How to build a fund manager

It is more difficult than ever to set up a new fund management company, but Swen Lorenz is an entrepreneur with an eye for an opportunity. In this interview he explains why the market is wide open for a nimble emerging fund manager like Sarnia Asset Management.

Q. Your diverse and wide-ranging career has seen you leave your mark in different sectors and organisations. These range from partnering to launch a Macau real estate fund with $300 million in assets, to managing a scientific organisation that is under the auspices of UNESCO and protects the ecological heritage of the Galapagos Islands. What made you revisit the fund management sector from an entrepreneurial standpoint?

A. Put simply, it was time to put my cumulative experience and my extensive network to use on something ambitious. Entrepreneurs who are in their 40s when they set up a new company are statistically proven to be five-times more successful than start-up founders in their 20s.

I just felt that now was the right time in my life to undertake something suitably ambitious, and I’ve had a lifelong interest and passion for the fund management industry, which is interesting in the sense that there are so many unmet client needs in the sector right now. This industry has been gravitating towards the standardisation of products, whereas sophisticated investors want differentiated products rather than a one-size-fits-all approach.

Last but far from least, I just happened to know the perfect co-founders for this venture, and I had a few exciting initial staff members in mind to get things moving. There’s definitely an element of serendipity to this venture, as is indeed true for many start-ups. Quite simply, all the stars were aligned for this particular company at this particular time, and it didn’t take us long to decide that this was the route we wanted to go down.

Q. Clearly you found your intellectual home when it comes to Guernsey and the way business is done here. Can you distil the essence of what makes Guernsey such an attractive place for fund management outfits and business in general? 

A. Guernsey is one of the finance world’s best kept secrets – let me explain. We’re closely linked to London, and from there to the rest of the world. At the time when we were planning Sarnia Asset Management it was obvious that we were going to be working with clients from all over the world, so we needed a jurisdiction that would facilitate that. Guernsey is ideally placed between the time zones – you can do business with Asia, you can do business with the US – and it’s English-speaking. In some respects, I find Guernsey superior even to Switzerland – and I say that as someone who deeply admires Switzerland.

Guernsey is absolutely the right place for us in terms of providing the stability we need. We really want to run this business for decades and our company’s three founders are in their 30s and 40s. We’re doing this out of love and passion for investing, which leaves us optimistic that we have at least a few decades left in the tank. (Click here for an interview with one of Swen’s co-founders.) Guernsey’s stability is underpinned by the fact that it has an approach where government is serving the people rather than the other way around – which is more than can be said for many large, developed states these days.

We also love the independent mindedness of the Channel Islands in general. Our jurisdiction truly doesn’t fit into any box. They’re self-governing but they also work closely and collaboratively with the UK, meaning they have a strong partnership with the world’s fifth largest economy and the world’s number one financial centre in the City of London. Sarnia Asset Management likes to do things differently, just as is the case for the jurisdiction that we have chosen as our home.

Q. When you say you like to do things differently can you give us a concrete example of what that looks like? 

A. Guernsey is a place that is truly client orientated. I know that everyone says they are, but when you look at the reality of these claims all too often a different image emerges. It’s no secret that I’m critical of the European Union and it’s well known that there are 30,000 corporate lobbyists in Brussels. They work to protect corporate interests rather than the interests of clients, savers or investors. The choice of products available to investors in the EU as a result of that situation is already getting more limited. Everything in the EU has a tendency towards being standardised. A nanny-state mentality has crept into EU’s financial regulation, which is beneficial to incumbent corporations but has dubious benefits to clients (and that’s putting it diplomatically).

In Guernsey we’ve found the right balance between regulation that makes sense and protects investors and their money, whilst giving firms like ours the freedom to create the best solutions for clients and satisfy market demands. Investors in the EU in particular are experiencing ever greater restrictions on what they can invest in and on what conditions. For example, I’m a big believer in concentrated portfolios, and in that regard Guernsey certainly offers more options than what you can get, say, through a UCITS fund. We simply want to give investors some of their freedoms back so they can decide based on what they believe is in their best interests. If someone wants a concentrated portfolio and they are experienced, high net worth investors, then why shouldn’t they have access to that kind of product? We provide investors with that kind of freedom and agility. Also, keep in mind that ever more restrictions placed on investors in large Western nations is now just a question of when, not if. The overall trend couldn’t be clearer.

In our increasingly volatile world, being free to decide what works best for you is more important than ever for generating the highest possible returns and for minimising risks.

Q. One of the attractions of Guernsey is the fact that its funds are available to 80% of the world’s investible wealth. How important is this factor when it comes to fundraising for an entirely new fund? 

A. The fact that Guernsey is such a well-connected finance hub with global reach was a major deciding factor for us when choosing a base for Sarnia Asset Management. Many among our audience will already know that in a personal capacity I publish a blog about investing, and just counting my paying readers I already have followers in over 80 countries. Their anecdotal feedback was one of the driving factors that encouraged me to set up Sarnia Asset Management. In these conversations (amongst many others) we realised there was considerable unmet market demand from investors worldwide relating to performance but also to other factors – for example, safety and diversification. In the old days you might feel relatively relaxed if you had something stashed away in Switzerland. But nowadays investors want to diversify further internationally, and Guernsey is one of the places that is increasingly appearing on their radar screens. People with an international mindset want to invest with fund managers who share that outlook but also cater to local needs – for example, tax reporting for the place these investors call home.

