In early September of this year, Touchstone Capital, Inc was recognized as one of the largest money managers in Pittsburgh. Almost 20 years of steady organic growth has led the company to reach an asset under management level of $125 million. This begs the question, can an investment company get too large? Can growing too big be to the detriment of investors? The answer is yes.
Warren Buffet has spoken about this subject on a number of occasions. One time he said this, “it’s a huge structural advantage not to have a lot of money.” So, should Touchstone Capital investors be concerned if we’ve become one of the largest money managers in Pittsburgh? Are we getting too big? In fact, Touchstone Capital is small by national and international money management standards. To give you one comparison, Touchstone Capital, Inc. with $125 million in assets is far smaller than even the 10th largest registered investment advisory firm in the United States. Our neighbor in Pittsburgh, Bank of New York Mellon, has $240 billion in assets under management.
Touchstone Capital investors have a definite strategic advantage due to our relatively small size. Our best performing stock year to date is a company called NIC Incorporated. It trades under the ticker symbol EGOV. The stock is up 66% versus 19% for the Russell 3000. EGOV has a great business model, and is a business that we find extremely attractive, but it’s a very small company. When we bought it, it’s market capitalization was under $1 billion because of Touchstone Capital’s relatively small size, we were able to acquire 259,000 shares, and it took us only two trading days to acquire this significant position. Our investors now own over one half of 1% of the outstanding shares in the company making one of every 200 investors in NIC Touchstone Capital investors.
Let me put it this way, this position in NIC is significant for our firm and our investors. It represents 9.4% of our equity assets under management. That is why we were able to benefit from the runup this year, because we took such a large position relative to the size of our firm. Larger investment firms would have taken weeks or even months to acquire a position of that magnitude relative to their own size.
Actually, most investment firms could not purchase a meaningful position because they would end up buying the whole company. Going back to our example of Bank of New York Mellon, the same sized position in NIC that we bought would be less than 1000th of a percent of their assets under management. You could see that with a position so small, even a 75% return this year would have generated negligible returns to their investors.
So, what’s the point of all this? It’s not just the Touchstone Capital has a strategic advantage in the marketplace as investors, but in fact, you as an individual investor, have the same strategic advantage that we do. You can nimbly buy and sell positions in smaller companies that larger firms are either finding difficult to acquire or are prohibited from doing so altogether. Keep investing, but look for the opportunities in smaller companies that are afforded to you as an individual investor with a distinct strategic advantage.