Emerging Manager Strategies: FIS Group
July 25, 2017
Providing niche services isn't just any asset manager's cup of tea, but FIS Group doesn't shy away from supplying bespoke solutions and unique funds employing their own unique strategy.
The firm has provided a refreshing and needed change at the right time. Clients who yawn at the restricting and almost puritan savoir faire of traditional firms take to FIS Group like a fish to water. They have the certainty of being in good hands – and this peace of mind has them happily following the firm's lead. “Our biggest and longest clients trust us to go find the alpha wherever it might lie or we would like to go,” Adam Choppin, their Lead Analyst for Emerging & Frontier markets, affirms.
Emerging manager strategies is their specialty; and due diligence, allocation, as well as careful manager selection, their modus operandi. Tapping into this niche requires far more than mere expertise, and their clients – ranging from public funds and endowments to foundations and corporations – know this well. The Philadelphia-based asset management and allocation firm is sought out for its customized separate account solutions in global equities that taps the entrepreneurial spirit of investing; carefully combing through the thousands of entrepreneurial firms worldwide and selecting just a handful of managers that –although not yet recognized– ooze potential. FIS Group separates the wheat from the chaff by culling entities such as publicly listed companies, subsidiaries and big banks, while plucking out overlooked majority employee-owned firms including earlier-stage start-ups.
Mr. Choppin is glad to explain the reasoning behind this move. “First, it makes business sense,” he earnestly reveals, “entrepreneurs work harder, they are incentivized and have their head in the game. Secondly, capacity constraints matter in active investing, especially when it comes to emerging and frontier markets. Focusing on this niche of entrepreneurial managers offers better alpha and higher probability to capitalize. And last, but not least, it offers more efficiency.” And that is something that their faithful long-term clients will attest to.
Targeting such a specific niche market does require a hefty amount of legwork, and that's where due diligence comes into the equation. FIS carefully screens entrepreneurial firms through its manager review process to ensure they fulfill their selection criteria. The ones that make the cut have proven track records of outperforming both the market and their peers. But it's not all about track-records, Mr. Choppin warns. “A track-record is not indicative of future performance; a track-record indicates style, but not always skill. It's important to understand that.” The firm's keen eye for alpha potential is what allows them to discern which entrepreneurial firms have the ability to achieve greater levels of alpha than their larger counterparts. And this potential, is based on a simple –and at times underrated– factor: knowledge. FIS is attracted to managers who understand not just the efficiencies of their asset class –such as knowing what will sell next year– but also the idiosyncrasies of a fluctuating market.
FIS Group is one of a kind, that much has been shown. Yet, Mr. Choppin casts a light on this trait by revealing that, whereas the firm does believe in checklists it does not believe in blacklists. “I feel that there's always an exception to one of those [blacklist] items that breaks the rule. We are willing to talk to anybody who is a majority employee-owned firm.” This broad-minded approach fuels their adventurous spirit: they're always in search for something different. That special je ne sais quoi that will not only maintain their prominent position amongst other asset management firms, but that will also appeal to the needs of their clients. “We are always looking for something different and/or better,” Choppin shares, “we are invested in all the asset-classes within equities, so it's not like we're necessarily looking for new exposure, at any particular time, but we're always looking something different from how we're allocated presently. All in all, we're just looking for a better way to manage money.”
Their flair for innovation translates into an inclination towards trail-blazing. “We like to actively be the first institutional investors with our managers,” Choppin offers. And they certainly have achieved that: they have been the first institutional investor for 25% of their managers, and their aim is to raise that to 50%. Often FIS will seed a new strategy as well, usually based on a carve-out of an existing strategy, such as the long book of a long-short manager or after hiving off a portion of the book they don’t need, such as U.S. equities. A brave and noble goal within a predominantly conservative sector that is under the constraints of their own job risk factor. “We believe that our job is to have opinions,” he retorts, “when you outsource them to the marketplace, you're not doing your job.”
Nevertheless, the current climate post-2008 is quite competitive. New rules and guidelines have been enacted that have disincentivized investing in entrepreneurial emerging managers. There is certainly a sense of safety in numbers, so many prefer to go with the flow and invest alongside other people – risking crowded trade and bloated investments. Yet, the more adventurous investors steer clear of this traffic jam, taking the road less traveled by seeking out entrepreneurial and diverse managers, while the run-of-the-mill investors still resort to garden-variety funds. “Much of the business has misaligned incentives,” Mr. Choppin heeds. “The fiduciaries and the asset holders don't have the same incentives,” he elaborates, “fiduciaries are incentivized not to screw up, not to up-perform. That job risk discourages taking a chance.” The case for many, but not for FIS Group.
Always on a quest for innovation, it comes as no surprise to learn that ambitious goals are included in FIS Group's plans for the future. “We're on the precipice of launching some of our own different vehicles that will allows us to take advantage of what entrepreneurial managers can offer even more.” Doing things differently is certainly the underlying factor to their singularity and appeal: a strong conviction and custom-made solutions in the asset management jungle are few and far between. But one needs to look no further than their entrepreneurial manager selection requirements to uncover why. “Our preferences, the things that we see that we really like, are people putting their money where their mouth is, investing into their own business but also into their own strategy. We like people to have the courage of their convictions.” In brief, FIS prefers working with firms who share their own hunger. unique core values.