By Fiona Maciver
In the quest for yield, a strong following from sophisticated investors has underpinned a flourishing investment boutique community in the post-financial-crisis era. Product differentiation has helped bring niche offerings to the attention of investors but influencing fund selectors requires more than a distinct fund. Distributors also rate boutique business models and marketing communications as important drivers of future business.
▪ Fashionable boutiques generate investor interest and provide stiff competition in the battle for sales
▪ Boutique brands well regarded for sustainable business models and management team stability.
▪ Flossbach von Storch is 2015′s top boutique brand thanks to domestic mixed asset appetite and foreign demand.
The success of boutiques (see text box for definition) or indeed any business comes down to delivering what is said on the tin. Naturally, for investment managers, and particularly for specialists, performance is critical. With fierce competition from larger players, both passive and active, boutique managers are under pressure not only to outperform benchmarks but also their mainstream counterparts. Are they delivering? Recent research published in Australia by asset manager AMG1, covering the institutional equity strategies of 1,200 investment firms around the world, concluded that the majority of boutiques outperformed non-boutiques across equity strategies. They’re certainly popular: during the first half of 2015, boutique specialists chalked up 15% of total European net fund sales – punching comfortably above their 10% market share of assets.
Despite the recent investor fixation on price and the looming impact of Mifid 2, boutiques have weathered the low-cost/passive storm well, with investors willing to pay for active managers that provide added value. The summer’s market turmoil has led retail investors to apply the brakes to fund investment, but this volatility has brought the distinct advantages of good active investment and specialist managers to the fore.
Not all distribution channels are receptive to boutique propositions with some clearly setting their business model to focus on low-cost options or preferring to deal with larger managers with a multi-disciplinary product offering. The most accessible opportunities for boutique managers are in the advisory, discretionary, and funds of funds channels. At the more sophisticated end of the market, boutiques have carved out a niche for themselves, with many building a loyal fan base. What are distributors looking for from boutique managers?
Drivers of success
Product and performance are the obvious criteria that spring to mind. Successful boutiques thrive on product differentiation – it’s their USP over the large, multi-disciplinary managers. The Fund Brand 50 2015 (FB50) study from Fund Buyer Focus revealed that overall product quality was the main driver of new business from existing relationships. But when looking for new managers to add to buy lists, distributors highlighted that they place slightly more emphasis on marketing and communications. Boutiques need to be equipped to tell their story and keep both existing and prospective investors well informed. Product and marketing are of course just two of the headline elements feeding into the influence of boutique brands on fund selection. Reviewing distributors’ weightings of importance of the 10 underlying brand attributes measured by Fund Buyer Focus reveals more insight into the level of scrutiny under which managers are placed. Not surprisingly, the ingredients for boutique brand success are weighted differently from those of the larger managers. In the FB50 2015 report, the top boutique brand attributes as ranked by professional fund buyers were:
▪ Appealing investment strategy.
▪ Stability of investment management team.
▪ Experts in what they do.
At first sight, this ranking seems to be at odds with the concept of ‘boutique’ but working with smaller managers presents more risk around the strength of the business model and key personnel. To get through the initial screening, managers must demonstrate financial stability and the alignment of interest of key staff, as well as proving their investment skills. The managers that scored well across these key attributes are shown in the top 10 rankings table above. Over the last few years, the groups in the boutique rankings have developed from having a very domestic focus, particularly in France and Germany, to a more diversified group of local managers and an increasing number of those with cross-border distribution models.
This expansion has been fuelled by the increased visibility of in-demand product strategies, and boutique managers looking at business growth opportunities and diversification of their client base. We now take a look at three such groups – Flossbach von Storch, Mandarine Gestion and Woodford Investment Management (launched in 2014 and as yet to appear among the top 10 European boutique brands) – highlighting how they have all met with success in their own ways. The table overleaf provides some headline reference points about each group.
