Seven years ago last week, Jack Lowenstein, Geoff Wood, and I were shown into the spare space of what had been the yoga and break-out room of Optimal Funds Management on Macquarie Street.
This little room was to be the new home for our nascent fund-management business, Morphic.
Four flat-pack boxes of IKEA-style “assemble yourself” desks sat in the middle of the room with some detritus of balance balls and old computers. We ended up assembling the desks with a 50¢ coin, though Geoff decided over the weekend to cut the bottom of the desks off with a power saw. It was an improvement.
Last week, Morphic was acquired by Ellerston Capital and today moves into the Ellerston offices, remaining as a team but working as a boutique inside the larger Ellerston business – thus ending this chapter of the business as a start-up and moving to middle age – much like me!
I never thought of myself as an entrepreneur – I doubt my university peers would have nominated me as likely to start my own business. Indeed, the odds of success in starting your own funds-management business are as low as other small businesses. According to a Financial Times article, a third of funds close within three years, with an average life expectancy of five years. Then there is size: by some estimates, more than 80 per cent of funds never reach $100 million in assets.
No wonder a friend, whose fund closed, opined: “You need everything to go right and then you need some luck.”
So, to be here seven years later running more than $170 million of assets, having launched with $5 million, is an outcome against those odds.
Along the way, we launched into Europe one of the world’s first environment, social and governance (ESG) hedge funds, short selling “unethical companies”, before European funds did.
In Australia, we launched the first ethical investing listed investment company in more than a decade to offer private investors a way to invest globally without compromising their ethics.
And there is the not insignificant donation of $800,000 of fees directed to charities, particularly focused on youth mental health.
And of course, there are the investors you meet: the passionate retiree who brings her sons along to the annual general meeting and asks every year about your kids; investors who are out protesting against Adani (along with Jack). It’s where the rubber hits the road of people’s retirement plans, versus the large allocators and consultants one often deals with as a fund manager.
What have I learnt?
- Nothing really prepares you for how hard it is. My wife refers to the business as our “third child”. I think the analogy is apt. If you have children, you will be familiar with the sense that much of the time is spent being “unhappy” – changing nappies, asking them to sit down for the umpteenth time – yet parents rarely, when asked, say they regret having children. Happiness is a transitory thing, but doing something that creates something can be fulfilling, even if it doesn’t always make you happy.
- Don’t do it for the money. Rebekah Campbell wrote this for The Australian Financial Review last month about start-ups. Funds management is no different. In fact, it’s worse – the roles you are giving up are already highly paid, so the opportunity cost is very high. I get asked to meet people who are planning their own fund, sick of the rules and red tape. I tell them: “You think you want to do it, but I’m here to tell you that you don’t. Get a hobby.” I suggest they need to have a clear view of why their fund is manifestly different to what’s already out there and why they believe that will improve investors’ lives.
- Appreciate your support staff. Fund managers, somewhat like footballers, live pampered lives. As the “revenue generators” inside their businesses, the machine is built around them so they can perform. In my previous roles, I didn’t fully appreciate my support staff, from human resources through to sales, and the processing of trades. I’ve had to learn a whole new set of skills to do those roles.
Why should investors back start-up managers?
First, if there is to be innovation or disruption in an industry, it rarely comes from the incumbents. Their business model is to protect what they have and not risk losing profit. In a rising world of artificial intelligence, machine learning and general fund underperformance, the next Magellans of the world are unlikely to come from existing houses.
Second, investors can get access to better pricing. With no brand and no existing clients to risk losing, new funds can offer much better investment terms than existing funds.
Finally, thanks to all those who offered their time, services and advice over the years, but more importantly – my team. The statistics are that young businesses are more productive and innovative than older businesses and this team, against all odds, produces material for investors on par or better than the bigger well-resourced houses they compete against. As Jeff Fenech said: “I love youse all.”
Chad Slater is chief investment officer at Morphic Asset Management.