Building a Boutique Asset Management Firm Around Culture

[Culture can be defined as the characteristics and knowledge of a particular group of people that encompasses shared patterns of behaviors and interactions, ways of thinking, and a quality of engagement that can be consciously and deliberately built into a firm. These shared behaviors and engagement patterns can identify the members of a firm.

Culture can be actively instilled and developed through corporate governance and training as a clarifying and unifying direction and purpose created by design to align a firm with its?customers, create and support an engaged workforce, pursue lifelong learning and constant improvement, a commitment to open collaboration, and a deep focus on the customer. The acknowledgment and deployment of crafting culture in financial services firms can be seen as a powerful way to construct the optimal impact that an advisory or asset management firm can achieve. Absent this human architecture, investment management firms can be all sizzle and no pop.

To better explore this issue of culture and its application for asset management firms, we were introduced to Ric Dillon, CEO & CIO, Lisa Wesolek, President & COO, ?and Jason Job, CFO and portfolio manager, the three co-Founders of VELA Investment Management – a Columbus, Ohio-based asset management firm launched in 2020. Despite getting their start amidst a global pandemic, VELA built a team of experienced portfolio managers and industry professionals around a unique culture. Now in their fourth year of operation, VELA’s origin story and development under the hands of an experienced asset management entrepreneur can provide an informative case study on a few notable characteristics necessary to position asset management firms for success in a hypercompetitive environment.]

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Hortz: Ric, you are an established entrepreneur with 45 years in the industry and three successful asset management firms under your belt. What motivated you to launch VELA at this point in your career? What industry issues were you all trying to address?

Dillon: Launching VELA represented my desire to build a firm that will not only be an excellent asset manager, but also a firm that provides great investment counsel (meaning not only returns, but financial guidance and support) for “family and friends”, which is very important to me. Some of the best firms in our industry have provided both asset management and wealth management services. My feeling is that the significance of the returns that we provide for our clients as an asset manager is sometimes easier to understand when working more directly with the beneficiary, which adds a great deal of clarity to the firm’s mission.

Job: To give one example, we hosted a small event in the past year for the VELA community, meaning clients and friends, during which we provided brief updates on our market perspectives, the firm, and allowed space for questions and interaction with our Portfolio Managers. Nearly every VELA portfolio manager was there and wanted to be there, taking the opportunity to get to know our clients. It is easy in our industry to separate the job from the result, but it makes a difference when you know that the funds you are investing are going to Mr. & Mrs. Smith’s downpayment on their first home, or that they are the primary source of Mrs. Johnson’s retirement funding for the next 20 years.

Wesolek: In my experience, our industry tends to take a large share of the economics that come from investing, ultimately to the detriment of the client. A true deeper focus on the client was important to all of us, and we feel that a holistic approach that marries asset management and wealth management is the best way to maintain that focus. Coming from traditional asset management firms, that shared value was a motivating factor.

Hortz: What do you feel are the characteristics or essential components of a successful boutique investment management firm?

Dillon: The name VELA is a Latin word for the sail of a ship, but for us, it is an acronym:

Valuation-centric philosophy, implemented by

Experienced investors, who maintain a

Long-term temperament, and through firm policy, having an

Alignment of interest with clients.

These four principles represent essential ingredients explaining our view of career success, and we consider them to be defining attributes of our firm. They were some of the first things we stipulated upon in thinking through what we wanted the enduring character of VELA to be, which is why they also ended up in our name. It is a cultural compact we make with our clients.

Hortz: Of all the investment styles and approaches, why is your first principle squarely focused on a Graham & Dodd influenced investment approach? And why do you use the term “valuation-centric”?

Dillon: At the heart of what we do as investors is valuing businesses; we are not market forecasters. We believe that is in many ways a fool’s errand, particularly over the short term where markets tend to behave irrationally. Instead, we focus on fundamentals—sound balance sheets, differentiated concepts, proven leadership teams, and both the prospects for and economics of future growth—to find businesses we want to own and that we believe can succeed through a range of market environments. For businesses we are committed to, we use a discounted cash flow methodology to arrive at our estimate of present value (the price we’re willing to pay in looking at these businesses). We agree with Warren Buffet’s quote and mindset - “Our position is that there’s no such thing as “growth” stocks or “value” stocks… value and growth are part of the same equation”.

Job: We chose the term “valuation-centric” because while “intrinsic value” or “value” are defined terms, and thus somewhat limiting, we felt “valuation-centric” was empowering. It allows for more creativity while staying true to a process grounded in rigorous research and valuation discipline. When you look at our current strategies, for example, a number of them integrate options for the purpose of risk mitigation. One of our strategies integrates both short selling and options, neither of which would be considered part of a traditional “value” portfolio. The goal is a marriage of time-honored investment principles with the flexibility to tackle the challenges of evolving markets and client needs.

Hortz: How would you characterize or weigh the importance of having a long-term mindset in building your firm and investment portfolios?

Dillon: Very important – in my estimation, five years is only the beginning of statistical significance. From a risk management perspective, I believe in matching investment time horizons with asset types. For periods shorter than five years, equities are too volatile for a variety of reasons, including the seasonal and cyclical nature of economics and life.

