Having spun out of the Pitcher Partners Sydney office late last year, Viola Private Wealth brought on former Kelly+Partners Private Wealth head of alternative investments Daniel Kelly in February to head up its investment offering to clients.
In less than three months, the chief investment officer said he’s received in the range of 150 pitches from fund managers looking to partner with the firm and get their offering in front of a high-value client base.
The perfect storm of a newly established firm with a large number of high-net-worth clients that just hired its first CIO has led to what Kelly told ifa is the “largest influx of fund managers that I’ve ever seen in my entire life”.
While this is an enviable position to be in – and one that opens a broad range of potential options that can benefit Viola clients – it has also clarified that far too many pitches are well wide of the mark.
“They send us pages and pages of material, as though that’s a good first introduction,” Kelly said.
“I’d be reading hundreds of pages a week just to work out whether a fund’s good or bad. We need something more concise.”
Noting that while these issues are not new to fund pitches, the “pattern recognition” becomes much easier when taking in hundreds of examples.
“There are some that do it really well, but it probably comes from a lack of empathy and understanding that your pitch deck is not the only one I’m looking at this week,” Kelly added.
“[Fund managers] need to have the context that it’s you and thousands of others that are trying to get access to groups like ours and inundating me with a tonne of with material up front, it makes it really difficult to easily sort and sift through managers.”
Likening the process to a dating app, Kelly said advice firms need to know what a manager’s “green flags and red flags” are before getting deep into due diligence.
“Dating apps have some of the main material that a male or female is looking for, like age, your job, your interests, you like dogs or cats – you see that on the first screen before you decide to book in a date,” he said.
“Then before you decide to get married, you do all of your deep due diligence, but you’re just looking for an upfront baseline compatibility.”
Ultimately, putting the vital information for decision making at the front of a pitch saves both parties a lot of time, Kelly said.
“Our full diligence process, I will probably spend upwards of between 40 hours on a fund. We go deep once we’re confident that we at least like the fund and there’s a better than not chance this is going to come out favourably,” he added.
“We’re looking for red flags, so they’ll get the chance to throw as much as they want at us and we’ll ask for even more than they have. But it doesn’t start there, because otherwise, we end up spending 40 or 50 hours on a climb that I might get 30 hours in and go, ‘Oh my God. If I had done this upfront, I could have saved myself all of this time’.
“We’re trying to remove that opportunity cost of barking up the wrong tree.”
He noted that there are “some fantastic examples of firms that are doing it well” and go beyond just sending across a load of information that isn’t useful for the advice firm.
“They don’t start just by attaching PDFs – sometimes unsolicited – it’s more of an actual conversation and an actual partnership,” Kelly said.
“Even if maybe they don’t have a fund that we’re like, if it’s a firm that’s a multi-asset firm, a big asset manager, they’ve got a number of different arrows in the quiver. So, rather than just assuming that you want to see a private credit fund, what are you guys looking for? Do you have any gaps? Is now a good time?”
What can advisers do to filter out funds?
Unlike Viola Private Wealth, most financial advice practices don’t have a CIO in place specifically to make these decisions and perform the due diligence on a wide range of potential partners.
According to Kelly, this makes it even more important that fund managers are pitching correctly but also that advisers know what to look out for.
“It’s especially important for firms that don’t have, if you want to call it like a research function, whose dedicated role it is to look at this type of stuff,” he said.
“If you’ve got an independent financial adviser or a planner or something like that, that is the one that’s making the product decisions, as well as investing the money, they’re probably not going to have the time or resources to do this, if we’re just being honest with ourselves.
“Some of them may, but they’ve got a split role. They’re probably going to rely more on Lonsec and Zenith ratings and things like that to fill out the full due diligence process if they don’t have someone internally doing it.”
There are essentially five or six categories, Kelly added, that would form the bulk of the information an adviser needs to decide if it wants to go to the next step in the process with a fund.
“To work out whether or not they are interested in taking a further look, it literally comes down to asset class, sub-asset class, target return, liquidity, is it open ended or closed ended, when does the fund close for new investment or is it ongoing, is it Australian dollars, is it wholesale or retail?” he said.
“If the fund manager said nothing else besides those things, I think they could probably screen out 80 per cent of the opportunities they see, because they’ll know straight away.”
For instance, if an adviser isn’t looking for closed-ended funds because their clients don’t want to lock up money, it wouldn’t matter that a fund has a 25 per cent target return.
“[Advisers] know what their clients want,” Kelly added.
“Those are the main attributes and then from there you can probably delete a lot of emails and get rid of a lot of fund managers. Then you might narrow down the funnel to maybe 10 per cent of what’s coming into your inbox and that’s where you spend a bit more time.”
Additionally, while it “sounds obvious”, the CIO explained that the whole reason to work with a fund manager is “their ability to outperform whatever the passive option is”.
“We’re very brutal with our expectation of alpha over multi-year periods,” Kelly said.
“We don’t necessarily assess whether a manager’s beaten the index or the benchmark over a six- or 12-month period, because that’s too short. But over three, five, 10 years, or since inception, if the manager is not producing outperformance, then why are you looking to employ that manager?
“Because there are others out there that have done it and will do it, and you might have to look a little bit harder. Something like 90 per cent of fund managers don’t beat their own benchmarks. Markets have become so democratised that you can choose to just work with the managers that actually do what they say they’re going to do.”
