A colleague recently reminded me that 15 years ago we celebrated Tocqueville Asset Management's tenth anniversary with a special issue of Themes, the publication we distributed to communicate with our clients and friends before the advent of the Internet.  So, if my arithmetic is correct, this year marks the twenty-fifth anniversary of our firm.

Tocqueville was founded in 1986 as subsidiary of Tucker Anthony & R.L. Day to manage  private accounts for high net worth clients. The firm became independent in 1990 and has been providing investment management services since its inception.
 
It has not been a peaceful quarter-century in the financial markets.  Shortly after Tocqueville’s launch we had to weather the spectacular 1987 stock market crash, followed by the 1990-1991 recession.  Then, after a relatively long bull market, the global recession of 2000-2001 hit, and finally the global financial crisis that started in 2007-2008 and arguably is still going on.  The period was also rife with speculative excesses, frauds, and other scandals, which we generally escaped through a combination of shared experience, common sense, discipline, and probably some luck.  Still, through it all, Tocqueville was able to grow and prosper – as were its clients.

A quick look back seems to confirm my recollection that we started this journey with nine employees and about $200 million under management, largely on behalf of clients inherited from my late partner and mentor, Christian Humann.  At this writing, we have about 120 employees and $12 billion under management.  This does not qualify us as a mega-institution by today’s standards, but it puts us on the map.

Compounding and client loyalty
Part of our growth has derived from the natural compounding of portfolios under prudent management, which I have chronicled before (“The Rear Long(er) View” – February 8, 2011).  But compounding only happens if you keep your clients, so I credit our growth as a firm first and foremost to our staff’s dedication to serve our clientele, but just as importantly to the loyalty of these pioneer families.

Indeed, a majority of our original client families are still with us today, and we now often manage the assets of three generations of Tocquevillians.  In a few cases, I look forward to being around to welcome to our firm the great-grandchildren of our original clients.

Growth through affinity
In 1991 Robert Kleinschmidt joined me at the helm of Tocqueville, after a successful early career at a leading research-oriented investment firm.  My own, main ambitions had always been rather modest: to excel at what we do and to enjoy freedom and comfort while doing it.  Robert added measured growth as an objective, feeling that only this would allow us to attract more talent over time and give us the resources to survive in a globalizing and increasingly complex and competitive marketplace.

Clearly, as the figures cited earlier testify, he has been highly successful in this endeavor.  But beyond the figures, I credit him for attracting a high-powered team of professionals who have proven highly compatible with the culture of Tocqueville Asset Management.  Specifically, I think that one of Robert’s prime achievements has been to preserve the atmosphere of an entrepreneurial, family firm in spite of the growth he has engineered.

Today, we have more than 20 portfolio managers, each working with his/her own research team and support staff.  They work independently and service their own clients, but there is much more cooperation and integration among these teams – both in the area of investment research and ideas and in client service – than is found in many other institutions.  Our secret has been cooperation through affinity rather than organizational structure.

Imagination as the mother of opportunity
We have too many partners, who all have contributed significantly to the firm’s success, to mention every one of them along with their individual achievements.  The case of John Hathaway, however, is particularly interesting, as it illustrates our ability to be both independent in our thinking and opportunistic when circumstances justify it.

John had been Robert Kleinschmidt’s friend and colleague early in their careers; and after leadership positions in research and investment-management at several prestigious firms, he already was a well-known figure in the investment business.  Robert convinced him to join Tocqueville in 1997, to help lead and inspire our research effort.  Shortly after joining, John convinced us that there was an outstanding long-term opportunity in gold.  The fundamentals (global budget deficits and central-bank money printing) were inescapable, and the contrarian case compelling:  “Everyone is closing their gold mutual fund for lack of demand – we have to create one to offer our clients a diversified vehicle to invest in the metal.”

When the Tocqueville Gold Fund was launched, in mid-1998, gold was selling below $300 an ounce.  At this writing, it is selling above $1800, and John’s fund, having attracted an expanding crowd of investors, has been a notable contributor to our firm’s growth.

Globalization
As we grew, we became much more global, both in our thinking and in our reach.

Tocqueville’s first experience with globalization was more a matter of circumstance than planning.  Not long after founding Tocqueville Asset Management, I had created Tocqueville Finance S.A. in Paris, France.  This was initially intended merely to serve as a two-member research office to identify investment opportunities in Europe and Asia.  But, over the years, Tocqueville Finance grew independently and developed into a highly successful investment firm in France.  As this happened, Tocqueville Asset Management ceded much of its Tocqueville Finance capital to its subsidiary’s incoming partners, on the theory that the capital of a partnership-like investment firm should belong mostly to the people who work there.  Today, Tocqueville Finance, now a full-service investment firm, has become part of the banking group of the French Post Office, though (at their request) we retain a small portion of their capital and maintain cordial relations with the whole group.

Subsequent globalization has been more deliberate and evolutionary.  Very early, we developed a policy of attracting young interns.  Initially, this was conceived as a service to our clients:  A number of their children and grandchildren performed internships with the firm, to familiarize themselves with our investment style and disciplines.  But, as the selection criteria and the training process became more exacting, we began to attract young, promising talent from a much broader base: university graduates from Europe to Latin America and from Lebanon to China.  In the process, the firm’s thinking and culture evolved – especially as a select few of these interns permanently joined our research staff.

Today, we can claim to be a true global investor – not only because we look at the world as our investment universe, but because our investment “brains,” even when they focus primarily on American-based companies, come with their cultural heritage from such faraway places as Hungary, China, Argentina, or Nepal.