Flossbach von Storch is Europe’s number one boutique brand and one of the fastest growing companies in 2015, as identified in Fund Radar’s Momentum rankings (illustrated in the June 2015 edition). It has built on its excellent domestic reputation with both retail and institutional clients thanks to its popular mixed assets offer, though it has broadened its fund product range into equities and bonds too. While its strength stems from its loyal home market, it’s now attracting significant cross-border attention, distributing products in seven other countries across Europe and sparking interest from new shores including this potential fund buyer, an advisory portfolio manager in the firm’s newest market, Spain:
‘At present we are looking at various smaller, boutique- style fund houses as possible providers. The people from this particular firm came to see us recently and we liked the products that they presented. We like its Multiple Opportunities II fund. We are interested in investment solutions such as this mainly due to its flexible management, which we believe is the right approach for the volatile markets we are facing at the moment. Moreover we are also convinced by the underlying asset allocation.’
French manager Mandarine Gestion, which moved up three places in the brand rankings over the course of 2014, has also expanded into new markets, diversifying its client-base exposure away from the local market. Established in 2008, the firm specializes in European equity and asset allocation products, and sources 33% of its assets under management from international clients according to its website. With the French retail market sluggish in 2014, it’s no surprise that this firm is looking for more international clients, targeting markets such as the UK with the Mandarine Unique European Small & Mid Cap fund, its most popular cross- border product. Indeed, this diversification strategy has helped to pick up the slack in French domestic net sales.
In a much earlier stage of development, the British boutique Woodford Investment Management has made a huge impact on its domestic market in little over a year. The firm’s rapid sales growth propelled it to pole position in our Momentum rankings. Like Flossbach von Storch, a single proposition – in this case, UK equity income – has fuelled its rise (though the group has this year launched an investment trust focusing on young, primarily British biotech groups, too). But an appealing product forms only part of the story behind its initial success – brand has been the key driver and differentiator in an extremely competitive market. Neil Woodford’s personal brand and excellent track record have attracted loyal investors from his long tenure at Invesco Perpetual as well as new clients. A clear investment strategy, and strong principles around transparency and pricing structure have further sharpened its edge. Additionally, this company’s approach to openness and excellent communication sets a new standard for client and distributor engagement. Distribution is conducted via platforms and fund supermarkets and yet the company is not scared to encourage conversations with end clients by way of its blogs and online polls. As has been mentioned in previous editions of Fund Radar, this company has raised the bar in the delivery of its communications, adapting to the opportunities of the digital world.
Naturally, the boutique rankings reflect some of the key asset allocation themes that played out in 2014. With their specialist nature and narrow product focus, the turnover of participants tends to reflect the rapidly changing support for particular products.
Outlook for boutiques
In light of the unprecedented level of change that the industry is undergoing – ranging from regulation to the influence of new technology – continued evolution of the distribution landscape is guaranteed, yielding winners and losers among groups of all sizes. The merits of investing with larger or smaller managers will always polarize opinions. The burdens of regulatory change may be more easily mitigated by groups with deeper resources but they also place the whole industry under a much greater level of scrutiny, highlighting anomalies and providing investors with more information with which to make investment decisions. Specialist boutiques, with their distinct product propositions, are in a much stronger position to attract business than medium-sized managers operating in the middle ground. Often, they have a more interesting story to recount to potential clients, with their founders and passion for investment bestowing distinct personality on their brands. And while high-conviction specialists will not become the mainstream norm, recent market volatility has highlighted the downside of opting for passive investment, as investors are dragged down in tandem. Low-cost options can come at a price!
Talking of price, this is an area where boutiques are able and willing to provide yet further value for clients, especially as more investors question the price-to-quality ratio of paying for active management, and turn to passive vehicles. A Dutch IFA interviewed by Fund Buyer Focus highlights the opportunity:
‘I think the biggest drivers of change are going to be the downward pressure on fund prices and the pressure on active managers to justify their fees by producing out- performance. If active managers cannot consistently outperform the index then, naturally, people will invest more in passive products and the weaker active managers could struggle to survive. I think that some of the boutiques are more competitive than the larger active managers and their funds also provide better value for money than passive funds. Hence, specialization is one route to survival for active managers.’
They only represent a small portion of the European fund industry, but boutique investment houses will continue to thrive in their niches – and may even provide