|Daruma Asset Management, Inc.
80 West 40th Street, 9th Floor
New York, NY 10018www.darumanyc.com
Founded in 1995, Daruma Asset Management invests in a high-conviction portfolio of no more than 35 stocks.
Daruma manages $2.0 billion for public and corporate pension plans, endowments, foundations and individuals. Our annualized Small-Cap return net of fees since inception is 13.6% vs. 8.0% for the Russell 2000 (7/28/95 to 6/30/11). Our annualized SMid-Cap performance net of fees since inception is 18.2% vs. 16.7% for the Russell 2500 (4/30/10 to 6/30/11).
Notes to Performance
The decision to launch a second business offering - something Daruma did 14th months ago - shares many elements with the decision to add a second child to a family... both are cause for much soul-searching and internal debate.
Today's newsletter offers three key benefits to launching a second product, all of which have their parallels in the child-rearing world.
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All the best,
Mariko O. Gordon, CFA
Founder, CEO and CIO
Daruma Asset Management, Inc.
Second Time's A Charm
I've been hanging around a lot of pregnant women lately (I know, I run with a wild crowd). And though it's been more than 14 years since I was similarly supersized, my memories of carrying around a neonatal Thing Two (our second child) remain quite clear.
Maybe it's because of what he represented: my last.
Unlike many of my more procreation-oriented peers, who view child number two as a given with numbers three, four and beyond open to discussion, I wasn't even sure initially that I wanted more than one.
Why so stingy with the offspring?
I think it came from my being "an only" myself. Sure, there were times when I rued the fact that everyone else seemed to have at least one brother or sister, but I learned that there are indeed benefits to being the sole child in the house.
For one, I wasn't subjected to random acts of sibling cruelty. For another, my vocabulary improved from listening to adults talk and reading lots of books - both the result of there being no one else to play with. Finally, there were no usage negotiations over telephones, bathrooms, clothing or cars.
And so when it came time to talk numbers with my husband (the youngest of four), there wasn't much debate. One would totally have worked for me, but I had no objections to two, if only so that as adults they'd have someone to compare notes with about who was crazier, Mom or Dad. (Editor's note: it's Mom.)
All that to say that in our house, the "How many kids should we have?" question has been settled for well over a decade. And yet just a couple of years ago, when it came time to decide on whether or not to give birth to a second business offering (a smid-cap), I found myself struggling with many of the same questions.*
[*We closed our small-cap product when it reached $1.5 billion in assets under management, understanding that with a concentrated small-cap portfolio, the limits of investments physics are quite clear. We can't run billions in a small-cap concentrated portfolio without cheating, e.g., several different 35 stock portfolios, gradually increasing the position count, buying large-cap stocks, something we wouldn't dream of doing.]
The benefits of a second product
If you've successfully birthed a business - any business - be it bait shop, tattoo parlor or money management firm, deciding to grow the "family" is cause for much soul-searching and internal debate, arguably more than when deciding on a second kid.
Will you grow too much or too fast? Will your resources be spread too thin? Can you handle the increased operational complexity? Will your business lose focus? And that all important question: what will your clients think?
In the end, we made the leap. Now, 14 months later, I can share with you three key benefits to launching a second product, all of which have their parallels in the child-rearing world:
- The second ride is a lot less bumpy.
First time parents are a study in frenzy. With no experience yet under their belts, they overreact, over control and over worry. By the time number two comes along they have calmed down considerably.
First time business owners have the same tendencies, wasting lots of time and needlessly losing lots of sleep in the process. The first product generates many teachable moments: how to pass your first SEC audit with flying colors; what the absolutely latest Fedex drop-off time is within a 10-mile radius; how to reassure clients through the first stretch of underperformance.
When you launch that second product, you ramp up more quickly and more easily, thanks to your previous trial by fire.
- Hand me downs are free.
Just as the first child requires a hefty investment in equipment, a business needs to develop an infrastructure to generate sales - infrastructure that, like a fancy stroller, bassinet or car seat, can be used by the second product at no additional cost.
Same goes for the business processes themselves. After we landed our first account (worth $1.5 million), for example, we invested in an Axys portfolio accounting system. Though we could have managed the portfolio using Excel (Axys cost us more than the fees generated by the account itself), we thought it better to set up scalable processes from the get-go.
With each new account we brought in, the fixed cost of the software per account decreased. Ditto for those accounts associated with product number two.
- In the long run, it's better for the family finances.
In the old days on the farm, having lots of kids was a way of hedging your bets. More expenses in the short run, yes, but many years of "free" labor later on, not to mention a personal form of social security.
For Daruma, since all of our small-cap portfolios are managed exactly the same, adding a second product lessens the degree to which all of our collective fortunes (clients and staff alike) ride on that one product.
Having just a wee bit of diversification makes our business even more stable, an outcome both good for our clients and good for us.
With my eldest turning 18 and my youngest 14, I can look back on our decision to have two as a good one (despite the elder's occasional plea to "send my brother back to the hospital"). They have each other's back and often revel in complaining about their parents to one another. In short, mission accomplished.
Likewise, Daruma has adjusted to being a two-product firm. While we took our time to present the second "baby" to the world, our smid is now as much a part of our identity as our teenaged small-cap offering. So much so that I visibly flinch whenever I'm asked, "Which strategy is better?"
I always say, "That's like asking me which child is my favorite." They're different, is all. And I love them both equally.
Sibling Rivalry, Investment Style
A time-tested technique for dealing with sibling rivalry (at least where dessert is concerned) is to let one slice the cake and the other choose first.
With two investment products sharing a few of the same holdings, we had to create our own "slicing protocol" to ensure fairness. The schematic at right illustrates our rules of engagement.
What does your birth order say about you?
Strengths: dependable, organized, and hard working - addicted to taking on responsibility
Weaknesses: stubborn, rigid, and easily hurt - quick to criticize everyone but themselves
Strengths: driven, nurturing, yet aggressive - the world's natural leaders
Weaknesses: picky, moody, and bossy - they usually think they know better than you
Strengths: calm, affectionate, and pragmatic - they see both sides of any situation
Weaknesses: needy, idle, and indecisive - they avoid confrontation at all costs
Strengths: energetic, innovative, and approachable - open to risk and new experiences
Weaknesses: selfish, shallow, and fickle - if it's not fun, they don't want to do it
Want to know more? Take the birth order personality quiz here.