Commonfund Forum 2024 convened a panel of emerging investment managers to spotlight their unique investment approaches. Moderated by Caroline Greer, managing director at Commonfund OCIO, the panelists were: Renee Yao, founder of Neo Ivy, Pardon Makumbe, founder of CRE Venture Capital, and Arthur Young, founder of Tensile Capital. The panel explored what emerging managers are and some of the key attributes that can support their alpha generation.
What are emerging managers?
Commonfund CEO, Mark Anson, spearheaded the term “emerging manager” around year 2003, to focus on relatively small managers that often have a strategic niche. While there are many definitions of emerging managers, “relative” is the key word. A billion-dollar fixed income fund is considered small, so may be in the emerging category, whereas a billion-dollar frontier equity market manager would be considered large. The panel speakers’ investment approaches spanned Africa-centered venture capital, an AI-derived quantitative hedge fund, and a fundamental equity manager, with each illuminating how their relative size can serve as a source of alpha, enabling them to identify and access opportunities that larger firms might miss.
The demographically diverse panel reflected the reality of overlap between emerging managers and diverse managers. Conceptually they are distinct groups, with the former focusing on size and the latter on demographics. However due to a confluence of factors, not least historical wealth inequalities and the biases that constrain access to capital, there is an overlap in which many emerging managers are also diverse. The recognition that less than 2 percent of assets are managed by women and people of color, as well as broader DEI initiatives, have contributed to an increased demand for diverse managers - including implementation of diverse manager targets or other commitments in the Investment Policy Statement (IPS) – a trend we have documented in Commonfund’s benchmarks studies across the nonprofit institutional investor space.
Here are three things we learned from the panel about the keys to success for emerging managers today:
Depth vs. breadth. The success of emerging managers across asset classes and strategies proves that bigger is not always better. Both Makumbe and Young emphasized that the limited number of investments they make are a critical part of their strategy, as each one is rooted deeply in relationship building – with both LPs and CEOs – as well as longer-term strategic partnerships and activism. These tactics require a depth of research that might serve as an opportunity cost for bigger managers that cast wider nets. Between research, relationship building, and active participation in the growth and development over time, these strategies would not be feasible for funding “even thirty companies” per funding round. That inherently caps the asset or portfolio size these managers can sustain. Makumbe suggested this strategy can best capture the power law of returns in venture capital, in which a small number of companies drive the bulk of returns.
First-mover advantages. Yao runs a small, highly specialized quantitative AI hedge fund. Like Makumbe as a venture capital firm focused on the African continent, Neo Ivy did not wait for the rest of the industry to dive into a relatively unchartered territory. Growth in AI-driven strategies might be in early stages, potentially limiting the size of any one firm. Yao explained that machine learning was previously used to detect patterns based on prior data, but those patterns might not be relevant for the future. Now generative AI can spontaneously learn to create new predictions and allow the team to stay on the cutting edge of market opportunity exploration – aligning with the first mover mentality. This helps the firm navigate any rapid unexpected market swings that may arise, from pandemics to geopolitics; whereas Makumbe sees vast opportunities in African countries on their paths to industrial development. This sets their team apart from those following the more well-trodden path in places like Silicon Valley. In these cases, alpha is generated by bridging gaps across continents, having in-depth long-term vision and collaboration with firms, or using the latest technology.
Culture, competency, and cohesion. Each panelist described ways in which their team is a strategic input into their strategy. For Makumbe, that involves working with a team that’s local to, and more deeply understanding of, investment opportunities part-way across the world. All panelists emphasized having a relatively small, tight-knit team with diverse backgrounds, capabilities, and ways of thinking as critical to staying on the forefront of their market opportunities. That might look like bringing together a multi-disciplinary team to build leading technology or dispersing geographically to make hyper-local connections in an emerging market. The often-touted benefits of diversity for return potential rings true in the cases of these managers – their relatively small and intentionally constructed teams contribute to the ability to find often unrecognized opportunities. It doesn’t hurt that investors are increasingly aware and interested in these benefits.
To learn more about the program and view additional Forum Spotlights click here.
