July-August 2010

BOUTIQUES: small firms are big news

boutiquesBoutiques are today’s buzzword as specialised asset management firms continue to spring up ... and lure managers away from larger firms, reports Fiona Rintoul. Another day, and another launch of an investment boutique. If not a launch, then a raid by a boutique on staff at a larger rival. Back in February, Bruno Crastes, global head of fixed income at Amundi Asset Management, made headlines when he left the recombobulated French behemoth, apparently with the intention to set up his own fixed-income boutique. More recently, RWC Partners demonstrated the power of the boutique asset manager when it lured two Threadneedle fixed-income managers into its fold.

At the same time, large investment houses are increasingly moving towards what is often termed a ‘multi-boutique’ structure. BNY Mellon Asset Management is one of the best-known examples with 18 companies in its shop window each operating completely autonomously as far as investment goes. Other examples include Axa Investment Managers, Nordea and Aviva. Last year ING Investment Management became one of the latest firms to adopt a multi-boutique structure, and earlier this year Hermes Fund Managers, the investment arm of the British Telecom pension scheme, announced “its continuing evolution as a multi-boutique asset manager” and established a global credit boutique to be run by two ex-Fortis managers.

Is this, then, the Age of the Boutique?

The investment management boutique is a comparatively new phenomenon. In Europe it all started around 1997 with the launch of Artemis in the UK. Since then, boutiques have multiplied. Over time, they have come to be taken much more seriously and to play an ever more important role in the investment management universe.

“Consultants are far more open to boutiques now because they deliver alpha,” says Paul Boughton, head of continental European sales at Neptune Investment Management. “Five to six years ago, consultants were far less responsive.”

Boutiques themselves are also becoming more innovative in their marketing. Neptune recently participated in a roadshow with Thames River, Martin Currie and First State. The roadshow brought these four independent firms’ various expertises to the attention of investors in the German-speaking world, with each firm showcasing one asset class. Neptune covered global and emerging market equities, First State showcased resources, Thames River offered global credit and Martin Currie offered European equities.

“We didn’t want boutiques mixed up with big houses,” says Boughton. “We still do other events in conjunction with large companies, but we thought it would be a good idea to have a separate event that just had boutiques. We deliver long-term returns to our clients in a different way and we support our clients in a different way.”

Favourable market
This is just one example of how boutiques are fighting their corner in a market where the boutique investment manager is increasingly common and increasingly accepted. And in a generally difficult environment, it seems that boutiques are going from strength to strength.

According to Northern Lights Ventures, a private equity firm based in Seattle, Washington, that specialises in investment in boutique asset managers, the current market environment favours the formation of investment boutiques. Of course, many of the trends that mitigate in favour of boutiques – the separation of manufacturing and distribution, increasing complexity, the drive towards specialisation, and the separation of alpha and beta – have been ongoing for some time.

“You’ve got to be either big or small. The mid-tier players will have difficulty,” says Boughton, echoing a theme that has been with us now for several years.

But according to Northern Lights Ventures, the crisis pushed a button that will cause this trend to accelerate.

“In today’s tougher economic environment, the competition for share of control, share of mind and share of wealth inside asset management firms is likely to blow some firms apart,” says Andrew Turner, chairman of Northern Lights Ventures. “The environment will likely accelerate the separation of distribution from manufacturing and put the impetus behind a new wave of boutique formation.”

Certainly, in Europe one of the asset management firms that emerged best from the crisis was the Paris-based boutique, Carmignac Gestion. Back in the first half of 2009, Carmignac topped Lipper FMI’s net-inflow table with net sales for the half year of €7.5bn, comprehensively beating much larger rivals across the continent.

“Everyone is looking for the new Carmignac,” says Boughton of his recent trip to Germany. “They’re very open to boutiques in mainland Europe. There’s a great appetite.”

Ultimately, the rise of the boutique can perhaps be brought down to two factors: the hunt for alpha and the drive for specialisation in an increasingly complex market.

Some of the most successful boutiques have focused on hard-to-reach areas – for example, emerging market debt in the case of Ashmore Investment Management, and certain Asian markets in the case of Atlantis Investment Management – where a keen focus can make all the difference. New boutiques are also springing up that concentrate on emerging areas. Examples include Silk Invest, a Middle East and Africa specialist, Active Earth Investment, which focuses on investment in sustainably managed companies, and Alquity, which targets sustainable investment in Africa.

“Client needs are changing continuously over time,” says Al Denholm, deputy CIO at ING Investment Management, which began implementing a multi-boutique structure 18 months ago. “You are more likely to be able to meet those needs if teams are focused on specific sub-sectors or specialisations. Fifteen to 20 years ago the product line of a typical asset manager was much more limited. Today, an asset manager such as ING has 150 different strategies.”

