Investment boutiques: Not everyone's cup of tee

Starting up a funds boutique might sound like a good idea, but research shows that buyers still want the big-name suppliers, writes Andrew Hutchings. What are the career opportunities for investment professionals in their late 30s or early 40s? One is to be a team player in a large asset management group. This requires the tailoring of the individual’s investment approach to match the employer’s philosophy. In this situation, they run the risk of being replaced with people in their late 20s who cost 50 per cent less. A switch to line management, moving from running portfolios to people, is another alternative. In the past, particular individuals made this successful transition. But it is less common today, partly because fund groups prefer professional administrators for executive roles and partly because they are employing fewer managers anyway. Investment professionals’ third option is setting up a boutique funds house to take advantage of their professional reputation, track record and experience. Far more often than not, they will look to provide a hedge fund. Although the establishment of a hedge fund boutique requires outlay on systems and staff, this is the alternative chosen by many many talented investment professionals. But their collective assumption that most buyers of third party funds are pleased with the large numbers of new hedge fund boutiques may be incorrect. Out of sight, out of mind Across Europe as a whole, only 9 per cent of distributors have identified hedge funds as useful products or initiatives that were absent from the offerings of fund groups. This was one of the key findings of interviews conducted last November by Sector Analysis with 250 buyers/ distributors to identify the products or initiatives that they think are missing from the European third party fund market place. It was explained that the buyers should only refer to products or initiatives perceived as successful in satisfying an existing need. Hedge funds were mentioned by 11 to 14 per cent of buyers in Germany, Sweden, Italy and the UK, but by fewer than 10 per cent in other European countries. A wide variety of other products or initiatives featured in the responses received from 38 per cent of buyers. These included funds of funds, structured products, derivative-based funds, real estate funds and exchange-traded funds. Chart 1 shows the product gaps identified by the buyers. No fewer than 36 per cent said that they could not think of any products or initiatives missing from the market. They felt asset management companies collectively offered all the products they need. This view was consistently held across nine of the 10 countries which Sector Analysis surveyed. Except in Italy, “no products/initiatives are needed” was one of the top three responses in every single country covered. Over half of the buyers interviewed in Switzerland, Belgium and the Netherlands gave this answer, as did more than one third in the UK, Sweden, Germany, Luxembourg and France. Meanwhile, 17 per cent of buyers suggested that (typically capital) guaranteed products were an obvious gap in the market place. Small names are no names As a separate exercise, Sector Analysis asked the buyers to say how they felt the newly established fund boutiques compared with large suppliers. The buyers’ responses are summarised in Chart 2. In every one of the 10 countries surveyed, at least 30 per cent of the buyers said that they felt negatively about the new boutiques. In Sweden, 55 per cent of buyers indicated they felt that the boutiques compared positively with the large suppliers. In all other countries, the equivalent figure was smaller. The buyers identified several reasons why they felt boutiques compared negatively with large suppliers. Often these reasons were related to the lack of a strong brand. As one Dutch universal bank put it, “small names are no names.” One German portfolio manager observed that “private investor confidence in boutiques is non-existent.” Often investment performance, or perceived lack of it, was an issue. “Boutiques are too little and too specialised, so it is difficult for them to achieve good results”, said one Italian bank. “We have used boutiques in the past but there were too many funds which failed to fulfil our expectations”, said another buyer. “Specialised products used to sell well, but they have become too risky”, lamented another. Sometimes the boutiques were seen as being less stable than the larger players. As one Swedish universal bank put it: “I would hesitate to recommend the boutiques to my customers for long-term investment. Stability of ownership is important and I perceive the boutique firms do not necessarily offer this.” Most of the buyers who felt the boutiques compared positively with the larger suppliers considered their specialisation was an advantage. In addition, the boutiques were seen as enjoying greater “flexibility”. As one Belgian portfolio manager explained: “They are able to tailor to specific needs and can move quickly relative to the market dinosaurs.” Interestingly, given their comparatively smaller resources, the boutiques were seen as being able to provide higher levels of service. As one Spanish portfolio manager explained: “The boutiques are well placed provided that they continue to offer high levels of individual service and attention.” Across Europe as a whole, 14 per cent of buyers had a neutral view of the boutiques relative to the large suppliers. This was generally because the buyers had no information about the boutiques or because they had never used them. Few boutiques seen as true fund providers The key conclusion is that boutiques tend to be seen first and foremost as providers of specialist investment management solutions. Many talented individuals leaving large and established asset management companies to establish boutiques have little or no professional experience except as professional investors. Only some – and, on the figures, a minority – of the boutiques are really seen as providers of funds. Collectively, the boutiques have not yet convinced the majority of fund buyers that they represent better long-term partners than major asset management groups. This is in spite of the widespread problems of the major groups, which have been publicised widely. Investment professionals who are looking to set up boutiques would do well to remember that they face the greatest challenges in the UK and Switzerland – the two largest national markets. The rise of boutique investment firms, in Europe and elsewhere, is one of the most widely commented-on phenomena in the funds industry. Nevertheless, as seen above, the majority of fund buyers still prefer to deal with the large and established asset management groups.

Andrew Hutchings, research editor, Sector Analysis