Some wealth managers brag about their assets under management and advertise when they hit “milestones” like $1 billion. Not so Palm Equity, a relatively new Florida-based outfit.

Some wealth managers advertise their assets under management and mark milestones like hitting $1 billion. Not so Palm Equity, a relatively new Florida-based outfit that takes a very conservative view on asset growth – although not when it comes from rising investments of course.

The firm, founded in 2008, is not yet well-known outside of its base, but it recently made its first hire in the shape of Christopher Battifarano as partner and chief investment officer. Battifarano came to the business after many years with GenSpring Family Offices.

Palm Equity’s founder, Grant Mashek, has a strong background managing assets for select wealthy families, having helped build New York’s CSM Capital Corporation “from the ground up” to what it was when he left, says Battifarano. Mashek founded his own business because “he wanted to do something more entrepreneurial,” and on a more personal note he was keen to relocate to Florida.

At the time, he discussed the decision with some wealthy families and came to an arrangement where he would run money for them and, if they were happy with the results, they would formalize the arrangement, making Palm Equity their multi-family office. “He hit that milestone early this year,” says Battifarano, which helps set the context for his own move to the firm in October this year.

Investment niche

The firm is carving out a niche for itself in manager selection, focusing on smaller and emerging managers (although not exclusively). This ties with its conservative approach to AuM growth, as being a huge allocator affects how investment decisions are made, he says.

“There’s been a lot of academic studies on this…most of these [large] allocators are precluded from these smaller managers.”

It’s partly about scale: a large allocation is just too disruptive for some small strategies. Likewise, it’s very time consuming for a large allocator to make many small allocations, given the research and due diligence requirements.

But it’s also about agency risk, says Battifarano. If you’re attached to a large, well-known brand there’s a lot at stake beyond the money that’s being run. This almost distorts the risk side of the decision of investing because, while a larger fund may not actually have a better chance of being a good investment, it is within the consensus. And if you go out on a limb for a manager and are wrong, you could be vilified, whereas if you’re wrong within the consensus there's less personal blame. “It’s a tougher thing to do,” he says.

In Battifarano’s view that’s a problem, because he believes the effect of a fund’s size and age on  performance is “enormous.” He cites some research to back his views up.

PerTrac has been tracking the issue for six years now, covering data from eight major data providers on the sector and correcting for duplication. Its latest study, which encompasses the years 1996 – 2011, found that the average small fund outperformed the average mid-size and large fund in every year except three: 2008, 2009 and 2011. Whether the fact these years are all so recent is important, it is too soon to tell.

Since 1996, PerTrac has found that the cumulative return for the average small fund has been 558 per cent, compared to 356 per cent for mid-size funds and 307 per cent for large funds. The annualized standard deviation for small funds is larger, at 6.92 per cent (large: 5.95 per cent).

When it comes to age, the average young fund has outperformed the average mid-age and average tenured fund in 14 out of 16 years since 1996, including every year after 2003. It’s about “identifying these managers at the right spot in their career,” says Battifarano.

As to why that might be, he cites the hunger for success – on which the “American dream” was founded – which is more likely to affect newer managers as a possible contributor.

The question is, though, if running smaller volumes of assets has its advantages, why are assets under management such a prized figure within the wealth management industry? One reason of course is that it’s a proxy of how a firm has grown and what its revenues are (although it could be quite misleading on this count). However, on its own it says little about the quality of the client relationships.  

Battifarano believes firms are keen to emphasize this because “a lot of clients like it – there’s comfort in numbers." He says "it’s like stocks that go up – they were better value before they went up but people prefer to buy them after.”

Cost is another factor. Scale can help multi-family offices (and indeed single-family offices) deliver some services at lower cost.

On the investment side Battifarano says small firms can be just as effective in negotiating fee breaks for their clients as long as the manager they’re investing in is emerging/small. “You’re still able to negotiate those fee breaks…it’s relative to the size of the fund,” he says. After all, an allocation of a few million will be very important for some managers, and a drop in the ocean to others.

The litmus test

Size is not the only misconception around when it comes to wealth management, says Battifarano, who is keener on boutiques than behemoths. Who owns a wealth management company is a “litmus test” for him.  

However, he acknowledges that clients don’t necessarily feel the same way. The benefits of working with an employee-owned firm often “need to be explained to them,” he says. The tendency can be to think “a big-branded firm can do a better job for me.” He says that while people don’t think this way in other areas of life – for example, with restaurants - with wealth management “people can fall into this misconception.”

“We always plan to stay independently owned,” he says, joking that the firm has “no visions of grandeur” – something which he thinks is anyway less applicable to the pure advice industry than investment management.

“I think if you look at firms that are independently owned they’re much more careful about not growing assets too quickly,” he says. “We’re running $225 million today and are profitable. We’re keen on growing the business but we’re in no rush.

“If you have clients who have joined you for the wrong reason it can lead to problems down the road,” he adds.

And it also applies to acquisitions: “The plan now is not to grow by acquisition…it’s a lot trickier than some people make it out to be,” he says, citing culture as the main barrier to real success and integration when companies merge.

As such the firm hasn’t set itself strict goals or targets. He says he doesn’t know yet the "perfect" AuM size for this strategy; it’s not something he’s figured out specifically. But he doesn't believe it scales to levels of $20 billion, or even $10 billion. And it won’t be the next big brand in wealth management. “To me this business does not scale to those sorts of levels,” says Battifarano.