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Remote control may shake up DFM due diligence; Boutiques await another moment in the sun

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Remote control

A handful of fund managers are having a good crisis: they include the likes of Allianz’s Mike Riddell, those running gold funds, and the Scottish Mortgage team. Unsurprisingly, they remain exceptions to the norm. Despite an uptick in sentiment this month, there are still just 250 funds out of the UK universe of 4,000 that are in the black since the start of February.

Such is the nature of crises, of course. But the current one looks like it may have wider repercussions than simply damaging investment returns.

Look beyond performance, and there are indications that a different group of managers may ultimately benefit from changing practices. A clue lies in comments made last week by Blackstone founder Stephen Schwarzman.

On his firm’s Q2 earnings call, Mr Schwarzman said Blackstone was reaping some rewards of being an established presence in the private equity industry. Due diligence meetings with those interested in investing are done in a single Zoom call with 150 attendees; remote fundraising is in many ways an easier process.

Larger asset managers may start to think the same once the world moves on from the pandemic’s epicentre. Established players may find it easier to maintain video contact with fund selectors, with little ultimate detriment to asset gathering. Managers with little in the way of reputation or existing relationships, however, might find themselves further behind the curve.

Fund selectors themselves might think this a good thing, on balance. All buyers like to see the whites of managers’ eyes, and that’s harder to do over video link. But democratising some forms of manager access would be of obvious benefit to smaller wealth managers and DFMs – and arguably, therefore, the retail investment industry as a whole.

Small wins

Another manager who’s managed to capitalise on 2020’s falling markets is Argonaut’s Barry Norris. Coincidentally enough, Mr Norris' performance turnaround, which we highlighted last month, has also led to the return of his regular blog posts.

The latest of these missives dwells on other potential long-term consequences of the pandemic for fund managers. Mr Norris thinks the crisis could lead to a renaissance of the boutique fund management model. That’s not a surprising conclusion for the head of a boutique fund house to make. But some of the argument is persuasive.

The manager notes that institutional investors have previously been “comforted” by big investment teams, which “populate an organogram with a depth of talent and decision making which is often simply illusional”.

It’s certainly true that large groups are currently finding it harder to collaborate than small teams. If that persists, fund selectors will have to figure out whether size matters that much to them. Argonaut’s founder predicts: “if employees can be trusted to work at home with no aggregate loss of productivity, it is unlikely that everyone will need to return.”

For DFMs, the boutique model is already their operating structure of choice. But in certain asset classes such as alternatives, discretionaries have started to favour team-based processes as much as individual big-name managers.

It’s probably pushing things too far to suggest that the crisis will see a return to the ‘star’ manager model, but some team structures and business models will come out of this period stronger than others. It may be that the ‘sweet spot’ for fund buyers remains those firms that can occupy the middle ground.

New interest

One positive to emerge from March’s market falls, from the investment industry’s perspective at least, might be that the lower entrance point seems to have attracted a younger set of investors.

Not having many existing investments to panic over, “asset builders” saw the drops as a buying opportunity.  While they may yet be disappointed by a renewed downturn, their emergence does suggest that dramatic drops in share prices could have long-term positives when it comes to shaping savings habits.

Wealth managers will know that this market represents a relatively distant opportunity: few of these investors are likely to have the asset bases that qualify them for such services. Some will think they can find ways to work with this cohort nonetheless. But whatever the qualifying criteria, all will welcome an increased interest in traditional investments - rather than the likes of cryptocurrencies or other more esoteric offerings.

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