It is undoubtedly true that active management is under pressure, some of its pain self-inflicted. The industry's response, greater scale, cutting costs and reducing performance volatility by increasing the range of activities is just what the micro-economist ordered. The problem is that while that prescription works well for today's shareholders of investment firms, it does little to increase returns for their clients in the immediate term and poses questions about the future. A firm engaged in slash and burn across the profit and loss account while preoccupied by the mammoth systems integrations and other headaches that mergers bring seems an unlikely place to patiently foster the investment skills that their clients will need in decades to come. When volume becomes a preoccupation, there is a risk that people and talent become commodities, mere ’revenue generators'. Also, the drive to remove the cyclicality from earnings, that dilution of unity of purpose, brings to mind the concept of antifragility. By removing the stressors and feedback mechanisms in complex systems, such as performance cycles, you may make the system as a whole less robust. We have a relatively recent example in what happened when banks came to favour volume over quality under the illusion that credit risk could be divided up and consumed according to taste. The effects may be less pronounced in asset management, but that does not mean that they won't exist. The long term cost of a more robust earnings line may be mediocrity of investment results, further galvanising the shift to passive investment.
Why should this matter to us? For our own partnership, the ability to thrive and grow organically through several generations of Partners is not exclusively a function of structure, nor a direct result of scale. There have been many successful investment partnerships, many of which evolved into or have been subsumed within the mega firms that now dominate our industry. Our success as an independent Partnership is as much a product of an enduring shared set of beliefs and a common investment philosophy centred around long-term growth stocks and good long-term capital allocation. We accommodate variation and self-expression, but we enjoy unity of purpose.