Hedge funds, private equity funds and other specialized investment vehicles designed to deliver market-beating returns have had a checkered record of success, as we have covered at length in a series of research notes. But there is no doubt that some have succeeded in delivering real alpha to their limited partners over the years. Some, such as Bridgewater Associates, have even done so for decades-long stretches.
Investors with the resources to allocate funds to external managers are always on the hunt for asset managers who can deliver market-beating returns over the long run, not just for a few years. Perhaps that is why Bridgewater has become so massive, now managing a staggering $160 billion. The company’s various funds have, by and large, done a good job of beating stock market benchmarks, even if there remain legitimate questions about net risk-adjusted returns after Bridgewater claims its capacious management fees.
In any event, founder and original CEO Ray Dalio (Trades, Portfolio) has shaped Bridgewater in his own image and built what might not unfairly be termed a cultish devotion among his employees. In the process, he has built the world’s largest hedge fund manager and produced healthy returns for clients.
Bridgewater’s reputation is secure, and its funds have lost none of their appeal for allocators. Indeed, the biggest challenge during the past couple years for the company and its 68-year-old founder has been to determine who will take the reins when he departs for good (whether it be due to retirement or moving into the Great Beyond). It is a serious question, since Bridgewater is so thoroughly modeled in Dalio’s image. Furthermore, actively managed investment funds often struggle in the absence of their original guiding lights.
Can Bridgewater and its like survive the departure of their vaunted founders? This article addresses this question and offers an intriguing example of multi-generational fund management success in the form of F&C Investments, a 150-year-old British fund.
Succession can be hard
Filling the shoes of an iconic CEO or founder can be enormously challenging. That is especially so when the business is currently considered best-in-class. Starting on top has its advantages, to be sure, but it also carries risks: While it is possible to go up in absolute terms, there is nowhere but down relatively speaking. A teething period for a new CEO can feel like disaster when the company looks at risk of losing its vaunted status at the top of the pile.
This problem is by no means unique to asset managers like Bridgewater. Indeed, similar concerns have been voiced about the eventual departure of Warren Buffett (Trades, Portfolio) from the helm of Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial). Buffett built Berkshire into a behemoth, beating the stock market as a matter of course while growing assets and expanding its various businesses. But the Oracle of Omaha is now 87, and he is already making preparations for a successor to take over. But many worry that, despite his top lieutenants’ obvious capabilities, they might not be able to match Buffett’s seemingly preternatural talents. We have discussed the future of Berkshire without Buffett in a previous research note, pointing out the widespread sense of “indispensable man” risk. That said, we still concluded that the skills of his likely heirs and the strength of the company culture would ensure that Berkshire continued to thrive.
However, many other companies have fallen apart without the guidance of the strong individuals who built them up. The meltdown of General Electric (GE) during the stewardship of legendary CEO Jack Welch’s successors presents one such example.
Asset managers have a harder time
Arguably, operating companies with real assets and businesses have it easier than asset managers. While a conventional business can continue to make its products and provide its consumers or business clients with services as usual without concern for new direction at the top (at first, anyway), an asset manager is a different beast entirely.
An asset management company like a hedge fund is meant to invest in the market and deliver superior returns. The money comes from clients who can withdraw their capital swiftly, sometimes even immediately. Perceived chaos or strategic uncertainty for an investment company is a death sentence.
Thus, succession at a hedge fund or other similar asset manager is rife with huge pitfalls that few other businesses experience. It is why, perhaps, so few hedge funds survive their founders. When the strategy is built up in the individual manager’s skill, outlook and strategy, any replacement may essentially create an entirely new business.
Bridgewater’s succession struggles
In the case of Bridgewater, size has been on its side. There are already numerous fund managers and executives in the firm. There is also the aforementioned Dalio-centric corporate culture. These would not likely disappear upon a sudden departure of the founder. However, that does not change the fact that, even for Bridgewater, succession is an extremely tricky affair.
As it so happened, Dalio appointed Greg Jensen a couple years ago as heir-apparent. But when Jensen failed to live up to Dalio’s expectations, the would-be successor was sidelined and Dalio himself returned in 2017 and “temporarily stepped back into management” for the ostensible purpose of helping make the transition run smoother. Jensen is now co-CIO, while executives David McCormick and Eileen Murray have been elevated jointly to the role of co-CEO.
Dalio’s continued involvement, and his willingness to defenestrate and elevate his successors, has made the transition somewhat fraught. Things do seem to have stabilized, but the travails of the past couple years represent an excellent example of how even the largest and most sophisticated hedge fund management company could face existential leadership risk in a way few other classes of business could.
Lessons from the other side of the Atlantic
Even at investment funds, successions need not be times of crisis. Indeed, some investment management firms have learned to thrive through numerous transitions of leadership. An object example of this comes from the U.K., where F&C Investments has been in continuous operation for 150 years.
The F&C brand is a new touch, stepping away (if only slightly) from its long-time designation as the Foreign & Colonial Government Trust. The fund began as a portfolio of international government bonds, but it has expanded its strategy to include equities, as well as more exotic asset classes.
F&C’s longevity might be chalked up to a certain degree of stuffiness and tradition-laden policy-making. Such structures often cause worry for hunters of market-beating returns, since byzantine rules and worldviews are often synonymous with stagnation. Yet, such has not been the case at F&C Investments. In fact, it has done phenomenally well, delivering a compound annual rate of return of 8.1% for the life of the fund and increased its dividend annually for 47 years running. And it has done so all while charging an almost comically low fee (when considering other actively managed funds) of just 0.37% annually. Unsurprisingly, the firm has grown its assets under management over the years, currently reaching about $5.7 billion.
Outliving the founder
A conservative-minded, tradition-oriented outlook has kept F&C in business even as an endless procession of star funds have risen only to burn out in the end. F&C clearly intends to keep trucking along; its website masthead reads: “Celebrating our first 150 years.” The next 150 may be just as successful, thanks to a commitment to institutional continuity and favoring collective responsibility and focused strategy to the fads of individual fund managers.
In any event, F&C is proof that actively managed funds can survive and thrive through many successive management teams. But it requires a commitment to the firm’s vision and mandate over loyalty to any one individual. That may prove challenging for many funds with leaders who continue to cast long shadows.
Disclosure: I/We own no stocks discussed in this article.
