provides advantages to investment managers who know how to use it. Deloitte identified three key technologies capable of directly contributing to alpha generation.
- Artificial intelligence (AI)
- Data acquisition and processing
- Data analytics
The firm also reported application to be the connection between the implementation of technology and revenue. Many investment managers are applying those technologies to incorporate new datasets into the investment decision process. They’re also using technology to streamline their front-to-back-office integration.
Benefits of Established Managers
On the other hand, established managers have a proven track record they’re more than likely able to replicate.
They have existing policies, procedures, and vital middle and back office, operational, and management teams. Established managers might be more risk-averse due to battle wounds they sustained during their previous professional experiences.
You can also find managers with previous success in your specific asset class. Managers with more experience have a greater understanding of the market over time, having learned from their mistakes and benefited from the knowledge they’ve gained in challenging markets and in times of political and economic uncertainty.
Many have also learned how to better manage their emotions. Some established managers can be more level-headed and provide a more stable and reliable investment approach. They know how to handle failure and success because both outcomes require clear-headedness.
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Challenges of Emerging Managers
Emerging managers may lack a middle and back office, operational, or management team. In addition, their short track record and small assets under management may limit their ability to attract larger investors and to evaluate data accurately. This lack of experience can lead them to make mistakes and inaccurate assumptions about the market.
Another challenge of working with emerging managers is the uncertainty you may feel regarding their ability to handle success. While they may be eager to prove themselves, it’s important to ensure that they have a level head and can maintain their focus and humility as they grow their business. Otherwise, that successful manager won’t be a good partner long term.
Challenges of Established Managers
Established managers can face challenges such as becoming complacent or losing their motivation to achieve success. It’s important to assess whether they have become too comfortable with their success and may not be as hungry to outperform themselves as they once were.
Another challenge with established managers is the risk of distractions from their focus on investment management. They may become involved in personal or business ventures that divert their attention away from their core responsibilities, potentially impacting their performance and ability to manage assets effectively. They can also get distracted by their success and make risky egotistical purchases, such as buying a baseball team.
Emerging Manager or Established Manager: How to Choose?
When deciding between an emerging manager and an established manager, it’s crucial to evaluate their skills objectively and avoid biases. To make an informed decision, conduct thorough due diligence, gather both quantitative and qualitative information, and ask follow-up questions. Creating a dialogue can help you “dig in” to discover whether a manager is complacent or hungry to succeed.
It’s important to note that past success doesn’t guarantee future results. Similarly, while emerging managers may be eager to succeed, it doesn’t mean they’ll deliver results.
The Arootah Decision Manager App can be especially beneficial among firms that wish to streamline the due diligence and decision-making process. This app guides organizations, teams, and leaders through research and enables them to document their findings. Organizations can use the app’s predetermined criteria for success — based on our three decades of asset allocation experience — or can create their own criteria.
The Bottom Line
While there are benefits to working with both emerging and established managers, there are also challenges associated with both when it comes to their track record, predictability, ability to perform, and emotional management.
Emerging managers offer organizations fresh perspectives and new investment ideas, while established managers offer them a proven track record and a more stable investment approach. Regardless of whether you choose an emerging or established manager, it’s essential to conduct due diligence and evaluate the manager’s team, investment philosophy, and risk management before investing.
Ready to make informed investment decisions? Arootah Business Advisory offers expert guidance to support you in choosing the right fund managers. Our advisors can walk you through our proprietary Manager Selection Decision Manager app, the same model Arootah CEO/Founder and Blue Ridge Capital COO/Co-Founder Rich Bello used for years to invest in managers and make critical decisions. Book a free consultation today to get started.
Disclaimer: This article is for general informational purposes only and does not constitute legal, investment, financial, accounting, or tax advice, or establish an attorney-client relationship. Arootah does not warrant or guarantee the accuracy, reliability, completeness, or suitability of its content for a particular purpose. Please do not act or refrain from acting based on anything you read in our newsletter, blog, or anywhere else on our website.