FAQ for Investors
What performance advantage have emerging managers succeeded in generating? Is there a performance advantage across asset classes, or do emerging managers perform better in some asset classes than others?
How does Progress define "emerging manager"?
Progress defines “emerging manager” as a registered investment advisor that has at least 51% employee ownership and $2 billion or less in assets under management at the time of the initial evaluation. For inclusion in the Progress proprietary database, we use these criteria for all managers, regardless of ownership type. Consistent with our founding focus, we also include all women- and minority-owned investment advisors regardless of size. More recently, we have expanded our focus to include emerging products from some of our more established emerging firms.
Emerging investment firms tend to be companies where investment performance takes precedence over asset-gathering, where niche or innovative investment strategies are designed to capture unrecognized market inefficiencies, and where people are highly motivated to succeed through ownership structures representing financial incentives as well as the psychological incentives of working within an entrepreneurial culture. Emerging firms frequently are still emerging precisely because they emphasize performance over asset-gathering - in fact, the very reasons why these companies offer significant potential often are the same reasons why they have not yet been discovered.
Does Progress fund only minority- and women-owned (WMBE) investment firms?
No. Our funding approach is inclusive. We research all investment companies with less than $2 billion in assets under management, and we fund managers, regardless of gender or ethnicity, based on the managers' ability to generate consistent superior investment returns for our clients.
Does Progress fund emerging investment managers outside the U.S.?
Yes. Progress considers and evaluates all emerging talent around the world, and based on the client mandate, would fund a non-U.S. based manager. The Progress database of emerging managers now includes non-U.S. companies that meet our preliminary selection criteria.
What performance advantage have emerging managers succeeded in generating? Is there a performance advantage across asset classes or do emerging managers perform better in some asset classes than others?
Numerous studies by Progress and others indicate that emerging managers tend to perform better across asset classes — with similar or less risk than larger, established firms. Please contact us if you would like a current bibliography of research on this topic.
If smaller, entrepreneurial firms possess a performance advantage, then why do so many investment firms today strive to become big?
Growth is the natural path of success, and size confers undeniable advantages, such as capital, resources and stability through diversification of risk. But with the growth of any business there almost always is a point of diminishing returns where large companies lose their edge and focus simply by virtue of being too big.
In the investment business, this point of diminishing returns happens when asset-gathering and bureaucracy begin to stifle client focus and alpha generation. This is why so many successful large, multi-product investment companies have restructured themselves as boutiques operating autonomously under the umbrella of a larger organization. This also is why top-performing portfolio managers at larger firms frequently leave to form their own investment companies, providing a steady stream of experienced new talent.
What is the composition of the emerging manager universe today? How many such emerging firms are there, and which asset classes do they offer?
The Progress database currently includes over 900 managers with 1,900+ products in traditional and alternative asset categories. Products span the full spectrum of traditional equity and fixed investment strategies along with alternative strategies such as hedge funds, fund of funds and private.
How is the universe of emerging managers today different than in 1990, when Progress was founded?
In 1990, we launched the business of managing emerging managers with 80 firms in our database, or approximately 10% of the companies we track today. These early emerging investment managers mainly offered traditional equity and fixed income products. Today, the Progress database includes talented, experienced emerging firms operating across the risk/return spectrum in every asset class.
Then, the market sought out emerging firms primarily to meet a need for diversity in their lineup of investment managers. Now, while diversity still is an important ancillary goal for some investors, the primary goals are portfolio diversification, new ways to generate alpha, and the potential performance advantage of smaller, entrepreneurial investment firms.
When our company was born, “small” often was incorrectly perceived as synonymous with poor quality, lack of experience and corresponding high risk. In the middle of the first decade of the 21st century, “small” has an entirely different connotation. Most emerging investment firms today are run by experienced founders and portfolio managers and have a track record of more than 10 years. These are companies with a history of profitability and at least three to four employee owners:
Experience and Longevity
- 76% of key portfolio managers have 16-25 years of experience before working with an emerging firm
- 62% of key portfolio managers have more than 25 years of experience
- 70% of emerging firms have been in business for more than 10 years
- 33% have been in business for more than 15 years
- 70% have three to four employee-owners with a median firm size of 10 employees
What kind of information advantage — i.e., competitive edge that translates into superior returns — do emerging firms offer investors?
Emerging firms offer a competitive edge in three areas: skill, access and execution. Skill takes many forms, with strategies based on primary fundamental research, behavioral finance, quantitative factor models, forensic accounting, economic forecast generation and technical analysis. Access can provide an information advantage to emerging managers through their experience in complex markets such as emerging market equity, emerging market debt and global inflation-linked bonds. Execution advantages include proprietary global data, protective sell strategies and electronic and other private trading networks. Managers gain an execution edge, too, simply by working harder and by being more nimble and less complacent in the day-to-day implementation of the investment process.
Why can't we, as a large plan sponsor, invest directly in emerging managers? What advantages does Progress bring to the process of investing in emerging firms?
