Basking in boutiques

Three years after marketing brains at Goldman Sachs Asset Management (GSAM) began talking about the “village of boutiques” structure, further publicised by Professor Amin Rajan, chief executive of consultancy CREATE, the position of the boutique among Europe’s fund houses appears to be stronger than ever.

So what is it about these smaller groups that can create both performance and customer loyalty, without the expense laid out on systems and client servicing?

The cultural difference is a simple one, says Muriel Favre, who set up technology specialists IT Asset Management in Paris in 1994, and now runs ?450m.

“The way that large managers in Continental Europe manage their money is always very benchmark driven. We are stockpickers,” adds Ms Favre, previously a fund manager with BNP Paribas insurance subsidiary Cardif and ABN Amro unit Neuflize, as well as France’s Fimagest. “Our way is to pick the best company for the best performance, to buy at a good time for good prices. Large asset managers are still strong buyers around the benchmark.”

France in particular spawns many boutiques, due to both regulatory and cultural reasons, believes Ms Favre. “The French mentality is very individualistic. Also, the rules are very open to creating new asset management companies run by two or three people. You don’t require a lot of capital to create a company, as you would in Germany.”

Distributors and manufacturers both agree that boutiques are much more successful in penetrating certain channels than others. “In the UK, boutiques can work with independent financial advisers (IFAs), but in those countries where the landscape is dominated by branches of big banks, it is more difficult for boutiques to break in,” says a senior manager at one of Belgium’s major banks. “You need a totally different type of organisation for distributing products in retail networks. The chances are more equal when it comes to selling to funds of funds.”

Fresh faces emerging

This argument is backed up by Ms Favre. “Insurance company platform distribution through IFAs has proved a very important development for boutiques. In France, the small firms became particularly popular, because they delivered performance in 2001 to 2002. Now there is a whole new generation of boutiques, as IFAs want to hear new names and new stories.”

The distribution effort at IT Asset Management, is indeed concentrated on markets such as the UK, where there are large discretionary advisers and wealth managers, such as the recently floated Bristol, UK-based Hargreaves Landsown, and established fund pickers – which themselves sprung from boutiques – including New Star and Jupiter.

“There is more and more interest in boutiques around Europe, because clients feel they have more direct access to a fund manager, that they are more transparent than large houses, and that they care about customers,” believes Ms Favre.

‘Even on good days, I don’t know what brand means any more. It is not irrelevant to have a brand, but you can still get major market share without it’ - Jean-Baptiste de Franssu, Invesco Continental Europe

“We really know about the customer and care about the people who invest in our funds. That’s the big difference. Large institutions don’t know who their customer is.”

This is a concept shared with Thierry Flecchia, chief executive at Flinvest, which has achieved good performance from investing in smaller cap, entrepreneurial companies, and selling the fund to the very type of family concerns who run such companies. Founded by Mr Flecchia, who previously ran private equity for Paribas and equities for another boutique, Oddo, in 2003, Flinvest runs ?550m today.

A family business

“We have 35 wealthy entrepreneurial families that trust us with their personal money and 30 institutions. We are talking about investments of between ?2m and ?25m,” says Mr Flecchia, holding court in his glass fronted office, overlooking the high ticket fashion outlets and restaurants of the upmarket Avenue Montaigne in Paris.

“We could manage maybe ?1.5bn if we paid retrocessions to distributors, because we are famous. But at the moment, we can have direct contact with each investor, rather than more assets and less performance. If we were bigger, we would not have such a sticky relationship with investors. That’s quite a common problem in France, where the market is sales and retrocession driven. Our sales are word to mouth. We have direct contact with 60 clients.”

In fact, the bigger the assets, the bigger the problems in generating performance, believes Mr Flecchia. “Relative to the industry, the assets we manage represent a tiny amount of money,” he admits. “You need talent to run money, not the assets of an HSBC. If I was in charge of the assets at HSBC, event if you have talent, it’s difficult to generate returns, due to diseconomies of scale. We manage money in classes where there is inefficiency,” he says. “It’s not possible to invest in a contrarian style with big assets, as you need to be benchmarked.”

Flinvest also outsources certain asset classes, and is happy to select funds for clients wanting broader exposure. For instance it has used JPMorgan funds to invest in Japan and Morgan Stanley funds in broader Asian portfolios. What is interesting here, is that Mr Flecchia’s fund selection team often favours bigger groups over boutiques. “We select only those fund managers we have known for years,” he says. “We can go into big institutions if there is a good fund manager team, and boutiques if they have good experience.”

‘There are no global firms which can meet all client needs, when there are so many opportunities in the market. In order to catch these opportunities, it is better to be decentralised than centralised’ - Gilles Glicenstein, BNP Paribas Investment Partners

This notion of boutiques sourcing products from larger institutions is embraced by Philip Saunders, director of Meteor Asset Management, a London-based selector and adaptor of structured products constructed by investment banks. Meteor’s clients are mainly IFAs and insurance companies.

