“Many of the entrepreneurs at fund boutiques and family offices love and enjoy their daily work, they live their vocation” (Interview – Markus Hill)

Fund boutiques, value investing, and economics of meaning – many investors on the family office and entrepreneurial side often make their decisions within this special economic triangle. IPE Institutional Investment Editor-in-Chief Frank Schnattinger spoke with independent asset management consultant Markus Hill about this connection as well as the role of absolute return approaches seeding of fund concepts, long-term thinking, and risk management. He also addressed some of these topics in a short intro to the presentation “Strategic Investing – Investing like an entrepreneur” by Prof. Dr. J. Carlos Jarillo on 29.11.2017 in Hamburg.

IPE Institutional Investment: Value Investing and long-term thinking among institutional investors are topics that will always accompany you in terms of content. Where do you see the special connection here?

Hill: Marcos Hernandez Aguado, a colleague of Prof. Dr. J. Carlos Jarillo, recently said in “Finanz und Wirtschaft” from Switzerland that value investing should currently give investors more pleasure again. I am biased. His statement caught my attention, as I was able to accompany smaller investor events with Prof. Jarillo on several occasions. Of course, Mr. Aguado is not the first to underline this fact. The possible current trend here seems advantageous. Convinced value investors often feel little affected by this kind of tailwind in their investment behavior. Analyze, evaluate, decide, invest – that is often predominant with this type of investor. Of course, positions are held and exit is also considered. Seen through the eyes of the person who has done his homework and rather thinks: the strength lies in calm. Procyclicality is less common here. Nevertheless, such trends can lead to certain investors becoming more involved in value investing.

IPE Institutional Investment: Are there perhaps certain groups of investors who might have a particular affinity for this investment style?

Hill: Particularly in the area of entrepreneurs and family offices, it is often found that entrepreneurial, independent thinking is well suited to this investment style. Economic independence often leads to a hectic and careless reaction neither in the financing nor in the investment area. Entrepreneurs who invest their own money go to great lengths, especially when it comes to the due diligence of investments, with attention to detail. The interesting thing in the value area is that many of the approaches are very communication-intensive. Whether I proceed here in a very “unconstrained” way or more bound by rules: For the investor to gain confidence in the approach, he must know very precisely how the fund manager thinks and acts. I am deliberately not talking here about smart beta approaches to ETFs or extremely highly automated processes. There is a segment in the value manager sector that naturally uses hard facts when selecting securities and also employs its processes, automatisms, and filters. However, a match is often found here between managers on the fund side and investors on the other side, the more their own know-how, market knowledge in niches and network are available in a less scalable form. Perhaps scalability is not the core factor, one could rather say that the head of the manager is, so to speak, the factor that forms the moat, Economic Moat. These managers, often with strong “business glasses”, do not compete with large companies and their product range, as niches are covered. It can be the strategy professor, the fund manager from the investment area, the analyst from certain industries, or even the portfolio manager from an established company with a strong urge to work independently. Precisely because you have to be able to mentally endure periods of drought in terms of performance over time, you will find many very independent minds here. People will criticize me, but still: these personalities often remind me of “artists” with a solid background in craftsmanship!

IPE Institutional Investment: For example, are there many of these “artists” in the fund boutique sector?

Hill: There are a lot of interesting minds with different approaches in Germany. Hendrik Leber, Frank Fischer, Marc Siebel, Johannes Ries, Raik Hoffmann, Christian Funke, Stefan Rehder, and many more, the list can go on. Without weighting, without conclusively evaluating the products – the managerial personalities, biography, approach, and philosophy are the interesting part. Many of these heads can be found in the product offers of specialized investment companies such as Universal-Investment, Hansainvest, Ampega, and other interesting addresses. Multipliers for the promotion of the value investment idea can also be found at custodian banks such as Berenberg, Hauck & Aufhäuser, and other companies. Liability umbrellas such as BN & Partner, NFS Netfonds, etc. also support the many independent asset managers in this field through their activities.

IPE Institutional Investment: Where do you see connections in risk management, absolute return approaches, and value investing?

Hill: Absolute return approaches are often more strongly positioned in the area of cash or bonds by investors. It is interesting to note that new approaches seem to be developing. Managers of value boutiques often invest their own money. In many cases, especially where there is a strong connection to entrepreneurship, Friends & Family are involved in the seeding process of the product. The constellation can result in the investment process being specially designed purely from a risk perspective. Although equity products, risk management can be carried out through different levels of risk in investments alone. The one or other investor who thinks strongly in the categories of small and mid-caps may be irritated in individual cases at the beginning when managers with great “niche expertise” suddenly invest in Unilever & Co. Many value managers may see their strength in these stocks rather than in elaborate cash and bond management. Other managers have the confidence to do so but then run into the problem that certain groups of investors say: “I didn’t give the money for this, we do asset allocation ourselves”. There are managers who, with or without bond expertise, take the first steps with a corset of thoughts in the form of value investing, so to speak, but with the handbrake on. This can also be one of the consequences of specialization in the fund boutique sector; it is not always possible to launch new funds in every field. Investing in concentrated portfolios with values that the manager knows and follows extremely well is another form of risk management. Asset management concepts in the value area can also be viewed with interest. Especially against the background that, for example, entrepreneurial assets are to be secured, but the entrepreneur has the nerve to endure volatile market phases as long as he has the feeling that he has “substance” in his portfolio, so to speak. Regardless of the mechanisms or played asset classes: In the end, it is a matter of entrusting ahead with certain expertise with an investment amount. Here, there are certainly interfaces between absolute return thinking and value investing – over the cycle of a certain number of years, positive results are to be achieved and losses avoided. With one small difference, perhaps: the dyed-in-the-wool value investor may be closer to the idea that in turbulent market phases one simply has to be constructively ignorant of the background noise in daily reporting. Clever investors then often additionally spread the overall risk by mandating a larger number of value managers.