So to summarise, being able to market our funds to investors in almost all jurisdictions – the UK, the US, much of the EU, Switzerland, South Africa, much of Asia and Australasia – that was absolutely key for us. We are based on a small island, but benefit from great connectivity on a global scale.

Q. All fund managers like to claim they’re different yet many fail to generate a performance that’s easily distinguishable from their respective benchmark. How does one create a distinct culture in terms of the investing ethos of a new fund manager? 

A. I think this all begins with our collective dismissal of the efficient market hypothesis. Markets are quite simply not efficient, and you can gain an edge over others through deep research and thereby generate outperformance. My two co-founders have done this successfully and consistently with their fund in Germany.

All this leads us to believe passionately in active fund management. We know that deep research creates value for investors and that active fund managers can generate alpha for investors. These are the key ideas around which our company has been built. Given the track record of our co-founders and key employees, we believe this is a winning formula that will deliver value for our investors and other stakeholders.

Incidentally, experience shows that new emerging fund managers provide the best returns during the first three, five and 10 years of their existence. Once they get bigger, the returns for investors tend to decrease somewhat. Sarnia Asset Management is now at the phase where the most experienced investors will have a keen interest in us because we’re offering that golden opportunity to invest with us while we’re still nimble, which can lead to high levels of outperformance.

Q. Of course, trust is THE most valuable commodity. So presumably setting up a company with people you have known and respected for a long time was essential? 

A. Warren Buffett once said you can’t do good deals with bad people. I personally rate trust as one of the most undervalued assets in business in general. If people can’t trust one another, they’ll spend a lot of time and money on lawyers and lengthy contracts and then in the end it often still doesn’t work out. On the other hand, if they do trust one another, they can do business faster and cheaper and have more time to focus on what generates value for all stakeholders.

I have known one of my co-founders for 24 years and the other for 10 years. Incidentally I’ve known them both since they were 22 years old. We’ve done business together on the back of a handshake; we’ve been on holidays together; and we always come to carefully considered, unanimous, rational conclusions – even when we start off with viewpoints that are on very different pages. We trust one another to do the right thing.

The trust between the founders is not an asset that you can see on the company’s balance sheet but it’s priceless and it works to the benefit of all stakeholders – our clients, shareholders, employees and business partners.

Q. The fund management business is notoriously complex but there are shortcuts available to those who are willing to sacrifice a certain part of their operating standards. What persuaded you to go down the route of setting up everything comprehensively from scratch – including applying for your own fund management licence?

A. It used to be the case that you could set up a fund management business at your kitchen table, so long as you had some experience and a laptop. And in fact, you can still do that – you can choose a jurisdiction that advertises itself on the basis of cutting corners. For example, as a fund manager in the Cayman Islands you’re not required to have a cyber security policy. Is that wise in today’s environment? You tell me.

But in any case, that’s not us. We want our clients to know that everything we do stands on a rock-solid foundation. This requires having specialists in your firm. For example, right from the get-go we had a staff member with tremendous experience in regulatory and operational matters. We invested in building solid processes instead of flying by the seat of our pants. And we kept control of as many aspects of the business as possible so that as a business we can determine our own destiny instead of being overly reliant on third parties.

As I said previously, we want to do this for decades so putting in the right foundations was a necessity. We don’t want to be distracted in our day-to-day work with having to catch up with unexpected problems that we really should have dealt with earlier. By investing in an initial period of building strong foundations we wanted to be able to transition to a period where we ultimately focus on serving our clients and building our business – and that’s where we are now.

Q. What you’re trying to create with SAM is a fund management outfit that has an unadulterated focus on protecting and growing client assets. In practical terms, what does that look like? 

A. We work with the best fund managers – you will see that from their credentials. We hire highly experienced staff – again, check their CVs! And crucially, we utilise Guernsey’s common-sense approach to regulation to create what we believe are the best solutions for our clients. You can see that in our product presentations.

Setting up a business is never easy and the first two years in particular are always a struggle. But we’ve now mastered the hardest part of the journey and we’re going to generate a lot more momentum from here onwards. Now we can focus on generating value not just for fund investors but also for other stakeholders. This includes the shareholders of our management company and our employees whose compensation is of course partially performance based.

I am so convinced that we have the right plan in place that I don’t take a salary and instead only participate in Sarnia Asset Management’s success through my large stake in the company. If the investors in our fund don’t make money, then I’m not going to do well either – my personal interests couldn’t be more fully aligned with our fund investors.

You can get a much better understanding of our approach by reading the other articles on our website or through signing up to our email newsletter and social media channels. Alternatively, we’d be more than happy to have a personal discussion over the phone or indeed a face-to-face meeting in Guernsey or the UK.

Disclaimer: This blog is intended for informational purposes only. This blog is not intended to invite, induce or encourage any persons to engage in any investment activities and is not a solicitation or an offer to buy or sell any stock, investment product or other financial instruments. If in doubt, please seek financial advice from an independent financial adviser. Sarnia Asset Management is licensed by the Guernsey Financial Services Commission (GFSC). Past performance is not an indication of future returns. Investments carry risk, including the risk that you will not recover the sum that you invested.