“They can go to big providers like SocGen, but if you are going direct to a bank, do you know you are getting the right deal?” Asks Mr Saunders. “It is our job to go to several banks and talk about the same structure to make sure customers are not short-changed. There can be huge differences in price between banks, particularly with a zero-coupon bond.”

Dangers of relying on a guru

Jean-Baptiste de Franssu, CEO of Invesco Continental Europe and newly elected vice president of the European Funds and Asset Management Association (Efama) acknowledges the success of boutique houses, but believes they have their limitations.

“When you see boutiques today, running as much money as they do, you question the whole notion of brand. Even on good days, I don’t know what brand means any more. It is not irrelevant to have a brand, but you can still get major market share without it,” reflects Mr de Franssu. “There are boutique managers who have been around for 20 years with a couple of hundred million, then suddenly they take off, and they have brand too.”

But there are reasons why distributors need to be wary of their exposure to the smaller players, he believes. “There is a succession issue in many boutiques. What if the guru is run over by a bus, who takes over? This is a big worry in the IFA market in France, which has completely focused on three or four boutiques in the last five years, which came from nowhere. But what if there is a major performance issue in two funds, and the guy disappears tomorrow, what happens? We are more diverse and able to go through a poor performing period, but prove we are still there. Now we are back as a top performing organisation, which we were not two or three years ago. That’s the bonus of being with us, or an organisation like Fidelity. Can a boutique to this? I am not sure they can.”

‘If we were bigger, we would not have such a sticky relationship with investors. That’s quite a common problem in France, where the market is sales and retrocession driven. Our sales are word to mouth. We have direct contact with 60 clients’ - Thierry Flecchia, Flinvest

Other, larger houses are increasingly trying to create the boutique structure within their groups, to boost performance, by giving their star players greater motivation, reward, more investment freedom and their own balance sheet to run, so they sink or swim on their own efforts.

BNP Paribas is the latest to introduce an official boutique structure, now including its BNP Paribas Asset Management franchise into a much larger group called BNP Paribas Investment Partners, which incorporates 15 seperately labelled units, such as fixed income player FFTW and fund of hedge funds house Fauchier Partners.

“We are not changing our focus,” says Gilles Glicenstein, chairman and chief executive at BNP Paribas Investment Partners’ ?350bn operation. The structure is simply changing to reflect issues in the industry. “The issues are that no one can have a one-size-fits-all approach,” says Mr Glicenstein. “There are no global firms which can meet all client needs, when there are so many opportunities in the market. In order to catch these opportunities, it is better to be decentralised than centralised.”

The process at BNP Paribas is that external boutiques are normally identified, before a plan is drawn up about how to bring them into the organisation. “The majority of our partners were not created organically and made independent,” says Mr Glicenstein. “We entered into partnerships with them in an early stage of their history. This was the case with Fauchier, Overlay Asset Management and with Axa on the ETF side. These firms then were either non-existent, or very small.

“We find a partner with the skills to grow internationally, that needs distribution, to link up with a group like us. We have a track record and reputation. We are not superior to those partners. We might be bigger, but that does not make us better than them.”

This is a very different to the GSAM approach, believes Mr Glicenstein. “We don’t want just one line of product, with one brand, but to diversify our styles as managers, to have the best specialising in each category. Our business model cannot be to buy as many assets as possible and integrate them into one model, like the Morgan Stanley or Goldman Sachs story.”

There is certainly respect for the GSAM operation within BNP Paribas. It is Mr Glicenstein’s belief that only US organisations such as Goldman can develop a truly global brand in asset management. That is one of the reasons why he feels it is better for his organisation to work under a series of smaller brands, each directed to its own niche market. However, there is also a belief that the GSAM “village of boutiques” exercise is a reactive measure to stop the best talent leaving for hedge fund groups, rather than a client facing move to present a combination of strategies. Indeed, GSAM allows and encourages its top managers to run hedge funds alongside their long-only responsibilities.

“Goldman Sachs claims to organise itself as a series of boutiques, but this is because they face the situation that more and more talented fund managers want to create their own firm, to have a bigger piece of the pie. There is a big trend of young and talented people leaving Morgan Stanley and Goldman Sachs to start their own funds,” says Mr Glicenstein. “So it is very important to Goldman Sachs to propose to their staff to have a structure where young people can work, like hedge funds, but in a big firm.”

Another chief executive of asset management is sceptical of restructuring trends and their chances of success.

“There are some things you need to centralise in the interests of the shareholder. But for Continental Europe based banks or insurance companies, the notion of going into a village of boutiques entails a lack of control at the centre, and high remuneration packages at the edges – much higher than those of executives in Paris,” says the board level source. “It will not be easy for these companies to collect enough assets to pay for this. There is one exception – Allianz in Germany have done it quite well.”