In the all-important hunt for alpha, the key advantage of boutiques lies not so much in their size as in their structure.

“We have an employee-owned partnership structure,” says Dominic Johnson, CEO of the recently founded emerging markets boutique Somerset Capital. “That’s how financial services companies used to be run. It means staff don’t turn over. That’s important because it means you don’t get process stir. The most important thing that we offer our clients is consistency of process.”

In a world where the typical fund management professional moves on about every two years, Johnson sees his job at Somerset Capital as a job for life.
“I’d be very surprised if any of our partners left to work in another organisation,” he says.

Autonomous structures
This long-term perspective combined with the company’s ownership structure serves to keep his and his colleagues’ interests aligned with those of their clients, he says. 

At Neptune, Boughton also emphasises the importance of a company’s ownership structure. Neptune, which has about 80 employees, is 75% owned by directors and staff, with the remaining 25% owned by small shareholders.

“It’s not just about being small,” says Boughton. “Everything is in the staff and directors’ hands. We’re not pushed to do anything we don’t want to do.”

Sometimes it is also about being small, however. Somerset Capital runs three funds and is sticking with that, and the company is very aware that it could not do what it does to the standard it currently does if it moved above a certain capacity.

“In active management, if you manage too many assets you can’t get the returns for the clients,” says Johnson. “If you have billions of dollars under management you have to buy bigger companies and then you get close to the index.”

He says the partnership structure means there are no external pressures to launch new and perhaps inappropriate products. There is quite a lot of stability in the client base and staff. This, says Johnson, means the fund managers can concentrate on managing money rather than being distracted by the need to fly around giving presentations.

Of course, there are downsides to the boutique structure. A couple of the more obvious ones are that if a firm is focused on one asset class and that asset class is not doing well, then the firm won’t be doing well either. Another concerns the running of the firm.  The business needs managing as well as the funds, and there is no guarantee that being a stellar fund manager means you can run a business – rather the opposite, in fact.

Multi-boutique structures
A way round these problems for people who would like to work in a boutique – and a way for larger asset managers to get in on the boutique action – is the multi-boutique structure. In theory, this type of structure provides the benefits of a boutique – alignment with client interests, ability to focus on running the funds, the nimbleness associated with a small size – without distractions caused by, for example, compliance and marketing.

There have been many experiments with such structures, most of which have involved buying in existing boutiques or departments and slotting them into a multi-boutique structure. ING Investment Management is a comparative newcomer to the multi-boutique structure and has taken the less usual route of constructing boutiques internally. The firm’s Denholm freely admits that this can cause tensions and ambiguities, but he says it’s worth it for the benefits that come from handing some of the control over to the boutique managers.

“The arrangement has to be managed,” Denholm says. “We have guidelines as to which decisions are taken at the boutique manager level and which at the investment leadership team level.”

Responsibility for developing new ideas is handed over to boutique managers. The leadership team then checks the integrity of the process and risk management, and prioritises the new product ideas. When it comes to multi-strategy products it’s important to make sure the right incentives are in place.

“We don’t give complete autonomy to the boutiques,” says Denholm. “We are trying to be competitive across all product categories but integrated. You always have to strike a balance between the overall business needs and how you incentivise the team for its own contribution. The key elements of compensation are a blend of common goals and individual boutiques’ goals.”

The way forward
As Jeff Monroe, chief investment officer at Newton, part of BNY Mellon Asset Management, put it in a recent Newton report on the merits of active investment management: “The crisis exposed the frailties of many investment approaches which, far from controlling investors’ risks, actually served in places to amplify them.”

It’s time to try something different. Disappointed in their active managers, many investors have switched to passive, a route that Monroe seeks to discourage. But what investors definitely don’t want is to pay active management fees for products that do not produce returns. With their ability to align client interests with those of the investment managers, boutiques in their various manifestations seem to offer a way out of the not-quite-good-enough morass.

Indeed, there is perhaps no other way to manage the increasingly complex investment universe than to segment. That makes life vastly more difficult for asset allocators, but new ways to allocate to boutiques have emerged – Thames River, for example, has a global boutiques fund – and the signs are that they are up to the challenge.

Consultants were reasonably quick to recognise the potential of boutiques and have in some ways driven the trend. To some extent, they themselves have started to segment in order to manage the increasing complexity and specialisation that faces them. Specialist consultancies have emerged in recent years in areas such as fiduciary management and socially responsible investment, and Mercer has now segmented its manager search offering into four boutiques.

“The boutique model is the most generic model that’s out there right now,” says Denholm. “Eight to ten years ago alpha was the buzzword. Boutique is the new buzzword. What is important to note is that no two boutique models are the same and each organisation needs to develop its own boutique model to best represent their overall business needs, product offering, geographic footprint and desired culture.”

©2010 funds europe

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