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Investment Consulting Business Plan
Executive Summary
Our firm’s hallmark investment product will be the Vista Total Market Equity strategy and will be initially offered through a mutual fund that is registered by the U.S. Securities Exchange Commission (SEC). Technological advancements also permit for other economically feasible distribution channels, such as separately managed portfolios for large accounts. The details of our particular investment product offerings are revealed in another section of this plan. However, it’s worth stating up front that we are extremely encouraged by a research piece to be published in the Journal of Portfolio Management, that supports the philosophy behind our primary product offering. Ennis Knupp, a premier institutional investment consulting firm, published a study called, “Failure of the Multiple-Specialist Strategy: The Case for Whole Stock Portfolios.” One of the underlying tenets is that specialization within equity portfolio management has gone too far; thus resulting in sub-optimal portfolios.
VISTA INVESTORS will be structured as a partnership designed to capitalize on industry research performed by one of the founding entrepreneurs, Michael Douglas, during his professional career in investment management research. Last year alone, Mr. Douglas conducted research visits at the investment offices of over 30 firms. In addition, he conducted literally hundreds of meetings with key investment professionals from around the globe either in person or via telephone conference. Mr. Douglas’s team presents this business plan as a “start from scratch” outline of what a successful investment management organization should look like as the industry evolves in response to political, social, technological, and other influences.
VISTA INVESTORS will offer high net worth or “angel” investors opportunity to assume minority ownership positions in exchange for contributions to VISTA INVESTORS’ operating capital and for providing seed assets to establish the investment products described herein. This document alone does not constitute an offer of any type, nor does it provide any guarantee, financial, or otherwise. Risks associated with the VISTA INVESTORS’ business plan are not limited to those detailed in this document.
1.1 Objectives
The purpose of VISTA INVESTORS is to create value for owners, employees, and investors via the establishment of an investment management organization designed for the Third Generation. The Third Generation is defined in a cutting-edge research effort by Merrill Lynch & Co., Inc. and Barra Strategic Consulting Group as a phase in the investment industry requiring a special set of capabilities for success. Our team has drawn upon this study, numerous other studies, and perhaps most importantly, our own experience in the industry, to define a plan for the success of VISTA INVESTORS.
1.2 Mission
Buy and sell decisions are implemented quickly and efficiently across all portfolios. Where applicable, a trading rotation is used to avoid any type of systematic advantage or disadvantage an account may experience. Under virtually no circumstances would we deviate from our discipline.
1.3 Keys to Success
Probably the single most important factor that defines success in the investment management business is performance. Thus, one of our primary goals is the achievement of a rating by Morningstar, an organization widely known by both individual and institutional investors for its marks of accreditation in the mutual fund industry. To be rated by Morningstar, funds must have a minimum performance history of three years.
Company Summary
VISTA INVESTORS will be structured as a partnership designed to capitalize on industry research performed by one of the founding entrepreneurs, Michael Douglas.
This company is unique because it differs substantially from the way most existing investment management firms originated. Most of the firms created in the last 25 years were started by the departure of portfolio managers from the nation’s largest banks, insurance companies, and brokerage firms. Generally, these individuals were deep in investment research talent but novice as it concerns the business and operating side of running an organization. The business plan for VISTA INVESTORS is different. VISTA INVESTORS is to be created by someone deep in knowledge of all aspects concerning investment management organizations. Investment talent will be acquired and retained by offering key individuals competitive compensation to include equity stakes. Biographies for individuals selected for the management team are enclosed.
Investment Philosophy
VISTA INVESTORS believes the goal of U.S. equity portfolios should be to outperform the broad market, as measured by the Wilshire 5000 or Russell 3000. Exposure to economic sectors will roughly approximate those of the benchmark. Our view is that any deviation from the benchmark represents a bet, or in our case, a calculated risk that will determine over or under performance. Portfolios will also maintain market cap exposure to large cap (>$10 billion), mid cap ($2 billion to $10 billion), and small cap (<$2 billion) securities. Like weightings to economic sectors, the weight of the portfolio allocated to large, medium, or small stocks represents a bet relative to the benchmark. On average, our portfolios will hold roughly 2/3 of their value in large cap stocks, and 1/3 of their value in mid and small cap stocks. This distribution among capitalization ranges represents a modest bet that mid and small cap stocks will outperform, consistent with studies showing small company stocks outperform larger companies in the long run.
