Recently, I found myself exploring a charming little fruit stand on the island of Guadeloupe in the French Caribbean. While making difficult choices among the fruits on display, it occurred to me that my process was not unlike the challenge many clients face in selecting the right money manager. We often say that to make a fair comparison, you need to compare “apples to apples,” but the investment world features at least three types of managers. Their goals differ as do their appeal and their drawbacks.
Most financial advisors will fall into one of three categories: (1) the asset gatherers, (2) the seasonals, and (3) the capital builders.
The asset gatherers
As the name suggests, asset gatherers are almost exclusively focused on increasing their assets under management. To do that, they must appeal to the largest possible audience and find the right marketing channel to distribute their product – usually a fund or a family of funds. As a market segment, over the years, they experienced massive consolidation. There aren’t many truly big asset gatherers, but the few in existence hold trillions of dollars in client assets.
Asset gatherers usually appeal to investors who favor a more passive investing strategy. Traditionally their products track the largest indices, and to make marketing easier, they don’t veer too much away from their benchmarks.
Portfolio management for the asset gatherer requires holding a large number of stocks (usually hundreds or more), and very closely resembles the respective benchmark or index. The goal is not really to outperform any benchmark, but rather not to fall too far behind one for too long, and to continue to sell the product to the broadest audience. Big financial institutions tap into this market, offering their cookie-cutter products through massive distribution platforms such as retirement plans, broker platforms, and financial planning.
One feature of asset gatherers is that they so closely follow benchmarks that clients might as well simply buy into low-cost index funds or ETFs (exchange traded funds). It’s a difficult task for many asset gatherers to convince clients that they offer anything beyond those low-cost alternatives. The truth is that ETFs are very quickly eating the lunch of traditional asset gatherers, and ETF providers have really become the asset gatherers themselves.
The performance of asset gathers tends to be closely linked to market trends. This has appeal in a bull market, naturally. But when the market sentiment turns, the clients experience major drawdowns. Unfortunately, they almost always panic and sell their funds, thus missing a recovery that usually follows. The most frequent challenge for the asset gatherers’ client is one of timing: joining a firm at the market peak, and leaving in panic at the bottom. Individual clients, due to their impatience, rarely get the best out of the passive approach. Asset gatherers experience big ebbs and flows in their client bases, but tend to survive market downturns thanks to “stickier” clients like big retirement or college education accounts.
Bottom line: If your money is invested with an asset gatherer, we recommend scrutinizing fees, and possibly switching to appropriate ETFs. Those offer a similar risk/return profile at a much lower cost. Furthermore, be aware that those funds will track the market, which means its falls as well as its rises. If you don’t want to endure the latter, you might consider a capital builder for your money manager!
We could think of asset gatherers as giants in the financial management field, which they dominate thanks to the magnitude of the assets under management, their reach, and their distribution. In contrast, the seasonals (a term we invented for the purpose of this article) specialize in occasionally striking overachievement across asset classes and investment styles, often thanks to higher risks. Luck usually plays a part in the seasonals’ success, but timing is the most important factor. Early clients reap the largest rewards and feel the seasonals’ often higher fees are justified, while clients who join the manager once the success of the investment theme or style has become well-known can experience big losses when tailwinds unexpectedly turn into headwinds.
Among the seasonals, some investment themes are repeat successes in the same industries, i.e., emerging markets, Asian stocks, small caps, health care stocks, Nifty Fifty, FANGS, etc. The seasonals build their portfolio not to match any benchmark, but to attempt outperformance of every benchmark. The easiest way to do this is to overweight certain stocks, industries or market segments, and ride out the momentum as long as it lasts.
Those managers almost always eventually get hurt by unpredictable market shifts. Investment history shows that a rising tide may last years, but when the market changes heart, all the gains (and more!) can be wiped out in a matter of days or weeks. It’s almost impossible for anyone, even financial professionals, to predict turning points. If anything, seasonals may convince themselves and their clients that every correction is just a dip worth buying, until a real correction occurs that brings massive losses for clients. This is usually a fatal blow for the seasonals’ style of business, though some change strategy and turn into asset gatherers.
Bottom line: You can identify asset gatherers by their size. A seasonal, though, can be confused with a capital builder. The difference is in the time frame: capital builders invest for the long term, as we show below, while seasonals just want to win the nearest sprint.
If you prefer to invest at a low cost with passive participation in the markets, asset gatherers and ETFs could be your choice, although their success ebbs and flows with the general markets that they track. If you seek excitement and want to participate in current investment styles, the seasonals might have something to offer. The danger there is that they sometimes overweight their biggest winners at the worst of times, and take on disproportionate risks to satisfy clients who joined them late in the manager’s cycle.
But if you are serious about growing your wealth and preserving your family fortune over decades and generations, the last category is the only one you should really consider. Capital builders tend to be hard to find, and even harder to identify. Why? Because on one hand, they are not in the business of gathering big assets, and, on the other hand, their performance wins very few of the short-term focused beauty contests.
They have a clear goal of compounding your wealth over long periods of time. They almost always retain clients through the ups and downs of the markets and grow their client base slowly and steadily. Most importantly, they view preservation of capital as their focus.
These money managers have learned that if you avoid a major loss of capital over decades, and you wisely put the money to work in quality investments patiently held over the years, your returns will be very respectable, and your wealth will not only be preserved, but will also grow.
The asset gatherers go up and down with the general markets that they track; the seasonals usually overweight their biggest winners at the worst of times, and take on disproportionate risks to satisfy clients who joined them late in the manager’s cycle.
It won’t surprise you to learn that we at Sicart identify ourselves as capital builders – we have no ambition to acquire the biggest asset base in the industry (though we see potential to attract a large number of new clients over the next years). Nor do we seek the highest return in any given year (though we may do better than most in some years). Our goal is the growth and preservation of our clients’ family fortunes and their life savings – which we treat with utmost care.
We have found that our investment style resonates most with families and entrepreneurs who choose us to nurture their life savings, family fortune or newly created wealth so that it weathers all storms and serves them for many decades (or generations) to come.
Our portfolios are not built to match any benchmark as it is for the asset gatherers, and it is not built to outperform a short-lived investment theme. We buy gradually and sell gradually. We like to hold only 30-50 stocks that we buy opportunistically. We let the winning positions grow in a controlled fashion. We are quick to admit our mistakes and redeploy capital in more promising investments. We are comfortable lowering our equity exposure when the markets get overheated, and equally comfortable going on a shopping spree for new opportunities in the midst of true market turmoil.
We will not beat the asset gatherers at their game, and we will not beat the seasonals at theirs. However, we aim to endure every kind of volatility and steadily continue to serve clients who value what we have to offer: growth and preservation – capital building over decades and generations.
Bottom line: Clients of asset gatherers might be better off investing in low-cost exchange-traded funds, while clients of “seasonal” managers, should consider allocating just a small portion of their portfolios to enticingly current investment themes. But those who earnestly wish to build and keep wealth over the long run will be best served by investing with capital builders.
And as for my choice of fruit? In the end, after much mature consideration of the options, I selected a mango. It was delicious.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: This article is not intended to be a client‐specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. This report is for general informational purposes only and is not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally.