Blue Chip Issue 79

BOUTIQUES
Why we like boutiques
Independent, owner-managed companies tend to have their own
money invested alongside clients and, essentially, “eat their own
cooking”. Boutique businesses are often characterised by multigenerational
management teams and succession plans. When we
see this, it signals a commitment to, and focus on, long-term returns
over short-term profits. In fact, alignment of interest is one of the
most important factors in our assessment. To this end, we applaud
when fund management businesses are willing to close funds to
manage capacity and protect the interests of existing clients.
Boutique businesses are
often characterised by multigenerational
management
teams and succession plans.
Another positive knock-on effect of this ownership structure
is the ability to attract and retain some of the best talent in the
industry, because the incentive system allows talented employees
to directly own the results of their investment performance.
Smaller, boutique investment managers do not have the
benefit of a big, established brand or distribution networks to rely
on during more challenging periods. This further distils their focus
on delivering superior investment performance consistently and
results that speak for themselves.
Importantly, the absence of corporate red tape and smaller
assets under management allow for nimbleness and flexibility
in internal decision-making as well as from an implementation
perspective. This often means these boutiques can react faster and
with more clarity than their larger incumbents.
Although having these characteristics does not guarantee that
an asset manager will be successful, research does show that these
factors characterise managers who have generated good returns
for clients over the long term – and the performance of our Best
of Breed fund managers across our range of funds over the last
decade and a half certainly reflects this.
The other side of the coin
However, there is a downside to being smaller and for some
asset management companies, the challenges have become
insurmountable. Profit margins in asset management have been
and will continue to be under pressure. This is happening globally,
and it is generally a good thing because the consumer ends up
with a better outcome, but there can be severe consequences for
some companies.
One of the big consequences, and we’ve seen it through various
cycles, is that, as margin pressure grows, there is an increase in the
level of assets that management companies need to sustain their
businesses. For certain companies that don’t get to scale, this is a
challenge, and we’ve seen a number of smaller asset managers
either combine or not survive in this environment.
We’ve also seen some companies struggle through periods
of under-performance and without the distribution network or
brand to fall back on, they cannot survive the consequent loss of
assets, even if the weaker performance period has been relatively
short-term.
Team size can also be a double-edged sword for multi-asset
managers who function with small, focused teams, as they may
not always have the breadth of expertise to cover all asset classes.
The sweet spot
The key is to find the sweet spot for boutique businesses – the
balance between being small enough to remain agile, but big
enough to be sufficiently resourced and survive market shocks
and surprises.
We want flexibility. We want owner-managed firms. We want
managers to be able to implement their views. But we don’t want
them to be worrying about
whether they can survive, and
this is an important focus for us
when we assess potential fund
managers as partners.
We believe the benefits of
independent, well-managed
boutique asset management
firms outweigh the negatives
and there will always be a
place for boutiques who can
demonstrably add value and
have an edge that is sustainable.
However, the reality is that asset
managers of all sizes are going
to need to demonstrate how
they add value, or they are
going to be under pressure in
turbulent environments.
Nic Andrew, Head of
Nedgroup Investments
www.bluechipdigital.co.za
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