We believe our process will be successful in the future for the following reasons:
- It provides the opportunity to outperform the market without taking undue risks.
- It does not concentrate heavily in a narrow segment of the market (e.g. small cap growth stocks, energy stocks, telecom stocks), thus portfolios are more likely to maintain a stable asset base when certain areas rotate out of favor and prompt redemptions.
- It simplifies investor’s portfolios by reducing the number of managers or funds they need in their overall asset allocation.
A recent research piece by Ennis Knupp, a leading institutional investment consultant, provides support for what they call “whole stock” portfolios. They believe manager specialization has gone too far resulting in inefficient structures that provide index-like returns at excessive fees.
The decision-making process is one of consensus. The portfolio management team meets weekly to discuss the portfolio and any changes to it. In rare cases, if we fail to reach a consensus decision, the CIO will act as the arbiter, usually prompting for additional research, but if necessary, providing a final decision. Our investment model is one in which portfolio managers are also analysts. This concept of portfolio managers/analysts making decisions on a team was recognized and adopted for its proven success in a few select firms that have been extremely successful from both an investment and business perspective.
Portfolio manager/analyst responsibilities include idea generation, due diligence, and completion of research projects directed by the CIO. While each portfolio manager/analyst has experience in various areas, they are generalists in the sense that they are not assigned specific sector responsibilities. We find this allows individuals to remain stimulated by their jobs. At least one research assignment per month will be that of an in-depth review of an economic sector. We find this provides sufficient coverage per economic sector and enhances the team’s overall coverage of the broad market.
Market Analysis Summary
Much of our analysis focuses on the mutual fund segment of the investment industry because it is such a large component of the overall landscape. We have additionally provided information as it pertains to the management of separately managed portfolios (i.e. “separate accounts”). To understand the data here, one must understand that separate account managers must register their firms with the SEC. Thus, they are known as “Registered Investment Advisors.” For VISTA INVESTORS, the technologies we have selected will enable us to capitalize by utilizing both product types, mutual funds and separate accounts.
Our analysis supports the 20% to 25% projected growth rates by outside sources. Probably the most important aspect to these projections are the factors that will fuel these rates of growth. The following section contains some of the key variables to creating this growth environment. All are expected to have a positive impact on the investment industry for at least the next three years.
4.1 Business Participants
The number of participants in the investment industry is large. They range from providers of a single investment product to multi-product firms with literally hundreds, if not thousands, of investment product offerings. The several-trillion-dollar industry certainly has the size to support a large number of firms. However, many participants are not “complete” firms as it pertains to the capabilities required for success in today’s, but more importantly, tomorrow’s environment.
4.2 Target Market Segment Strategy
Our target market will be highly dependent on the stage of our product in its development cycle. Most of the marketing opportunity will occur beyond the first year of product development. However, some initial opportunities do exist. For example, the firm can utilize its transfer agent’s distribution services, which would put the product in a highly visible online platform. Additional opportunities include marketing to programs that invest specifically in “emerging managers.” Furthermore, the high net worth and retail marketplace can be accessed to a limited degree, even in the early stages, through similar creative opportunities and already-established relationships with clients.
Like manufacturing organizations, investment management firms must develop products to provide to their customers. This plan provides substantial market analysis to support the trends expected to occur in the field of investment management and the types of investment products that will be demanded. VISTA INVESTORS’ hallmark product offering will be the Vista Total Market Equity strategy, an investment product offering based on the evidence supporting investor’s desires to outperform the overall market via a single, diversified vehicle and to avoid the need to create complex investment structures such as those employed by institutional investors.
4.3 Positioning Statement
While it’s important to show some level of consistency with the latest trends in the industry, it’s more important to provide a solution that will stand the test of time. The decade of the 1990s is littered with examples in which individual investors have chased past performance and have sought unrealistically high returns by investing in recently hot investment vehicles, often concentrated in niche areas such as technology specific funds (e.g. Internet mutual funds) or style specific funds (e.g. small company growth mutual funds).
The hard learned lessons for individual investors are that past performance is no guarantee of future performance, and that the market tends to favor one area for a period of time only to unpredictably rotate in favor of another area at a later time. Additional support for our strategy comes from the tendency for individual investors to mimic the strategies they see utilized by the nation’s largest institutional investors (e.g. pension funds and university endowments). Because of their size, institutional investors allocate their assets to various portions of the U.S. equity market (e.g. large cap growth, small cap growth, large cap value, small cap value, etc.) by selecting investment firms and products that are specialized in certain areas. These structures are complex, and as research contained herein suggests, inefficient as it pertains to the average investor. In fact, a prominent investment consulting firm is advocating what they call “whole portfolio” strategies for institutional clients where the overriding feature is to reduce the inefficiencies they have observed in their institutional client portfolios.
