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On the surface, City Financial is a tiny asset manager of the type that would be especially vulnerable to the financial crisis. As customers flee to solid brand names with mammoth reserves, a firm in this category could be seen as an acquisition target, not an acquirer; a victim of convergence between large houses and smaller boutiques.

But under chief executive Andrew Williams and chairman Rob Hain, City Financial’s profile looks very different. First, the firm is already a multi-boutique, a business model that industry convergence is expected to produce. It outsources its investment management to three external managers – North Investment Partners for equity and managed funds of funds; Millennium Global Investments and Charteris Treasury Portfolio Managers for fixed income. This gives it a diverse product line-up and a range of management styles.

Second, City Financial is an unleveraged partnership, with all the attendant financial hallmarks – long-term commitment to the firm by its equity holders, no interest payments, an entrepreneurial alignment of management and shareholders. Importantly, it has access to fresh equity without having to tap the malfunctioning capital markets. To complete the reversal, it is therefore little surprise to hear the firm is on the acquisition trail for cheap assets itself, funded by equity rather than destabilising debt.

Not that buying in the middle of a crisis has been easy. As Mr Williams explains, the bid/offer spread on fund management assets last year was so huge that the firm has completed no deals since it publicly announced its intentions last July. Sellers had last conducted valuations at the end of 2007 and hence demanded unreasonable prices, he said, while buyers were making offers at distressed valuations which they have now been forced to revise upwards as markets grow stronger.

But, according to the chief executive, 2009 will prove easier. As asking prices move in line with purchase prices, he says, assets will change hands even more rapidly and the pace of the consolidation trend will quicken.

“In the past few weeks, the bid/ask spread appears to be tightening, which will cause more deals to be done,” he says.

As one might expect with a small company, City Financial’s shopping list consists of bespoke assets and has little in common with the roll-call of names which have been sold in the last six months. Any transaction will look little like Aberdeen Asset Management’s purchase of parts of Credit Suisse Asset Management, Henderson Group’s acquisition of New Star Asset Management or GLG Partners’ merger with Société Générale Asset Management UK.

Although Mr Williams is an admirer of the latter deal in particular, any he and Mr Hain complete will probably bear a superficial resemblance to Marlborough Group’s strategy last year. Its subsidiary, Marlborough Fund Managers – like City Financial, a privately owned multi-boutique which outsources much of its fund management to an array of external houses – is now busily incorporating Guernsey-based Apollo Investment Management into its distribution strategy. This followed Marlborough's purchase of a controlling stake last year. The integration has come as part of a push to expand Marlborough’s competencies in core asset classes, including equities.

In City Financial’s case, the core asset classes are fixed income and multi-manager, but even there the picture becomes slightly blurred. The group has exploited increasing demand for diversified global allocation through a Strategic Global Bond fund, run by Mark Astley at Millennium Global, and Multi-Manager Growth and Diversified Absolute Return funds, managed by John Husselbee at North. The cautious investors who have grown more numerous over the recent crisis are served by Charteris’s Strategic Gilt fund and the North-run Multi-Manager Income fund in the Cautious Managed sector. A lone UK All Companies portfolio – UK Select Alpha – completes the set.

Amid this broad range of assets, the top-performing portfolio has been the Strategic Gilt fund, a gilt fund which has pulled off the seemingly impossible task of adding value through an option overlay. Funds which sell options to buy the assets in their portfolio typically make the most money when those assets are at their most volatile. Demand for options to buy or sell at a set price increases along with uncertainty as to what the price for the asset will be in the future.

But as gilts exhibit one of the lowest levels of long-term volatility, a strategic gilt fund should by rights be extremely difficult to run. Nevertheless, Ian Williams, chairman at Charteris and an options expert, delivered returns of 13.8 per cent over one year to May 25, topping a sector of 26 funds and a sector average of 8.5 per cent.

Challenges to gilt-based strategies remain strong. Standard & Poor’s recently put the UK government on credit watch, with a one-in-three chance of it losing its AAA rating. Quantitative easing could stoke inflation, eroding the real-term value of their fixed interest payments and repayment on maturity and causing asset values to tumble. Low yields could prompt investors to move out of gilts and into riskier areas.

Conversely, if gilt prices rise, the relevant options strategies need to be very strictly managed. One of the most common income-generating techniques is to sell covered call options on holdings in the portfolio. Under this approach, investors buy options to purchase the manager’s holdings. The manager therefore has to ensure he has enough holdings to cover all potential purchases. Furthermore, in rising markets, the manager must not be forced to sell his holding at a set price only to have to buy it back later at a much higher one.

The strategy has already been popularised in such funds as Schroder Investment Management’s Income Maximiser vehicle, a UK equity income fund with an option overlay. In spite of the risks, neither the Schroders nor the City Financial vehicle has come under any strain, but investors who are tempted by their yields need to ensure they know what they are buying.

Elsewhere, the range has not had the easiest year, as all other funds have underperformed the median in their sectors. But with managers of John Husselbee’s reputation on board, advisers may think twice before dismissing City Financial from their portfolios.