Meeting the challenges
The investment-management landscape is changing at an accelerating pace.  Technology and mathematical models have inflated the volume and speed of trading, with a significant portion of orders now automatically triggered by computers and exacerbating the volatility of markets.  The proliferation of constantly evolving derivative and synthetic products has introduced more distortions to an activity that used to be much more closely associated with the fortunes of real businesses and real economies.  To a new generation of investors, stocks, for example, are increasingly just pieces of paper rather than actual shares in operating companies.  In the end, of course, fundamentals will prevail.  But in the interim, as the famous economist John Maynard Keynes reportedly said, it feels like “the market can stay irrational longer than you can stay solvent.”

More recently, to try and control the excesses that have accompanied the speculative environment described above, regulatory and supervisory authorities have engineered a multitude of reporting requirements, rules, and regulations.  The result has been an ever-growing mountain of paperwork, which is making it difficult for a small or even a medium-sized firm to operate efficiently and profitably.

These are all challenges that, with Robert Kleinschmidt and the highly competent and responsive team he has assembled, we will have to confront in coming years.  I have full conviction that we will continue to be successful in doing so, and I will let Robert address some of his ideas about Tocqueville’s future.

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Following Francois has always been a bit like what the vaudevillian said:  “Never follow an act that has children or dogs.  You just can’t look good by comparison.”  Oh, well – such is my lot.  But, while following him is difficult, being his partner has been a breeze.  Francois brings and has brought so many positive intangibles to the culture and intellect of the firm that it would require a book on management rather than a review of the highlights of the last 25 years to do them justice.  But permit me just one example, because it has been so important to our success.  The day before I first joined Tocqueville 20 years ago (and rather reluctantly at that, because the firm was so tiny and so unknown), Francois left town for almost three months.  In his absence, I sat at his desk and began the process of overseeing the firm.  Only later did I realize that Francois’ absence had been deliberate and for my benefit.  He knew that had he been at his desk, the existing employees who had looked to Francois for so long for guidance and approval would have questioned every decision I made.  By removing himself from the scene long enough for me to gain the respect and the confidence of the team, Francois made the transition easier for everyone.  More than that, he instilled in all of us one of the guiding principles of the firm:  Surround yourself with talented people and don’t micromanage them.  If there has been one single secret to our success, it has been this.

Talented people don’t like to have others looking over their shoulders and telling them what they can and cannot do.  Almost by definition, I have found, the best in our business are authority-resistant, independent thinkers.  So, collegiality rather than coercion became our trademark.  As the years went on, this semi-autonomous collection of bright, motivated investment professionals became more and more attractive to other potential partners, as most of the industry was going in exactly the opposite direction, becoming more and more concentrated and centralized.  At the same time, our managers and analysts have become increasingly collegial in their work.  Working together, it turns out, is more rewarding (and productive) when it is voluntary.

Like John Hathaway, many (but not all) of the partners who have joined us in the past two decades were friends and colleagues of mine from earlier in my career.  Whatever doubts they may have had about me, or Tocqueville, were dispelled once they had the opportunity to meet with Francois.  His ability to put people at ease and to convince them of our hands-off approach to our partners made recruiting them much easier for me.  Once here, our partners became valuable contributors to our process and, as importantly, highly successful managers.  Some have built businesses and others have expanded the businesses they brought to the firm.  Tellingly, none has left us.  Tocqueville, it seems, is a little bit like the Roach Motel of yesteryear’s television commercials:  You can check in, but you can’t check out.

I should point out one other thing.  Francois is funny, even downright hilarious at times.  Humor is a very important part of our culture.  Investing is a very serious business and we take it very seriously.  But without humor, an office can be a very dreary place, not one where you would want to spend a lot of time.  Tocqueville is anything but dreary.  We believe that if we are having fun, we will work longer and harder and do a better job.  And humor is an effective way to break the tension and deflate the pretentions that often come hand in glove with the investment business.

Looking ahead
So where do we go from here?  It has always been our belief that small is beautiful.  Small makes it possible for everyone to know their colleagues.  Small is more focused, more personable, more manageable.  Years ago, while speaking before a roomful of financial planners, I was asked what was my goal for Tocqueville.  “We hope to continue to lose market share,” I replied, “but not too quickly.”  Our marketing consultant quit the next day, but I was being serious.  Growth for growth’s sake is of no interest to me or our partners.  Far more important is to achieve superior investment returns and client satisfaction.  If we do that, growth will come.

What is astonishing is what constitutes small these days.  Not too long ago, approximately $12 billion of assets under management would have seemed very large indeed.  No longer.  Truly large firms have hundreds of billions under management.  At the same time, truly small firms of $1 billion or less under management are a dying breed.  Regulations, pressure on fees, and the costs of compliance are driving smaller firms to seek merger partners.  We have spoken with a few and may well incorporate some in the years ahead if the personalities fit and the chemistry is right.  But we have reached the stage of our development where we are under no pressure to do anything other than grow organically, care for our clients, and build a team for the next generation.  This latter is a work already in progress.  My hope in constructing this team is to replicate with younger people the culture and abilities of the group they will eventually replace.  That is no small task.

At least part, and a major part at that, of what makes Tocqueville unique is our “old-fashioned” approach to investing.  We don’t use computers for high frequency trades; we don’t use esoteric financial “instruments” to hedge our portfolios; we don’t “asset allocate”; we don’t employ derivatives; we don’t look at equities as mere pieces of paper.  We invest in companies and we invest for the long run.  Obviously, an old-fashioned approach is one that resonates more with “old timers.”  Our challenge going forward is to find and train younger people who will embrace these old-fashioned and time-honored investment values.  Whatever other compromises we may have to make in a more highly, if not more intelligently, regulated investment environment, these values will remain inviolate.

François Sicart and Robert Kleinschmidt
September 2011

This article reflects the views of the authors as of the date written and may change at any time.