We are extremely encouraged about the outlook for our total market portfolio strategy. One of the underlying tenets of Knupp study (mentioned in Section 1.0) is that specialization within equity portfolio management has gone too far; thus resulting in sub-optimal portfolios. Many portfolios piece together numerous managers, resulting in index-like structures at high fees that are incapable of providing the performance sought after by active portfolio management in the first place. In fact, the study estimates the annual cost to institutions of operating a multi-manager portfolio at 1.20%. This is a huge amount when considering the negative effects this would have on a portfolio held for the long-term. Additionally, we can state with nearly 100% confidence that this cost is even higher for individual investors. The prescription to institutional investors by the study is to embrace the entire opportunity set represented by an asset class via utilization of more simplified structure. Simply put, we concur.
We’ll go one step further to purport this is even more important as it applies to individual investors. The level of acceptance of “Whole Stock” portfolios among institutions remains to be seen. Some institutions may find difficulty with the concept simply because the large size of their portfolios makes it prohibitive to reduce the number of managers within their portfolios. However, this concept is one to be embraced by individuals because it simplifies their portfolios, while at the same time reduces the need for outside counseling. The trend toward more simplified portfolio structures is simply a reversion to the way things were prior to the specialized categories and labels developed for equity products over the last couple decades.
4.4 Service Business Analysis
The investment industry is a classic example of a traditional industry embracing technology to become more efficient. It is clearly fragmented, and while the past few years have seen some consolidation, fragmentation will remain due to the differentiation in investment products, both real and perceived. It’s important not to understate the complexities of this industry. While mature by some measure, a dynamic change (e.g. advancements in communications and other technologies) and a positive environment for investing have created opportunities that will perpetuate well into the next decade.
“The investment industry is complex. It has many moving parts and it’s experiencing dynamic change. If this was not the case, opportunity probably would not exist.”
– Mike Douglas
The beauty of investment management is that great economies of scale can be achieved with successful investment product offerings. When organized efficiently and provided with the appropriate technology and support services, the size and number of accounts becomes irrelevant. Essentially, the underlying portfolio (product) is the same. Additionally, related products can be easily derived from the main product platform. At a recent investment conference, the CEO of IOMEGA stated, “…derivative products are important in any industry.”
We would certainly agree. Thus, we have provided for introduction of closely related products to be launched during the later stages of our start-up (see Multi-Product Platform). These derivative products include a balanced product (our Total Market Equity strategy combined with a non-proprietary, fixed-income product), a large stock product (the large cap portion of our Total Market Equity strategy), and an extended market product (the mid and small cap portion of our Total Market Equity strategy). As an investment track record is developed, marketing opportunity expands. Additionally, a successful product can be leveraged into derivative products, thereby increasing asset gathering potential.
A study by Merrill Lynch shows that mutual funds with 4-star or 5-star ratings (the two highest levels) accounted for 74% of net asset flows over the last four years; however, there are virtually no guarantees when it comes to investment performance. This is evidenced by the SEC mandated disclosures attached to all mutual fund disclosure. If a firm takes all the steps to “stack the deck” in its favor, the probability of achieving the desired success is significantly increased. In the following sections we outline a plan that identifies the right people to execute the investment process within an environment conducive to efficient investment management practices. As it pertains to the investment management industry, a properly “stacked deck” (i.e. the optimal organization) is a competitive advantage that cannot easily be achieved by many of the firms in existence today for a variety of reasons.
4.4.1 The Three P’s
There are three P’s commonly associated with investment management organizations: People, Process, and Performance. The prior two determine the latter.
While this proposal highlights many areas (market research, financial projections, etc.), there are only two areas that will ultimately determine the level of success achieved by this group. The first is the people. Bright, energetic, talented, and knowledgeable individuals compose the core of the team presented to you. In addition, research explains that the most qualified investment professionals are attracted to efficient firms that are free from bureaucracy and that align interests via equity stakes. Process is the second critical element of this proposal. Cutting-edge research is provided in support of our portfolio management process. The implementation of our process is maximized by outsourcing virtually all functions not related to portfolio management and research, thereby exploiting the firm’s human capital.