An artisan with solutions
Where one still finds asset managers attached to banks, the former tend to be junior partners. Not so at William Blair, whose founder always had an ambition both to finance and invest in small growth companies from day one in 1935. “I think that we have navigated our partnership well,” as head of investment management Michelle Seitz puts it.
When Seitz took over the division in 2001 assets under management were $12bn (€7.2bn), contributing 23% of revenue. Today, at $62bn, it makes more than half of the revenues. Growth has come by diversifying both its clients (augmenting wealth, endowment and foundation assets with broader institutional money) and its product range (into non-US equities, which stood at just $500m in 2001).
Performance has helped: at the end of 2013 92% of Blair’s strategies had outperformed over one, three, five and 10 years. But this understates the risks the partners took in these strategy shifts. The international tilt had an emerging markets flavour, and between 1996 and 2001, the S&P 500 outperformed those markets by 140 percentage points.
“Because we were mostly a high-net-worth, endowment and foundation franchise, we often managed 100% of our client’s assets and our desire to establish a footprint in non-US securities was rooted in our belief that it was the right thing to do for them – it wasn’t about asset flows or client requests,” says Seitz. “We globalised our research effort before anyone wanted to buy global in the US, and included emerging markets from day one, long before they were accepted as a legitimate investment class, because we knew this was the way to analyse companies: as a growth investor we clearly saw globalisation in industries like technology and healthcare.”
A firm with a quality-growth investment mind-set, but more importantly a partnership of investor-owners, can recognise the long-term risk of US-centricity above the short-term risk of going global, she argues, looking through “a professional rather than a commercial lens” during “pivotal” periods. Alongside the late-1990s’ international push, these periods include 2004-06, when institutions in Switzerland became the foundation for its $4bn European business; and 2008, when assets halved in a quarter, partners took a hit to their compensation, but infrastructure investment grew and not a single strategy, or distribution channel, was shut down.
It makes Seitz recall a roundtable question she faced soon after she took the reins: How long would you tolerate underperformance of breakevens before shutting a strategy down?
• 2001: Head of William Blair Investment Management
• 1996: Portfolio manager; head of wealth management services and private wealth management, William Blair
• Previously: Senior portfolio management roles with NationsBank
William Blair Investment Management
AUM: $62bn (€45bn), 31.12.13
• US growth and value equities
• International growth equities
• Emerging markets growth equities
• Global growth equities
• Core fixed income
• Dynamic allocation
• Alternative strategies
“I was the last to speak, and everyone before me said maybe two, three, four years,” she says. “We were already in year six for international equities and it never crossed our minds. We never talk about assets under management or sales targets. These are by-products of our success, not measures of it. To put it simply, we aspire to be the kind of company that we want to invest in.”
This requires a significant buy-in from investors, whom the firm is prepared to lead rather than be led by. Extensive customisation, fashionable in today’s industry, is the exception rather than the rule at William Blair. “It does a disservice to the focus of our portfolio managers and can hinder our overall effectiveness for all clients if not properly exercised,” says Seitz.
Similarly, the firm’s first large institutional sub-advisory mandate almost did not happen because the client was ready to hand over $500m for international small-cap growth before really getting to know the firm – Seitz couldn’t offer that much capacity in small-caps, but in any case was wary that money coming in that fast could leave as suddenly. After further discussion, the company in question seeded the more mid-to-large-cap-tilted International Leaders strategy and remains with Blair today.
When investors only sought quality growth, if they genuinely appreciated it as a long-term strategy, then the hot-money problem was rare. Are things different after three years as the sexiest contestant in the bond-proxy beauty pageant? Seitz argues that lower growth expectations and ageing populations make this cycle more durable and structural than that question implies.
“When growth is scarce, high-quality clearly shows a value-add,” she reasons. “Moreover, retirement-savings investors that are de-risking or drawing down those savings, but having to retain an allocation to equities, will want that allocation to be compensated properly for the risk they are taking.”
Nonetheless, while the quality-growth focus has helped Blair gain market share in US equities, de-risking must ultimately be a threat to active equities in general. The firm has considered expanding its fixed-income capability, but it has never been a real focus of development. Instead, its pre-emptive strike came in 2011 with the acquisition of the ex-Brinson Partners value equities and asset allocation teams from UBS.
“By the mid-2000s I had noticed that asset allocation, risk control and solutions-orientation was more advanced in Europe than in the US,” she says. “The greater the need to fund the future liabilities to an ageing demographic, the clearer it was to me that this was the growth opportunity. At the time, I didn’t know exactly how we would use the expertise but I knew we had to have it. It will prove absolutely crucial for the company, akin to growing a non-US capability.”
Seitz works hard to emphasise its complementarity. It fits with the firm’s active-management beliefs – it is research-intensive. There is even a new strategy that combines the best of the firm’s new top-down and traditional bottom-up approaches. But it still feels like a bit of a departure: how does Blair’s highly-artisanal business (what Seitz calls that of the “component provider”) absorb this move into the more collaborative world of “solutions”? Has the firm become a fashion victim, after all?
“There is no question that Blair is a component provider,” insists Seitz. “The dynamic allocation team can be both a component and solutions provider, but while many will take this skill set and try to use it as an outsourced CIO or to compete with consultants, we are clear that we are not in the advisory business – we are a money manager. In that role, better understanding of a client’s broader needs means better ability to offer any of our components in the right context.”
Seitz makes a persuasive case for how this engagement on risk budgeting and modelling benefits the entire firm, not least by fully using the intellectual capital it has built up, compared with the ‘simplistic’ conversations around style boxes it used to have. A recent article describing the New Zealand Superannuation Fund’s allocation of risk capital in the Rotman International Journal of Pension Management, on which head of asset allocation, David Iverson, collaborated with William Blair’s Renato Staub, shows this client partnership at work.
It also sums up Blair’s current business priorities – growing its client service teams for institutions in Australasia and Europe and working on greater traction for asset allocation. The challenge, to which its wealth and foundations heritage could be well-suited, will come in addressing these solutions-based markets with a solutions-style offering while retaining the firm’s artisanal DNA.