Trends Watch: M&A for Investment Managers

EisnerAmper’s Trends Watch is a weekly entry to our Alternative Investments Intelligence blog, featuring the views and insights of executives from alternative investment firms. If you’re interested in being featured, please contact Elana Margulies-Snyderman.  

This week, Elana talks with Darin Tuttle, Founder & CIO, Tuttle Ventures.

What is your outlook for investment management?

I am beginning to see a shift in the investment management industry. Looking back over just this last year, the headline has been consolidation. M&A activity has steamrolled smaller investment managers and rolled them up in impressive fashion. You don’t have to look far to see a $2.1 billion sale of Wells Fargo’s asset management division or Macquarie’s $1.6 billion acquisition of Waddell & Reed. In fact, 35% of overall wealth management assets are now controlled by just ten firms, according to Citywire Selector.

The big names are dominating, with M&A activity predicted to consolidate through 2021. After all, the desire for quality assets is still in high demand across all industries. M&A has also predominantly been within the same investor population. The big players are still fishing in the same pond.

Bigger does not necessarily translate to better for investor outcomes, especially investors who don’t fit a cookie-cutter definition and have unique needs.

I believe there is a large population of underserved investors who demand specialized investment managers. The future of advisor technology is incredible. This technology allows for better portfolios, deeply customized solutions and an offering that allows smaller investment managers to not only compete but provide better outcomes to unique clients. This includes managing active discretionary investment decisions, trading, managing market risk, tax efficiency, advising on proxy voting and sustainable finance. Specialized managers have continued to show that they are able to generate stable growth and accumulate assets.

What are the greatest opportunities you see and why?

There are always opportunities in the market if you know where to look.

We are strong advocates of basing investment decisions on studies of value rather than wasting time guessing whether prices will be higher or lower next week or next month.

The investor who is more concerned with price than value places little weight on the differing characteristics of industries and companies and that is just not how we see opportunities for the future.

Two primary areas of focus are global themes of cybersecurity and semiconductors.

More than any other country in history, the U.S, has been the greatest beneficiary of technology over the last decade. After all, Facebook, Apple, Netflix, Google, and Amazon are all still U.S. companies (last time I checked).

But there is a trade-off between innovation and security. There is a tremendous investing opportunity in U.S.-based cybersecurity companies for those that have the vision, courage, and patience to invest with a skilled active investment manager.

A flurry of new threats, technologies and business models have emerged in the cybersecurity space as the world has shifted. This is no longer just an IT issue. Executives are taking notice and are willing to pay to secure their network.

A study by business consulting firm Grand View Research claims the global cybersecurity market size was valued at USD $156.5 billion in 2019 and is expected to expand at a compound annual growth rate (CAGR) of 10.0% from 2020 to 2027.

If you’re not paying attention to cybersecurity, then you are overpaying for financial advice.

As a theme that runs concurrent with cybersecurity is the semiconductor industry. Semiconductor opportunities are also there if you know where to look, specifically as just basic microeconomic principles.

Delivery for semiconductors is at a sluggish pace. We’re now at an average wait of more than 20 weeks for new production microchips. This affects many interdependent industries. When demand outpaces supply, prices go up.

The capital-intensive and specialist nature of the semiconductor sector, as well as its concentration in a limited number of countries, opens the table for upside potential investment opportunities to just a handful of public companies.

The downside is that a high degree of cross-country interdependence exposes the supply chain to political risk.

The U.S. Senate passed the U.S. Innovation and Competition Act to allocate $52 billion for domestic chip manufacturing as part of the infrastructure bill legislation.

This type of long-term investment from a sovereign nation is part of a growing overall trend that is a large tailwind for semiconductors. That’s why we are obsessed with adding a semiconductor position to our portfolio.

What are the greatest challenges you face and why?

Investment managers tend to be compulsive readers. For me, that means getting through a stack of reports and financial statements. It becomes an accomplishment in and of itself, which is of course ridiculous. Managing my time between “maintenance” reading and insightful analysis is a challenge. The trouble is that reading for the sake of reading may be of no benefit to an investment portfolio or investment outcomes. The important thing, obviously, is to get something out of what you are reading. Devoting and managing my time to what is most needed and being able to gain actionable market insights is important.

What keeps you up at night?

As the world continues to work through the impact of lockdowns and mandates in the name of public safety, I fear that there will undoubtedly be industries that come out as winners and losers. I stay up at night trying to see how the next decade will look for countries. Governments have issued wide sweeping economic safety nets, trillions in stimulus packages and directed towards supporting industries that could not survive through the pandemic on their own. But I wonder what the impact will be for the citizens of those countries that ultimately will have to bear that burden. Today it seems like the cost of making a poor decision from a policy standpoint is high, and a misstep in allocating trillions could set back future generations in terms of future wealth accumulation and advancement.

The views and opinions expressed above are of the interviewee only, and do not/are not intended to reflect the views of EisnerAmper.