Plan sponsors can invest directly in emerging managers, and some do. But others prefer not to — especially during the earliest stages of an emerging firm's life — due to asset size restrictions, time constraints and the need to diversify the business and investment risks associated with investing in early-stage investment companies. Studies prove that “small is beautiful” when it comes to performance, and experience has shown that diversified is beautiful when it comes to harnessing the performance advantage of emerging managers in a risk-controlled manner. Progress provides an expert, one-stop source of emerging manager talent. We offer a diversified, risk-controlled portfolio of emerging managers, and we provide constant oversight based on years of exclusive focus on investing in emerging manager-of-manager portfolios. In fact, many Progress clients do ultimately invest directly when the emerging manager(s) “graduate” from a Progress portfolio relationship to a direct client relationship.
When do emerging managers "graduate"?
Emerging managers who are candidates for graduation are determined through an evaluation by Progress, with input from the client. Progress often helps clients craft explicit policies defining when the emerging managers in their portfolios will be considered candidates for graduation to direct client relationships. Graduation policies typically mandate that a manager attain a certain level of assets under management and a track record of superior risk-adjusted performance.
Describe Progress' approach to identifying emerging manager business risks. What are the warning signs, and how do you prevent your clients from losing money?
Business risks can be greater than investment risks for emerging managers. While a majority of emerging manager founders and portfolio managers have investment experience, many are running their own business for the first time. That's why our manager selection process includes people and organizational stability as scoring criteria along with the performance track record and the investment process.
Experience has taught us that organizational problems, if not diagnosed early and corrected decisively, can result in weak investment performance. Warning signs are rapid growth without corresponding infrastructure enhancements, sudden changes in key personnel and any unexplained shift in portfolio structure that is inconsistent with the stated investment process.
During the history of the firm, Progress has funded over 100 managers, many of whom have graduated to direct relationships with our clients and, inevitably, some of whom were terminated due to irreparable process or organizational shortfalls. In most cases, the terminated managers demonstrated signs of organizational instability before there was a corresponding decline in the performance numbers. But in some cases, process inconsistencies — when examined closely at the root cause level — proved to be red flags signaling problems affecting the business as a whole.
To protect our clients, we control risk at every step of the investment process, from manager selection to portfolio construction to portfolio rebalancing and manager termination. We have daily access to the managers' portfolios, and portfolios are monitored by our investment analysts, portfolio administration, and compliance for adherence to client guidelines. The administrative team reports to the investment team any deviations from guidelines. Significant or repeated deviations are cause for a manager to be put on the Progress Watch List and could result in termination. In addition to formal oversight measures such as these, our practice of providing assistance to the managers [link to Step 4 under “Investment Process”], serving as a partner in establishing and maintaining best industry practices, helps Progress anticipate potential risks.
How does Progress determine when it is necessary to terminate a relationship with a manager?
Our clients value our ability to identify manager problems quickly and, if necessary, fire a manager expeditiously. Managers are terminated when they demonstrate: (1) persistent performance shortfalls versus benchmarks and peers; (2) inconsistent investment process implementation; (3) severe organizational issues, or (4) regulatory sanctions or legal proceedings.
How has the Progress investment process been changed or enhanced over the years? What prompted these changes?
Over time and with experience, our investment process has been strengthened through a more rigorous manager termination policy, tighter integration of qualitative and quantitative decision factors, and technology enhancements that provide a more detailed, timely picture of underlying manager and total portfolio risk exposures.
Can Progress meet the requirements of a socially responsible investment mandate?
Yes. Progress believes in doing well by doing good. We can build socially responsible investment programs to fit each client's specific objectives, and we currently manage portfolios to fit client-specified socially responsible guidelines. Our process not only allows for screening out ineligible investments based on a client's criteria, but also can be inclusive in selecting investments that promote the social objectives a client wishes to support — investments in companies that seek to promote a healthy environment, for example.
What is your client service model? Who is responsible for ensuring that client expectations are met?
Every Progress client is served by two client service experts — an external relationship manager and an internal client service professional. The external client relationship manager provides an important source of continuity, ensuring that client expectations are clearly defined and systematically communicated. The internal client service professional serves as a central point of contact.
The internal professional ensures that the client's reporting needs — scheduled or otherwise — are met on a daily basis in a responsive manner. Through the internal client service professional, clients can receive information from all other departments and professionals within the firm easily and efficiently, including our back office, the chief executive officer, the chief investment officer and all others.
Another advantage of this model is that, with one internal and one external client service professional, our senior investment team can focus on selecting best-in-class managers and building robust client portfolios. Senior investment professionals, however, are involved in the ongoing communication of investment strategy and results, and they attend all formal client meetings where the portfolio will be discussed.
The Progress client service model is designed to fit each client's explicit policy and preferences. Our goal is to serve as an extension of staff, exchanging resources freely with clients. The Progress Plan Sponsor and Emerging Manager Conference, for example, serves as a forum for plan sponsors and emerging firms to share ideas on issues ranging from hiring and retaining the best people to nascent investment strategies to best practices in compliance.