With regard to the firm, a long-term mindset for a business connotes a commitment to our colleagues, prioritizing the main strategic direction rather than micromanaging peoples’ daily activities. We have deliberately put together a team of people for whom we have great respect, trust, strong working relationships and quality experience, and who each share our vision and drive for the firm. We want to give them what they need and allow them to do what they do best. This is important in relationships with both our colleagues at VELA and our clients, with whom we want to develop long-term partnerships.

Hortz: When it comes to experienced investors, how did you manage to attract seasoned investment managers to leave their well-paying jobs in established firms and rally them together into your startup boutique with no track record and limited resources? ?

Job: In a recent board meeting, one of the VELA Funds trustees asked, “How is the compensation number… how are you guys keeping expenses so low?”?That was, I think, the first time that the trustees and other service providers understood that of the eleven partners at the time, five were taking, and continue to take, no pay. The remaining partners—primarily inclusive of the younger set with growing families-- each drew a minimal salary, representing a substantial reduction from both previous roles and current market rates. So, the same question as yours came up.

When I look back at my time at Diamond Hill Capital Management, some of the most rewarding time spent was in the early days as we were building the firm. To be able to do it again, to build a team and leverage lessons learned from our collective experience and careers, and to set up strategies we believe in was extremely attractive.

Dillon: A big reason I think that VELA was attractive was that many have worked with different companies in our industry, some large public companies, so they are cognizant that it’s really tough to impact larger organizations. And that was the appeal here, that we can build a purposeful culture together in a boutique firm where everyone can have impact. It engenders an excitement to be here, to get this thing going, to put infrastructure in place so that it can continue to serve our clients more expansively and address 80% of the problems that come with organization and growth. It’s a unique opportunity to put in place what I think makes a successful firm – a powerful culture.

Wesolek: As I worked with Ric prior to VELA, the opportunity to work with him in the role of CEO again was a big draw for me—I think the calculation was the same for a lot of our team. Many of them, particularly the initial partners that joined us, all had the opportunity to work with him or were directly mentored by him earlier in their careers. His decision-making, how he treats employees and team members, how he engenders trust with clients, his knowledge of and approach to the market, and to have the ability to build something around those values, was a unique opportunity. It’s really important to understand that you have to have a successful leader who can draw talent to leave successful firms, generating high revenue and high-income packages, to be part of a partnership where most of your income (if not all) is coming from sweat equity.

Hortz: What are the ways you structured your firm to attain alignment of interests with your clients?

Dillon: Perhaps most importantly, managers’ incentives should be aligned with those of their clients. During my career, I have seen countless instances where people spend a meaningful percentage of their time on activities that do not benefit the firm’s clients, especially the management of their personal investment accounts, which look very different than client accounts. Determining an appropriate portfolio size or fees charged are also common sources of misalignment in our industry. With these in mind, I feel our solution to aligning our interests with those of our clients is both simple and meaningful: once joining VELA, portfolio managers and associates are limited to investing in VELA strategies, or asset types that VELA does not manage (such as Muni bonds).

Wesolek: A lot of times when people talk about alignment in terms of investments, you will hear the saying “eat our own cooking”. And they do—at past firms I have worked at, a Portfolio Manager may have $100-200k invested alongside their clients. That’s not insignificant, but it’s substantively different than what we personally do and what we ask of our colleagues, which is to invest only in our strategies, alongside our clients for any asset classes in which we participate.

Job: I think our purposeful expansion of client services beyond just a focus on asset management into a more holistic wealth management approach also greatly helps us build a stronger understanding and alignment with our clients.

Hortz: How would you recommend advisors work with your firm and apply your value-centric investment approach in their client portfolios?

Dillon: Our strategies are all actively managed, so they complement portfolios containing passive strategies. All use the same investment philosophy across our four mutual funds and separately managed accounts, so some advisors might want to pair us with strategies representing different philosophies. We strive for all of our strategies to be tax efficient and intended to be utilized for taxable portfolios as well as non-taxable portfolios.

The?Institute for Innovation Development? is an educational and business development catalyst for growth-oriented financial advisors and financial services firms?determined to lead their businesses in an operating environment of accelerating business and cultural change.?We operate as?a business innovation platform and educational resource with FinTech and financial services firm members to openly share their unique perspectives and activities. The goal is to build awareness and stimulate open thought leadership discussions on new or evolving industry approaches and thinking to facilitate next-generation growth, differentiation and unique community engagement strategies.?The institute was launched with the support and foresight of our founding sponsors — Ultimus Fund Solutions, NASDAQ, FLX Networks, TIFIN, Advisorpedia, Pershing, Fidelity, Voya Financial and Charter Financial Publishing (publisher of?Financial Advisor?and?Private Wealth?magazines).??

VELA Disclosures:

VELA Investment Management, LLC is a registered investment adviser.?Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.?Investments involve risk and unless otherwise stated, are not guaranteed.?Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.?Past performance is not indicative of future performance.

The views expressed are those of VELA Investment Management, LLC as of 3/21/23 and are subject to change. These opinions are not intended to be a forecast of future events, a guarantee of future results, or investment advice. Third-party information in this report has been obtained from sources believed to be accurate; however, VELA makes no guarantee as to the accuracy or completeness of the information.