We plucked this from a recent RFP we have seen for Smallcap Investing. First off, all hail the idea that someone is actually allocating money to the space. We fit every criteria except numbers 2 and 7, which solely relate to asset size. Let’s discuss.

1. Must be an investment advisor registered with the SEC.
2. Have existing Firm AUM of at least $2 billion.
3. The Firm must have a minimum track record of five years acting as a manager of US Small Cap.
4. The Firm and senior team must have a performance track record for managing a US Small Cap strategy in compliance with Global Investment Performance Standards (“GIPS”) that extends at least five years.
5. Have ability to offer a separate account structure or collective investment trust. All vehicle types will be considered; however, separate account mandates and collective investment trusts are generally preferred.
6. Utilize an active long-only management strategy that seeks to achieve higher risk-adjusted returns, net of fees, than the benchmark.
7. Have a minimum of at least $1 billion in assets under management within US Small Cap.
8. Have a capacity of at least $100 million within the strategy.
9. Have a weighted-average market capitalization of $8 billion or less.

The world is a complicated place and to paraphrase a recent conversation:

Q. You know what you learn from meeting 1 X Type Prospective Client?
A. What and How 1 X Type Client thinks.

So what you learn over time is that you need to figure out who YOU are and do what YOU do, and be transparent about it, and if you execute competently, you will in theory attract like-minded clients.

Not everyone apparently agrees with us on some things, like the idea of “Product Focus” rather than a multi-strategy firm, particularly if you are running AUM of only $2 billion..
Our soft close asset number in smallcap is $1.1 billion, which would still enable focus and “no, we are obviously not an index fund which you can buy for 20 bps.” Quick and large asset growth is the highest negative correlation to future performance that our industry can generate.

And…there is a LOT of room under $8 billion market-cap which is where the firm these folks will hire will likely not be playing where we still can.

And lastly, a Howard Marks-ism, which has been on our website since day 1:

“ I’ve heard committees say, “we don’t want to represent more than x% of a manager’s assets under management or of the fund’s total capital.” But why not? Is the goal better performance or is it safety in numbers? If you’re considering investing $10 million with a manager, why does it matter how much money she manages? Why is investing $10mm safe if she manages $1 billion but risky if she manages $50mm? If a manager is unusually skillful, aren’t you better off as her client if she manages less money than more? And if a manager was really good, wouldn’t you prefer that she managed only your money? My most specific and most heartfelt advice is this: The surest way to achieve superior performance is by investing significant amounts with individuals and firms that can be depended upon for investment skill, risk control, and fair treatment of clients.”

Operators are standing by.