Willow Oak Asset Management 2Q20 Letter: Finding Emerging Managers

Willow Oak Asset Management commentary for the second quarter ended July 30, 2020.

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Q2 2020 hedge fund letters, conferences and more

Willow Oak Asset Management: Overview

The second quarter was one of the most consequential time periods in American history. Risks that existed in the economic and political systems revealed themselves during the quarter due to the COVID pandemic. The stock market crashed. The Federal Reserve and Treasury took the playbook from the 2008 economic crisis and rapidly upsized it. The stock market then reacted swiftly and, amazingly, certain indexes reached new all-time highs despite the economy being closed in most major metropolitan cities.

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The volatility caused any given day to provide drastically different results. Investors in both Willow Oak Asset Management’s parent company and in our affiliated funds should keep in mind that the last day of a month, quarter, or year is completely arbitrary. We are looking for investors who have a multi-year and multi-decade investment time horizon. The value of an investment on, say, May 31, 2020, is completely irrelevant unless there is a need to liquidate the holding.

For Willow Oak Asset Management, the quarter was an economic success. More importantly, the activities we undertook this quarter will define the long-term future of the company.

Willow Oak Asset Management 2025

In May, we brought together our employees, outside advisors, and the directors of Willow Oak’s parent company for a planning session to discuss and define the company’s long-term goals. We have built an incredible ecosystem of investment managers over the past four years, and we wanted to determine the best ways to expand the resources Willow Oak Asset Management can provide to these managers.

The fundamental issue for sub $100 million managers is operational support and the distractions associated with non-investing activities. The investment managers who are in our ecosystem, and those whom we seek to attract, are solely focused on long-term investment returns. They want to get to an acceptable size for sure, but these are not managers who are interested in being asset gatherers.

I personally think the best way to obtain great, long-term investment returns is to have a small investment team. In many cases, this is one person or one person with one or two analysts. That one-person investment committee, as my friend Scott Miller calls it, allows for rapid decision-making and a strong commitment to portfolio holdings. These managers do not outsource their analyses or discipline. They have a significant amount of their own net worth in the investment strategies that they employ, and their interests are aligned with investors in every respect.

The most successful one-person investment firms have a strong network of other portfolio managers and investors with whom to share ideas. This can not only help with camaraderie and, at times, idea generation, but it also is helpful with learning new industries and deeply understanding new investment opportunities. Most of the managers in our network come from different industries and have real-world operational experience in various fields. It is tremendously helpful to be able to chat with a fellow manager who has operational experience in an industry being researched.

For investment managers focused on investment returns over asset gathering, it is a distraction to also have to be a manager of an operations team. Plus, a one- or two-person investment firm cannot afford to hire a COO, a marketing person, an investor relations person, a back-office person, a bookkeeper, a compliance person, etc. Nor would the manager need someone full-time in each role.

Willow Oak’s Fund Management Services (FMS) provides all of those necessary operational roles. This takes these responsibilities off of the investment manager’s plate, and it allows for a broader range of expertise. Willow Oak Asset Management has a team of employees that fulfill these roles for our affiliated firms. A firm may only need the services of a back-office person for five hours a week right now, for example, but as assets and the number of investors increase, Willow Oak’s dedicated back-office employee can increase activities and time as needed.

This increased infrastructure is often required to garner significant institutional allocations. Willow Oak’s capabilities give our affiliated firms the infrastructure that institutional investors demand. Willow Oak Asset Management provides the necessary due diligence documentation, communication and record-keeping capabilities, and other services that major allocators expect.

Finally, a relationship with Willow Oak’s FMS brings best practices and economies of scale with external service providers. FMS has preferred vendors that streamline the entire process, whether it is the administrator and auditor, or the compliance advisor, lawyers, or others. Willow Oak Asset Management is the liaison between the investment firm and these service providers.

