As an aside, Buffet has never surrounded himself with legions of analysts but has still been deeply incentivised to put on the resources needed for the task at hand. Yet more assets, people and revenue also increases equity in the management company. Then there is the asymmetric pay-off which may even be emphasised under a fixed fee arrangement with performance fees. Even if performance fees are structured more like bonuses than asset-based percentages, there remains the option-like incentive to go for broke . So is there a better way? Glennon Capital thinks it is easier to see from the vantage point of a smaller, younger firm. First, the concept of equity should sidelined and work done under the assumption that equity in our company is worthless. Mostly this turns out to be the case anyway, at least until the boutique has turned into just another asset gatherer. If our brand of investment management is about alpha or investment talent, then its value is inextricably linked to the people and not the company. If you have shareholders, then you owe them a fiduciary duty to which your clients must come second.

This is too often forgotten in financial services, which is after all supposedly a services industry too. That is why we do not want outside shareholders, even in the form of an incubator. And what about incentivisation? The only way, that we know, to really align interests with a fund manager in a symmetric manner is through co-investment. Typical objections to this include the pre-requirement of wealth to invest (we would not want to restrict ourselves to recruiting wealthy analysts) and the concentration of risk in the manager’s portfolio (a concentrated collection of small cap stocks a diversified savings strategy does not make). We believe that our structure does not suffer from these weaknesses.

First, bonuses are effectively equitised through investment in our funds and calibrated such that once investment professionals have been with us for two years or more, the original amount invested in our funds from bonuses must be more than their annual salary, and it must stay that way. The investments must be spread across the (absolute return but small cap dominated) Principal’s Trust and the (fully invested) Small Companies Trust in a ratio of not less than 2:1, depending on the individual’s outlook for markets. Not perhaps the most diversified strategy but that’s not always such a bad thing. Lastly, one might question whether this really incentivises the creation of alpha. This is a valid concern for a momentum- based investor, but our process is valuation-driven and downside risk is defined by absolute valuations, therefore our alpha and absolute incentives remain naturally aligned. This is by no means a perfect arrangement, but overall we believe it serves to sharpen the mind in a manner coherent with our clients’ objectives and will retain our focus over time on investment excellence rather than distribution.

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