The Portable Alpha That Wasn't
A public pension plan is selecting an emerging-markets equity manager. One finalist, a boutique founded four years ago, presents a 10-year track record. The portfolio managers previously ran a similar strategy at a large asset manager, where the composite returned 11.2% annualized over seven years versus the benchmark's 7.8%. At the boutique, the composite has three years of returns, 8.1% versus 7.9%, and assets of $600 million. The firm claims GIPS compliance and says the prior track record is 'portable' because the same three decision-makers moved as a team. However, the prior firm's compliance report lists different portfolio managers, and the boutique's composite includes several accounts funded by seed capital from the founders. The plan's consultant is concerned about survivorship and portability. The committee must decide whether to hire the boutique, request more information, or reject.
1. What are the key conditions for presenting a prior-firm track record as portable, and does this case meet them?
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Portability requires more than a moving team. The prior-firm track record can be presented only if the same decision-makers, process, and resources are intact and the firm has records to support the performance. GIPS requires that the prior performance be clearly labeled, that the firm disclose why it is portable, and that it not link the records unless the conditions are met. Here, the prior firm's compliance report lists different portfolio managers, which directly challenges the 'same team' claim. The boutique should provide a team history showing who made decisions, whether the prior composite was managed by the same individuals, and whether the prior firm's records are verifiable. The seed-capital accounts also raise questions about whether the composite represents actual client assets. Until these are resolved, the committee should not credit the seven-year prior record.
2. How should the committee treat the boutique's three-year composite and seed-capital accounts?
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The three-year composite is a short sample and should be treated as preliminary. Seed-capital accounts funded by the founders may not be arm's-length client accounts; they can be managed differently, may not pay fees, and may be used to incubate a strategy. The committee should ask for a composite listing that shows all accounts, their inception dates, fee status, and whether any accounts have left the composite. It should check for survivorship bias: did underperforming accounts close? The composite should be asset-weighted and include all discretionary, fee-paying portfolios. If the boutique cannot provide a GIPS-compliant presentation with a complete list, the three-year record is not reliable. A short record is not disqualifying for a new firm, but it shifts the burden of proof to qualitative factors: team, process, and risk controls.
3. Recommend next steps for the committee.
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Request a GIPS-compliant presentation for both the boutique and the prior firm, a team history with decision rights, the prior firm's composite definition and verification letter, and a full account list for the boutique composite. Ask for references from clients that have been with the boutique for at least two years and from the prior firm. If the prior-firm record cannot be verified or the team continuity is not demonstrated, reject. If the records are clean but the track record is short, place the boutique on a watch list and consider a small seed allocation with a 12-month review. Do not hire on the basis of the 10-year record alone. The decision should be documented with the portability tests and the specific evidence that was missing.