The art of hiring external managers has, for many investors, meant choosing smaller, investor- owned firms over large, publicly- traded and bank or insurance company-owned managers. The arguments have primarily been around key employee retention and motivation and, to a lesser extent, around alignment of interests with clients.
In the fallout from 2008, we witnessed events that have reinforced the importance of alignment of interests and the value of smaller, employee-owned firms. Large publicly-traded firms and subsidiaries of large financial institutions have had a consistent response to declining assets under management due to negative equity market returns — trimming staff or even putting entire investment management businesses up for sale. The smaller, employee-owned firms are stable, gaining new business and many are taking advantage of the available talent and adding new people to their teams.
There are many factors and beliefs involved in the art of external manager selection but one more lesson learned of late is that there may need to be a much higher value placed on independence and widely dispersed employee ownership.