A $150 million college endowment had been working with its $400 billion investment consultant for three decades. Recently, however, the investment committee had become disappointed with the consultant’s ability and willingness to conduct research on compelling managers identified by the investment committee—in spite of the fact that the portfolio’s top long term performers had been committee-driven selections. In addition to new managers, the large consultant’s business model did not allow for it to adequately maintain research on existing, legacy managers in the college’s portfolio.
With limited manager research and operational due diligence staffing, constrained travel budgets and the need to layer “approved” managers across a client base in the hundreds, many large consultants and Outsourced Chief Investment Office (OCIO) firms must limit their research to relatively known and safe managers. After all, no one ever got fired for hiring managers like PIMCO, Vanguard or Dimensional Fund Advisors. Furthermore, with mushrooming assets and client base, many large OCIO providers must focus on managers with enough capacity to be effectively layered into all their portfolios so that they can realize economies of scale.
The trouble is that outperformance frequently comes from lesser-known managers that self-impose limits on the assets they manage or that are relatively new and emerging. At Silvercrest, our research has shown that we can expect as much as 0.75% additional annual return simply as a function of investing in managers that are capacity constrained, invest in a limited number of securities and have a history of less volatile performance.
Silvercrest’s Manager Selection Group conducts more than five hundred interviews each year with a current approved roster of more than 130 managers and strategies as well as prospective new ones—including onsite operational due diligence visits with all managers before we invest. In addition to working on behalf of Silvercrest’s OCIO and family clients, the Manager Selection Group team has been hired by third-party peer firms, including a Zurich-based global bank, Singapore financial institution and large multi-family office to conduct manager research, operational due diligence and sophisticated risk analytics. This outside work not only speaks to the skill exhibited by the team, but also is an opportunity to uncover little known new manager ideas.
We see the same symbiotic benefit from our work with experienced client investment committee members. These professionals are frequently successful investors in their own right, leading successful hedge fund, private equity and public investment firms; and, they often serve on a number of other nonprofit boards that gives them insights into some of the best ideas on today’s investment landscape.
In the case of the College, the committee appreciated Silvercrest’s willingness to carry out bespoke research on the endowment’s longtime legacy managers as well as its ability to conduct manager research and operational due diligence on prospective new managers where committee members had first-hand knowledge. As a result of the work, Silvercrest quickly identified two managers worthy of a further look and possible inclusion in other client portfolios.
With Silvercrest’s Manager Selection Group and the College’s designated Silvercrest Portfolio Managers on the front lines of its manager research, the school quickly gained confidence in the new team and moved forward on a number of manager changes that it credits for improving the portfolio’s performance.