In an industry characterised by ego, and immortalised by movies like The Wolf of Wall Street, it can be tricky to stay humble in the asset management game.
Particularly when both your career and entrepreneurial debut fall squarely into the longest and most successful bull market in history. You think you’re bullet proof. There’s no end in sight to the growth you can achieve. And then the market crashes, and the walls start closing in.
For Steve Liptz and Cy Jacobs, the crash came after three years of painstaking work on their business. Through careful planning and an incredibly lean business structure, their business, 36ONE Asset Management, survived when other businesses were closing their doors.
Their turnover and profits plummeted though, and other than lessons learnt, there wasn’t much to show for their first few years in action. But those lessons are not to be discounted.
Today they have in excess of R12 billion in assets under management (AUM), a figure that was reached after growing AUM at an average of more than 50% per annum since inception, with 2012 and 2013 seeing turnover growth approximately doubling each year.
And they did it through mindful planning, patience, a lean business model, and a savvy focus on client acquisition, and more importantly, retention.
Surviving the market crash
“2008 was a watershed year for us,” says Liptz. “The difference between where we thought we’d be and where we actually were was huge. It was as if the three years since we’d launched had never happened. But they had happened, and the losses were hard to swallow. You expect to take some knocks in business, but the realities of the recession were hard to stomach for everyone.
“We knew we weren’t in danger of going insolvent. Despite our years at HSBC and Investec we’d had no ambitions to build a large corporate, and so we’d kept our business model incredibly lean and focused.
This would save us when the market turned, but it was still a difficult time. We got through it by putting the groundwork in place for change. When the market did turn, and we knew it eventually would, we’d be ready for it, with a very different business.”
But first the business had to go into survival mode. “By 2007, the industry had started to forget that markets don’t just go up, and we had unconsciously built our business on this attitude. As a result, when the market did crash, we had two key problems.
“First, we had focused on big clients, which are great for two reasons: They invest a lot; and they do so in lump sums. This gives you a lot to work with on the investment front. Much more so than with smaller investments. It’s also less work, because you’re servicing one client instead of twenty or thirty.
“The problem comes when your handful of big clients need to suddenly pull their investments because they need liquidity, which is what happened to us. Dozens of smaller clients would have meant a more manageable spread of risk.
“The second problem was the way we were investing. Our underlying funds weren’t ready for a bear market. We hadn’t hedged our bets. We were in great company – but that didn’t soften the sting. We knew we’d never let that happen again.”
Read Next: Red Lascaris on Sense and Winning Hearts
Going back to basics
Surviving any upheaval in business starts with the business owner going back to basics, which is exactly what Liptz and Jacobs did.
“Instead of wallowing in self-pity, we needed to focus on what was working for us, and develop a strategy going forward. I know that the three most prevalent issues that business owners face relate to staff, stock and collecting money from debtors.
“We have no debtors, we don’t carry stock, and we have a small team. When things aren’t going well, it’s always good to start with how things could be so much worse. Once we got that out of the way, we could concentrate on what our problems really were – and how to solve them.”
As in all businesses, 36ONE’s opportunities and challenges go hand in hand. “Our core strategy focused on five areas: Building the brand; creating a business that was as lean and efficient as possible; finding the right people; securing great clients; and giving them great returns, because clients that see results will stay with you, even when markets dip.”
“When we started, our focus was on staying as lean as possible. We wanted to keep our overheads low. We worked from one room, with two desks. Our only overhead was the rent for the space. We had no costs and we paid no salaries, not even to ourselves.”
Today the company has a prestigious address in Sandton, but despite a great location, the team (and its offices) is still small.
“As we grew and we started employing people, we incentivised our team. We have base salaries, but the real rewards are performance-related bonuses. We have specifically created a very competitive bonus structure. We want the best people on our team, and we pay them well if they perform, but we minimise our fixed costs if they don’t.
“We’ve also been very careful with our cash. Many businesses fall into the trap of spending money as they earn it. As your sales grow, you invest in things that are nice to have, but not necessary, like big fancy offices, personal secretaries and PAs, and big bonuses.
“All this takes your eye off the ball. Eventually, you’re hiring people to manage other people, simply for the sake of having a big team. We never wanted that to be our strategy.”
Instead, Liptz and Jacobs have focused on creating a much smaller but highly effective team.