IPE Institutional Investment: For years, you have been intensively involved with the topics of fund boutiques and long-term thinking in asset management. Against the background of your short intro in Hamburg – what do you find so interesting about this topic?

Hill: I know the target group of fund boutiques quite well through internal and external cooperation. It is therefore easy for me to understand the thinking in this area of the company, especially since I have been an independent consultant since mid-2005, providing advice and operational support myself. On the one hand, in projects relating to product selection, and on the other hand, to increase the visibility of certain fund concepts or personalities with whom I like to work more intensively. Especially the professional feedback from investors often enables you to initiate optimization steps for your concept at the beginning. This at least increases the probability that the end-user of the product was not completely overlooked in the seed money search. This is also independent of the product packaging or asset class in which one is moving. I would even go further: Roughly speaking, this approach can also be applied to direct investments – more with the consideration: How does your product or service fit into the portfolio of the potential investor or sponsor? Often this fund initiator approach is not enough: “I’m good at this, I want to do that – please give me your money, as soon as possible! There is, by the way, own experience, which is quite convincing in the first discussion with potential seeders. The history, experience in the field is standard for the continuation of the talks with the investor – something “special” with substance must be offered. In combination with this, however, the personality of the fund initiator seems to me to be the strategic bottleneck factor for the success of the talks. It is difficult to find interchangeable concepts in this process, as one is already in the race against the established ones with a practical track record with the investors from the outset. With an extremely good relationship of trust with Friends & Family, perhaps still with their own money in the fund, such concepts can then “fly” after the seeding process. Unless there is no distribution with a network for further promotion in the subsequent stages. Otherwise, many of these products will “go mouldy” later on, bob along for years with minimal fund volumes. There are no guarantees here. Often there are even seeders who do not even know that they should be seeded. It is often not easy to identify them, so you develop a market yourself, so to speak – it’s time to drill a few holes. Much in this area is reminiscent of consulting for start-up companies – idea, concept, seeding, stumbling blocks in sales, awareness level, etc. The pleasant thing about the customer group of fund boutiques is that they often appreciate that the practical support here often has an added value compared to pure “PowerPoint slide consulting”. What is fascinating is the enthusiasm and dedication of many of these specialized companies to their cause. By their own thing, I mean that they consistently do “their thing” in a professional high-quality way. That’s why the thoughts on the economy of meaning are mentioned elsewhere. Due to their specialization, many of these companies can be compared in the financial sector with hidden champions from the classic German medium-sized businesses. One does things in which one is very good to excellent, ideally naturally. This specialization is then sometimes reflected in investment philosophy, processes, know-how, or certain asset classes. If you have to stand behind your product, maybe invested in your products, then that says a lot. One is often reminded, of Aaron Hurst’s field of Sensual Economics, a somewhat unwieldy term for this approach.

IPE Institutional Investment: What exactly do you mean by that, sense economy?

Hill: I don’t want to get too philosophical at this point, nor do I want to bring Viktor Frankl into it. I’m not interested in things like work-life balance, so perhaps the classification of sense economy is not quite accurate. Originally, for example, it was very much about representatives from marketing and human resources, who strive for a high degree of self-realization. To put it somewhat bluntly: many entrepreneurs in fund boutiques and family offices love and enjoy their daily work, they live their vocation. They are thus, so to speak, constantly on the right track when it comes to their self-realization, which is certainly associated with work. To take the sting out of it, less “psycho-jargon”: having fun and doing things that suit you doesn’t mean that you don’t work hard – you simply see more sense in what you do than perhaps many employees who work for large companies, for example. But I would go one step further at this point. In addition to self-realization, there is often the aspect of public welfare. Last week I had a very interesting conversation with a value manager who is in the seeding phase for a new fund. I found it fascinating that in an admittedly somewhat theoretical, but personally convincing way, he made a very almost altruistic sounding argument for his actions. As a good value manager, he would filter out the economically efficient companies on which investors should focus their capital allocation. The inefficient companies would be punished by this, slowly pushed out of the market, so to speak. Here too, I admit, I am biased. I wrote my diploma thesis in economics on the competition theory approach of Friedrich August von Hayek. Many thoughts about market economy processes and their effects on the common good can be found here without having to become a follower of the so-called Austrian School of Economics – the spontaneous order can be transferred as a concept of thought to the most diverse social areas. Admittedly, more is slowly being found here in the field of social philosophy. Politics, economics, history, and philosophy often come together in such topics. After all, the world of interesting topics of conversation is not exclusively defined by financial topics – the margins, intersections with other fields often add spice!

IPE Institutional Investment: Thank you very much for the interview.


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