Bigger Isn’t Always Better

We think it makes sense to study your competitors. As analysts, we closely study the competitive threats facing the companies we research. And we study our money management competitors for lessons in what to do (ideas from great investors) and what not to do.

Falling in the “what not to do” bin for us is the tendency to automatically equate firm size with investment excellence. Mega managers often take great pains to highlight how big their businesses are (assets they manage, number of portfolio managers and analysts, number of offices, number of countries in which they invest in, etc.).

Smaller firms tend to have a few potential advantages in seeking strong investment results. We’ve previously discussed the advantages that smaller asset groups have in pursuing investment ideas of all sizes. Clients of smaller firms also can benefit when their investment teams are material owners of the firm and invest alongside their clients.

Finally, think about fine and very well-known restaurants. Do you think Wolfgang Puck is personally making your dinner at Spago (if that’s still around)? He might be for his most famous patrons, but maybe not your dinner (sorry Wolfgang!). Large firms can have prestigious names on their door that may or may not work on your portfolio. Most smaller firm leaders directly analyze and manage all of their accounts whether you are the biggest or smallest investor.

Why All Cap?

Triad’s primary investment strategy is known as an all-cap equity strategy. In more straightforward language, it means we are able to invest in small, mid-size and large companies.

And we do. But why?

It gives us a wider group of companies to choose from. We believe that good companies come in all sizes. As we manage concentrated portfolios of our best ideas, it makes sense to draw those ideas from as wide a pool as possible. Given that we require an estimated 15% rate of return from each new investment in the portfolios, not too many companies are investable at any one point in time.

Something else, that we’ve seen happen in our careers at larger investment organizations plays into our appreciation of all cap investing. Mega firms with hordes of analysts can develop the institutional imperative to keep everyone happy by buying something from each sector since they have people working there. It’s human nature to want to see your ideas in the portfolio.

But, in our view, the right thing to do for the client is to avoid areas when our investment criteria aren’t being met. Zero utility company investments? That’s OK with us if there are no ideas there (and no upset utility analyst to avoid eye contact with in the hallway). Since we are all-cap investors, we can do whatever makes the most investment sense.