February 2009

FUNDS SELECTION: Boutiques seek strength

If institutional investors continue to be unwilling to go with smaller, arguably more specialised, players, they help create an industry dominated by a select few. Niklas Tell reports... niklas_tell.jpg Fund and manager selection is, at its core, all about fund research. Over the years we have seen that it is difficult to build a pure fund research business and most companies offer their research capabilities through products such as funds of funds, or as part of an overall consulting offering. Over the last year or so the industry seems to have taken the next step in this development, where it is no longer enough to be an excellent boutique and instead specialist players become integrated parts of larger financial conglomerates.

Why is that? We are only human and when forced to take decisions we are sometimes, if not always, motivated by fear, uncertainty and doubt. This concept of ‘FUD’ was, according to Wikipedia, first defined by Gene Amdahl after he left IBM to found his own company, Amdahl Corp. “FUD is the fear, uncertainty, and doubt that IBM sales people instil in the minds of potential customers who might be considering Amdahl products.” From this we got the axiom that “nobody ever got fired for buying IBM equipment”.

I guess nobody ever got fired for going with a large provider rather than a boutique in the asset management sector either. Or, put another way, if institutional investors continue to be unwilling to go with smaller, arguably more specialised, players they help create an industry dominated by a select few. We have over the past year or so seen a number of examples in the fund selection space where independent specialist players are teaming up with larger entities.

On 2 April last year we saw that Investment Manager Selection (IMS) was being acquired by BNP Paribas. The company is now operating under the FundQuest brand, the multi-manager specialist within BNP Paribas Investment Partners. Late last year we also learned that Altis, the Swiss multi-manager boutique, was joining forces with ING. ING said at the time: “This move contributes to ING IM’s ambition to be a leading solutions provider for its diversified client base and responds to increasing market demand for a fiduciary management approach.”

That might be so, but it also points to the fact that it is tough to be an independent player, regardless of how excellent your research and product delivery is, when you don’t have a large enough distribution and sales network. Teaming up with a larger entity, such as BNP Paribas and ING, gives independent fund selection boutiques instant credibility with larger institutional investors and they also provide sufficient resources – not least in sales and marketing.

The same argument can be used to explain a similar deal in the Nordic region, which was made official in November 2007, where SEB – the Nordic banking group – bought Key Asset Management, a London-based manager of funds of hedge funds.
One could argue that this trend creates fund selection entities that are less independent, but at the same time it creates entities that have sufficient resources to do a good job.

But I have two or three questions for you: Is the trend outlined above positive or negative? Is it possible to successfully (operationally and financially) run an independent venture providing fund and manager research, or do you have to offer your research capabilities as part of implemented consulting or as part of a fund-of-fund operation?

Have your say at www.fundselection.org/blog .

Now, please keep me updated ([email protected]) to make sure this column covers what is most relevant in the fund and manager selection space.

Niklas Tell is a partner at Tell Media Group AB
©2009 Funds Europe

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