“Our bonus structure attracts individuals who are self-motivated, and able to work independently of a management structure that monitors each employee’s every move.
“The harder (and better) you work, the more you earn. It’s hard work, but the rewards are excellent. We’ve handpicked each employee, and kept our structure flat. Coming from big corporates, we didn’t want a bureaucratic structure. We all work in an open plan office, there are no titles, and we all sit next to each other.
“It works very well for us. It also means we can easily scale. In 2009 we had a staff complement of six. It was one of the reasons we survived the downturn. Today we have just double the staff, but we manage 11 times the assets.
“We also outsource all non-essential functions. We know what we’re good at, and we stick to it. We don’t focus on peripheral functions like IT and admin. It keeps the team small, and costs low.”
Building the brand
While strong performance will always help a business grow, particularly in the investment industry, Liptz knew it was essential for the business to get as much exposure as possible.
“This has been an area of investment. While we’ve kept the business lean, we’ve gone all out to build our brand. Instead of taking out adverts though, we’ve focused most of our energy on sponsorships that align with our interests.
“This provides clarity on what we’re trying to achieve, and shows what the brand stands for: Not just money, but lifestyle choices. Life should be about enjoyment, but also investing in the future. We’ve aligned ourselves with sports events that we believe embody everything we stand for: Training, preparation, hard work and team effort.
“We sponsored Christoph Sauser and the late Burry Stander to become the winning team at the Absa Cape Epic, we sponsor the JP Morgan Corporate Challenge, and we even launched our own cycling event. It’s a slow process, but it will be an enduring one.”
It’s also an excellent way to attract clients. “Right from the beginning our focus has been on relationship building. We identified key clients. In each case, we learn as much as we can about the individual and their business. We invite them to events we believe they’d enjoy; we keep them abreast of how we’re doing, and keep in touch to find out how they’re doing.
“We don’t overburden them, but build relationships, and when they’re ready to invest, we’re already familiar with each other and they have a good understanding of what we offer. Great clients don’t happen by accident. It takes time to foster the right relationships.”
Attracting clients is one thing, but keeping them requires excellent administration and customer service, and more importantly, good returns.
“At the end of the day, people are trusting us with their futures, which means we have to perform. We focus on individuals and large corporate accounts and we develop products to suit them, based on our understanding of their needs.
“When we first set out, we had a few key decisions to make. We didn’t want to be stockbrokers. Instead, we wanted to be asset managers. We would manage the funds and decide what to invest in, but the actual trades would be executed by other companies, who specialise in trade execution. In the investment industry there are three levels:
“Pure execution (stockbrokers); advice; and discretionary portfolio management; in which your asset manager chooses how to invest your funds to grow your portfolio. That was where we wanted to be. It’s more specialised, and the rewards are greater.
“We also knew that we really wanted to grow the assets we managed. We would do this by keeping our team small so that we wouldn’t become too corporate, and focusing on smaller clients.
“We are experts on the South African equity market. We can also invest in Africa and international markets, but our real edge is in local markets. Our markets are not big enough to manage very large amounts of money, and so with smaller AUM we can keep our investments flexible.”
36ONE currently has two unit trust funds and two hedge funds. The unit trust funds were created first. They allow the team to make bigger trades on behalf of multiple clients, and each client’s returns are proportional to how many units they own within the fund.
However, unit trusts are by their nature only geared towards ‘long’ investments. In other words, they are designed for investments you believe will go up. In a bull market this is great.
Each investment keeps climbing. But when the market crashes, the fund loses money.
“We made the decision to launch hedge funds, which would allow us to go both long (buy) and short.” The difference is simple. When you sell short, you’re essentially betting that a share price will fall (or rise less than another share which you buy with the sale proceeds) – and when it does, the fund makes money. If you are both long and short, your fund can perform whether the market is rising or falling, as long as you’ve correctly anticipated what each share will do.
“Hedge funds require a careful focus on each position, but the returns are very good if your mix is right. It’s an advanced trading strategy, so you need to know what you’re doing. It’s also the cream of the crop because it earns higher fees, but has the ability to generate returns in all types of markets.”
As the funds have grown, 36ONE has attracted institutional money as well, and holds assets on behalf of client pension funds, for example. The 36ONE Hedge Fund is currently one of the largest hedge funds in South Africa.