Himali Kothari, Founder of Aquamarine Value, is having a conversation with Anand Ramachandran, Partner and Fund Manager from River Valley Asset Management in Singapore. River Valley Asset Management started at U$10 million in 2014 and as of today, their AUM is U$60 million.
How did River Valley Asset Management get started?
The Partners in the firm have all worked in large global funds for over two decades and felt a need for stepping out of the straight-jackets which institutional asset management firms are finding themselves in. Large firms increasingly manage assets in specialised pools trying to outperform narrow market benchmarks while the return vs risk trade-off is left for the asset allocator or investor to manage. This creates dissonance as, during periods of market drawdowns, many investors feel disillusioned if their managers make a loss but claim they outperformed the benchmark. Secondly, active managers are finding that exchange-traded funds replicate narrow benchmarks cheaply, putting pressure on their revenues. In the past, as investors when we looked around the marketplace to invest our own capital, we could never find funds which could deliver the return expectations we were seeking. It was easy to find funds focused on themes such as a China fund or an India fund or a technology fund but very few mainstream funds focused on absolute return across sectors and themes. Most absolute return funds were in the hedge fund space employing complicated strategies but there were limited funds which employed a plain vanilla bottom-up long-term oriented multi-asset investment strategy. We felt that there was a need for delivering steady absolute returns, taking focus away from index-based benchmarks and delivering on a client’s absolute return expectations, ultimately the true benchmark. The result of this is River Valley Asset Management. The investment philosophy of the firm is a gist of how any professional investor will invest their own personal wealth, absolute return with low volatility. We believe in an active security selection process and are not straight-jacketed by the boundaries of benchmarks and asset classes. Our objective is not to beat benchmarks but to beat our clients’ return expectations without taking excessive risk. This approach takes away the complication of asset allocation and investment decision making which many investors want financial firms to take responsibility for.
What was your approach in raising seed money for the fund?
Our initial source of capital was friends and family as well as referrals from professionals who understood our philosophy and objective of delivering consistent absolute returns. In the initial days, we did not approach institutions because from past experiences, we knew that an established track record and an ability to demonstrate delivery of the investment process with proper systems and controls were key to attracting institutional money. As we started building a track record, we have seen increasing traction with institutions who are now doing due diligence on our firm.
Who were your initial hires? After your initial hires, did you wait until assets grew before expanding and, if so, what key positions were the hires?
We are a small firm with just five professionals. A lot of our activities were outsourced from day one and our belief is that as a firm we need to focus on the activity which adds the most value, i.e. investments. In the beginning, the firm started with two partners with the third partner joining subsequently. Other than investment professionals, from day one we had a dedicated person responsible for operations and compliance. Once we got our initial pool of capital, the first hire was an associate who could help us with middle office systems, financial modelling and record keeping. Our future hiring will be a function of our asset growth and we have a long-term plan whose objective is to grow headcount in line with asset growth mainly to ensure that client servicing is appropriate to the level of assets.
Was location a factor in your decision for the use of service providers for the fund?
Yes, location was a factor but, in addition to location, we focused on cost and the ability to provide adequate service for our clients. We were conscious that as a small boutique we may not get enough resource allocation by service providers and that was a key factor we took into consideration.
Did you outsource any middle, back-office processes from the beginning as you ramped up your AUM? If so, was the fund’s breakeven point a determinant or some other factor that was the reason to outsource?
We understand that scale matters in a lot of routine functions in investment management firms and so from day one, we outsourced the processes we thought could be done more efficiently by third-party providers. These include activities such as administration, trade settlement, accounting, technology support and compliance. We also understood that as a small boutique having well-recognised third parties supporting us on various functions would give investors added comfort in investing with the firm. The fund’s breakeven was definitely a factor under consideration and it was something we discussed with our outsourced providers, though that was not the primary consideration.
This is an excerpt from a 2017 Yale Endowment brochure: “Start-up and early-stage firms play a central role in the Endowment’s sourcing process. While many institutions seek established managers with long-standing audited track records, Yale keeps an open mind to nontraditional firms and looks beyond standard metrics to assess the integrity and skills of investment professionals. Yale pays particularly close attention to start-up and early-stage firms run by seasoned principals, believing that investment talent and entrepreneurial drive outweigh the risks of backing an unproven firm”.
Do you have any opinion on this from an emerging manager viewpoint and can you share your firm’s experience with allocators?
Our challenge with allocators is that while they may understand us and also like us during their due diligence, most of the investment allocation is very siloed and follows a cookie cutter allocation process, akin to what I call as “tick the box approach”. We struggle with this approach as what we are looking to deliver from our investment process straddles multi-asset class boundaries. Allocators typically classify managers by putting a manager into a particular asset class bucket and comparing funds with one another in the same bucket. They try to pick the best manager within a bucket while we would want to be picked across buckets on the pure merits of our risk-adjusted returns. A comment from one of the third-party agencies in Europe who has been tracking us for a long time highlights this dilemma: “What you guys do from a quality perspective is way above what I am used to seeing normally, but the challenge that I find is how to classify and present you and moreover your small size also does not help with that”.