Multi boutiques make their mark

At a recent conference on the future of fund management, Jon Little of Mellon International identified a series of trends in the industry. Referring to the prediction 10 years ago from Goldman Sachs Asset Management that only giants or nimble pygmies would survive, he pointed out that there are significant pressures in each direction today.

The institutionalisation of retail sales, for example, has led to greater demand for a strong investment culture from companies supplying the retail market, along with fund buyers' insistence that they be able to meet key staff. These effects would tend to favour the boutique, Little suggested.

However, those professional fund buyers who want better access to the investment staff than the intermediaries who were traditionally satisfied with a good story from the marketing guys, also demand the strong client service and sales and marketing support that only a large company can provide.

In the move to open or guided architecture, boutiques are favoured because they can convincingly talk about their specialist product, always a hit when you are trying to distinguish yourself from a dozen other products.

But once a distributor has bought into the concept of guided architecture, larger fund manufacturers start to seem more attractive because it is easier to deal with a few big relationships instead of scores of single small funds from all over the place.

Big companies are also more likely to be able to cope with cross border business and offer the wholesaling support required.

Little identified other trends: the rise of the ‘new balanced' mandate, the trend to defined contribution of pensions, the war for talent and the industry-wide increasing emphasis on systems for compliance and risk management. Each of these can be dissected in the same manner, pushing in opposite directions. Is it better to be a slow but reliable giant with economies of scale, or a small and feisty specialist, which may not have the ability to deal with volume?

For Little, the answer is the multi-boutique. This is not a new answer; a McKinsey report in October 2006, ‘The asset management industry; a growing gap between the winners and the also rans' identified three successful business models that tend to dominate the top performers in terms of operating margins in the US.

What they term "at-scale competitors", companies with over $100bn in assets under management, showed an average profit margin in 2005 of 35%, companies that focused on a single asset class managed 37%, as did multi-boutiques. This compares with a 20% average profit margin for the rest of the industry.

According to the report, the main factor distinguishing multi-boutiques from competitors was their high productivity. In institutional sales, for example, their productivity was more than 50% better than the average similar size firm using a different business model.

But this is all very well for the asset management firm - do its clients care if its sales figures are better? Surely what they care about is return.

According to Jonathan Polin, sales and marketing director at Resolution Asset Management, there are benefits for the investors to the success of the multi-boutique structure.

"At the end of the day, you've got a small boutique that is only interested in performance," he says. "This aligns their interests directly with those of the client."

The Resolution model is unusual, but could be seen as the natural end of approving of the multi-boutique style.

Resolution decided to turn around its ailing asset manager that depended largely on captive assets by forming joint ventures with individual investment managers or small teams. It owns these businesses on a strict 50:50 basis, giving total investment autonomy to the managers while requiring them to use all Resolution's infrastructure and systems. Resolution pays all the running costs, seeds the funds and deals with sales and distribution. In return it gets 65% of base fees and half of performance fees.

The manager gets to feel he is running his own company free from the administrative hassle of operational issues and capital for his bright investment idea.

 

o far, all three joint ventures have been successful for Resolution: Argonaut is a European equities shop whose High Alpha fund delivered 71.4% return in its first 21 months of existence; Cartesian is a UK specialist, with six out of eight funds in the top quartile, and Hexam is a recently launched emerging markets specialist.

This idea of setting up joint ventures with clever investment managers was largely in response to one of Little's trends: the war on talent. Resolution was in trouble after taking a beating when the tech bubble burst, and it was having real difficulty reinvigorating demoralised staff or attracting new talent to its Glasgow base.

"In Glasgow, you're fishing in a very small pool for talent," says Polin. So it identified what factors would stop a talented fund manager from setting up on his own. These were initial capital, ability to build a track record, the burden of administration and the challenge of distribution. Since it could provide all of these, especially with the captive assets of their insurer Resolution Plc, it decided to create a beautiful golden cage.

This sounds like a dream for the managers themselves and Resolution appears to be doing nicely out of it: "We'd rather have 50% of something than 100% of nothing," Polin says. But are there really advantages for the customer? The sales figures suggest they are getting something right. In 2006, third-party sales tripled, with more than £1bn (€1.46bn) coming in on the back of "strong investment support for its multi-boutique investment strategy", bringing its total assets under management to £61bn.

Investors may be attracted to the idea of a high performance fund of the kind associated with the impassioned ideas-people of boutiques, combined with the security that comes with knowing the company managing your money has invested in major operational infrastructure and risk management systems, as well as having a corporate reputation to maintain that does not just depend on a single owner-manager.

There are many different versions of what a multi-boutique might be. Mellon Global Investments is an umbrella for a number of almost completely autonomous investment companies, such as Newton, Pareto Investment Management or WestLB Mellon Investment Management.

Allianz Global Investors is another example of this. It is clearly a challenging task to oversee a stable of very distinct fund manufacturers (AGI's includes quant manager Nicholas Applegate Capital Management and global equity house RCM, as well as bond doyen PIMCO), but given a clear vision of the objective and a steely discipline coming from the top, it seems it is possible, even desirable.

Other companies implement a strategy of dividing the front office into a number of small investment teams and see that as creating a multi-boutique. F&C and Gartmore have adopted this strategy, as has Resolution to some extent since its internal asset managers are divided into eight in-house teams.

To the naked eye, AXA Investment Managers fits into this box, but the firm is adamant that it instead consists of ‘multi-experts'. This has the advantage that it can insist on global branding while still claiming many of the advantages of the small specialist investment teams.

Although the trends identified by Mellon's Little have certainly created the right conditions for the establishment of multi-boutiques, it remains to be seen whether the model will stand the test of time and an unfavourable market environment. It seems likely that, in common with so many other good ideas, it is good only in the hands of those who understand it and get it right.