On the investor- and prospect-relations side of the business, Jessica Greer and her team at FMS are the first point of contact for people and institutions looking to learn more about our affiliated funds. Portfolio managers get brought into the discussion when the time is right, but the fact is that there are a lot of logistical issues regarding offering documents, distribution of materials, and other communications that can be a distraction for portfolio managers or, if a fund is small, are simply not being done when they should be.

Many sub $100 million funds are missing opportunities because of a lack of internal capacity—missing opportunities with new investors and missing investment opportunities because portfolio managers are distracted by operational matters. Portfolio managers should be focused on the portfolio.

I understand these challenges through my work with Arquitos. I simply could not manage the portfolio without the operational support I get from FMS. When I launched Arquitos in 2012, I did not appreciate the infrastructure needs and the time commitment required to be a professional fund. Running a fund is a business and today’s regulatory environment does not let you do it like Warren Buffett ran his partnership in the 1960s. Plus, you can’t scale the firm without help. FMS provides that help in a cost-effective way.

The planning session that we held in May focused on expanding these activities and bringing them to more managers. A relationship with Willow Oak provides greater infrastructure at a fraction of the cost of a firm building out an internal operational team. Our goal is to provide these services in a way that allows firms to access these capabilities early in their lifecycle by charging the firm a fee share. We want to help firms grow and be there with them decades from now.

We seek managers who have at least a three-year track record and who currently manage between $10 million and $100 million in assets, although we are willing to accept firms outside of these parameters on a case-by-case basis. And we are agnostic in regard to investment strategies. Willow Oak is not limited by geography and may partner with firms throughout the world.

Marketing Activities

In-person marketing activities have obviously been curtailed during this time period. This has given our affiliated managers an opportunity to increase their participation in podcasts, video roundtables, and written interviews. Our affiliated managers participated in the SNN Network’s Virtual Conference and are excited to be working with Robert Kraft and his team at SNN to share our thoughts.

Of course, Geoff Gannon and Andrew Kuhn at Focused Compounding continue to churn out their podcasts, David Waters at Alluvial Capital continues to write at OTCadventures.com, Keith Smith at Bonhoeffer Fund continues to release in-depth research pieces, and I have been a regular podcast guest for SNN Network and other podcasts.

Willow Oak Asset Management also launched a video series named Value Hour for our YouTube channel. There we’ve held interviews with our affiliated managers, advisors, and service providers. During the quarter, we shared our thoughts on the Berkshire Hathaway meeting, discussed operational matters, and talked about challenges and opportunities during the pandemic. We look forward to providing additional resources in the coming months, and I encourage you to subscribe to Willow Oak’s YouTube channel at youtube.com/willowoakassetmanagement to be notified when new content is released.

You can view all updates from Willow Oak and our affiliated managers by visiting the news section of our website.

Quarterly Results

Willow Oak’s investment in Alluvial Fund is the major driver of our results each quarter. At the end of the second quarter, Willow Oak Asset Management’s interest in Alluvial was $9,532,332. This was an increase of $1,231,908 for the quarter including Willow Oak’s fee share. While we are happy to see the increased value, these short-term results are irrelevant to the long-term value of the relationship and our investment. We measure the success or failure of our investment in Alluvial in decades, not quarters, and we have been thrilled with the partnership with David Waters and Alluvial since 2017. Overall, for the second quarter, Willow Oak had comprehensive income of $1,175,077.

Closing

We are excited about this next chapter for Willow Oak Asset Management. If you would like to learn more about our Fund Management Services, please send a note to Jessica Greer at [email protected] She would be happy to discuss our services.

Willow Oak’s near-term goals continue to be:

  • increasing AUM at our associated funds;
  • continuing to find alignment between our managers and like-minded investors and allocators;
  • adding funds to the Willow Oak platform;
  • increasing the visibility of Willow Oak and our associated funds; and
  • growing the Willow Oak network of emerging manager partners, investors, and FMS clients.

Thank you for your continued support.

Best regards,

Steven Kiel

Willow Oak Asset Management

This article first appeared on ValueWalk Premium.