by Detlef Glow.
Lupus alpha is an independent German investment boutique (launched in 2000) that specializes in small- and mid-cap and alternative UCITS strategies. Prior to the annual Lupus alpha investors conference in Frankfurt I had the opportunity to speak with Mr. Ralf Lochmüller, founding partner and speaker of the board at Lupus alpha, about the company and how it has succeeded, as well as about the market for alternative UCITS in general.
Mr. Lochmüller, Lupus alpha has become an established fund promoter in Germany since its launch in 2000. What has been the biggest obstacle you have had to overcome—from the company’s perspective?
The first question we had to answer before we launched the company was how we could differentiate ourselves from the competition. We started as an asset manager with a well-known approach in the small- and mid-cap segment. We were dedicated active managers, and we believed that it is possible, especially in the small- and mid-cap segment, to generate alpha with an in-depth, bottom-up analysis. And since our team had high competency in this space, we formulated our intent in naming the company. But even though we had well-known team members, we started with no track record and no assets under management. It was hard to tell our story to possible investors, since we didn’t have much to showcase other than the history of our team members. In this regard, it was not surprising to us that our first meetings ended with investors saying: “Yes, we believe your story, but we would like to see a live three-year track record and a minimum of 50 million euros in assets under management in this mutual fund.” We mastered this chicken-and-egg problem with some institutional investors we already knew from prior relationships. Since these investors trusted our approach, they invested in the first year via mandates and so-called “Spezialfonds” (a regulated German investment vehicle for institutional investors) in our strategies. But it still took years to gather the expected assets under management for our mutual funds. So, institutional investors were the drivers of our growth at the beginning, and even today the majority (roughly 85%) of our assets under management consists of institutional money, mainly from pension funds.
Lupus alpha is not only focused on small- and mid-cap strategies, the company also runs a number of alternative UCITS funds. What was the reason for setting up this part of the business?
With the translation of the UCITS III directive into German investment law (Investmentmodernisierungsgesetz) in 2004, it was possible to employ derivative strategies in regular mutual funds and therefore also in German Spezialfonds, i.e., this regulation enabled asset managers to build portfolios with an asymmetric risk profile–a risk profile that was and still is in favor with institutional investors. Since this also looked very appealing to us from a business perspective, we decided to broaden our product offering and ended up as the first asset manager in Germany with a license to manage hedge funds. Since hedge funds have some reputational issues in Germany, the industry named the mutual funds that are regulated by the UCITS law as alternative UCITS. Today the management of portfolios with alternative strategies is an area with a high growth rate for us. This success is based on the experiences we had with the introduction of these products, since we set up a data base and built a team with deep knowledge in derivatives. Now we have a long track record in the management of portfolios with an asymmetric risk structure. One initiative we launched was the “Talent-Hotel,” where we hosted experienced managers with new strategies. Even though the Talent-Hotel no longer exists, it can be concluded that we and the managers learned a lot from this initiative, since the managers could run a number of strategies under real market conditions and see in a safe environment whether they would be successful.
Since Lupus alpha is well known for its ability to manage small- and mid-cap portfolios as well as alternative strategies, does it make sense to launch a small-/mid-cap long/short fund, since investors favor these products at the moment? Are you planning to launch such a product?
We get asked quite often by investors whether we will launch a long/short portfolio, since we have a successful 16-year track record in this segment. But from our point of view a long/short portfolio is quite a different animal. Even though our managers are well experienced and we have all the information on the respective companies within our data base, this does not mean we can be successful long/short managers; running a short book requires a different skill set than managing a long/only product. So, we are answering these questions with a clear “no.” We explain that we have all the people and processes in place to manage long-only portfolios, but we don’t want to tap into the long/short arena, since we have not set up processes for the management of short positions. It makes sense that a good long-only manager is not necessarily a good long/short manager, since a number of successful long/short managers do not have a background as stock pickers.
In hindsight what were the drivers for the success of Lupus alpha in the past?
In recent years, Lupus alpha has grown significantly, managing today 8.5bn Euros for institutional investors. One of our key success factors lies in our focused independency. When you look at the setup of the company you see that we are an independent asset manager with no banks or insurance companies in our ownership structure. This structure enables us to follow our philosophy and beliefs without influence from third parties. In addition, it was important for our success that we started with a team of experienced investment professionals who were well known in the markets.
So, experience and reputation are the crucial factors in Lupus alpha’s portfolio management?
The answer is both yes and no. Perhaps the most important driver of our success is the passion our portfolio managers and analysts show for their daily work. Everybody has to deliver on his task—that’s what every job requires, but I can see that all of our team members really love what they are doing. One example is the regular allocation meetings where our portfolio managers discuss the holdings in our portfolio. In these meetings you experience the passion of the portfolio manager for their stocks and of the portfolio managers for their portfolios; the analysts strongly advocate their picks, even if they are questioned by the portfolio managers about having reached their target price or showing an unexpected underperformance. These discussions are a fight for the best investment ideas. The high level of engagement in these discussions has not changed since the inception of Lupus alpha 16 years ago, and I strongly believe this will also be the case in another 16 years, with the difference that the team will be even more experienced at that time. We have not faced a lot of turnover in our portfolio management team since the inception of the company, and I think the consistency of our team is another success factor for Lupus alpha. Even though the environment we are in has changed a lot over the years and will continue to do so in the future, the philosophy of our portfolio management has not changed at all and won’t in the future.
What is your estimation for the future growth of the alternative UCITS segment in Europe?
From my point of view the alternative UCITS segment will be one of the fastest growing market segments in Europe. One of the drivers of this growth is the current low-interest-rate environment. If investors get 4% or 5% from a government bond, they won’t have to use alternative sources of return. But with the current interest rates institutional investors especially have to look for new (alternative) sources of return.
Thank you for your insights!