Investment boutiques fly the flag for alpha generation

21 September 2016
By Tiziano Giannotti

By Fiona Maciver

Despite regulatory headwinds, and active fund management coming under constant fre in the media, Europe’s boutiques are weathering the storm better than many of their larger counterparts, enjoying a bigger relative market share of recent sales flows. The search for yield and the market polarisation of active and passive strategies is putting the offerings of smaller, specialist, managers in the spotlight and in the frame for new business.

• More than 2,200 investment fund boutiques are operating across Europe.

• Boutique managers are punching above their weight in the battle for sales.

• The stability of the management team is an essential brand attribute for investment boutiques looking to impress fund buyers.

European boutique culture

Often driven by the need for innovation and breaking free from the shackles of larger corporate structures, the enterprising flair of investment boutiques is these days to be found across markets and asset classes. Adopting the Fund Buyer Focus definition of a boutique specialist investment manager – a firm with less than €10bn in AUM and managing fewer than 20 funds – Fund Radar estimates that there are more than 2,200 (1) such providers operating in Europe. Entrepreneurial talent is spread across the continent with France often considered the biggest incubator of fledgling managers. However, the geographic breakdown of boutique firms reveals that Germany is narrowly ahead, at least in terms of absolute numbers. The French though are perhaps more revered for cross-border success, with managers such as DNCA and Financière de l’Echiquier moving into new territories and growing business levels sufficiently to graduate from our boutique classification and into the major league. The UK has also been a successful breeding ground for boutiques, names that have met with cross-border success including Polar Capital and Alken. More recently, Woodford and Fundsmith have become quasi-household names in their domestic British market with well-known founders enticing both professional fund buyers and end-investors to entrust their money to these firms. Nordic countries are well represented, too, with Sweden having a particularly strong boutique contingent. This was reflected in the Fund Brand 50 2016 boutique manager rankings, capped by the current leading boutique brand Lannebo Fonder. Niche US specialists have also successfully penetrated Europe.

1) Source: MackayWilliams analysis based on Broadridge FundFile data
 

Torte boutiques

Boutique hunting grounds

Europe’s fragmented markets provide many opportunities and challenges for third-party fund providers. In terms of overall market size, Fund Radar estimates that 56% of Europe’s wholesale fund assets under management are allocated to third-party providers of all shapes and sizes. Countries with the largest shares of assets under the guardianship of third-party investment managers include Germany, the Netherlands, Switzerland and the UK. Retail banks are the largest distribution channel with a 31% share, followed by advisory portfolio managers. With the exception of sub-advisory and external funds of funds, retail banks provide few opportunities for boutiques due to generally high servicing and capacity requirements placed on asset managers. The discretionary, advisory and funds-of-funds routes are the most obvious for boutique managers to achieve distribution success, both at home and internationally. Discretionary and advisory channels include private banks, wealth managers and family offices. With wealthy, fee-paying clients, these channels must demonstrate their investment expertise and identify the best opportunities to meet their clients’ needs. The challenging market conditions make it more difficult to generate returns, and so the intensive search for alpha generating managers will bring more niche and innovative strategies to the fore, creating opportunities for specialist fund providers. Limited marketing budgets and fund sizes prevent most boutiques from targeting the large retail channels. Clever use of digital marketing including social media has also helped to build awareness and generate interest at a relatively low cost.

Reviewing the net sales flows of boutique managers for the first six months of 2016 highlights the sectors where smaller managers have achieved notable success with buyers looking for alpha-generating specialists. The top five sectors in the table on this page reflect a combination of the broader trends in European fund flows and the appetite of buyers looking beyond larger managers. This is also reflected in the diversity of asset managers in the top five for net sales.

Asset Classes_Boutiques

The rules of attraction

Naturally, future asset-allocation intentions play a significant part in fund buyers’ identification of new managers and strategies. In recent years, several boutique firms offering multi-asset products have come to the fore, competing with the market leaders’ flagship funds. DNCA, Flossbach von Stoch and Ethenea are just a few of the names that have benefited from this growth. Concerns over capacity issues, the concentration of funds and, in some cases, performance, have driven buyers to look beyond mainstream providers in their quest for yield. While product strategy has to be the initial hook to catch fund buyers’ attention, investment managers must also demonstrate a robust investment process and the stability of their company and management team. The latter has been particularly prevalent in recent editions of the annual Fund Brand 50 reports. This year’s edition highlighted the increased importance of the stability of the management team as a driver of boutique brand success, continuing the trend noted in 2014 when ‘solidity’ displaced ‘appealing investment strategy’ as fund buyers’ most important driver. The sentiment behind this reflects the need for comfort and assurance that there will be no surprises around the corner.

Ranking Skills_Boutiques

The other significant shifts in brand drivers manifested themselves as a rise in the importance of both ‘local knowledge’ and ‘client-orientated thinking’. In times of market stress, investors’ nerves need to be calmed and this played out both for larger and more modestly sized managers in 2015, with the rise in importance of the latter aspect. From the client’s perspective, boutiques are small and therefore able to nimbly respond to individual needs, giving them a competitive advantage over some of their larger counterparts. As market volatility persists, ‘client-orientated thinking’ is sure to remain a key driver of brand success. Current market conditions have facilitated the winning of new business by a diverse range of boutique asset managers, and the boutique brands ranked highly in Fund Brand 50 2016 also demonstrated a depth of investment expertise. For some, brand recognition came from high demand for domestically focused funds as in the case of Moneta, the French equity manager, while for others it was an appetite for their global strategies. Some groups were relatively young and others, such as Acatis, better established. But for most, it was a single fund that attracted selectors’ attention. For firms looking to understand the reasons behind the awarding of new business from distributors, Fund Buyer Focus measures the relative importance of five business drivers. For boutiques, product quality has historically been the key driver, something that continued to be the case in 2015. Interestingly, brand preference moved up sharply from fourth place to second. Market volatility was behind this move, something that was a feature in the analysis of the larger cross-border brands, too. When the investment environment gets stormy, customers gravitate to trusted and stable names.

Outlook

Current market conditions appear to augur well for boutique investment houses. Ongoing volatility and the increasing costs of doing business to meet new regulatory initiatives present significant challenges for all asset managers. The acceleration of allocations to passive investments and the spotlight fixed on the performance of active managers will continue to provide a platform for specialist managers upon which to demonstrate their value. Boutiques with a distinct product offering and strong brand will continue to thrive.