What is the outlook for boutique fund managers?

Into that tough environment, several well-known industry individuals, including Ben Whitmore at Jupiter, have announced plans to launch their own boutique companies. 

Boutiques have to some extent become the poster children of the active asset management industry, with Terry Smith’s Fundsmith Equity being the largest fund in the UK wholesale market.

But the boutique structure has also suffered extremely negative headlines, particularly around the collapse of Woodford Investment Management.

On top of the market turmoil and key person risk have come challenges from increased regulatory scrutiny. These compliance functions are “the only area of the asset management industry that is growing right now”, says Steve Kenny of QD Consulting.

‘Peak may have passed’ for boutiques

But if markets are turbulent and costs are rising, is it possible to make a success of a boutique? 

Jason Hollands, managing director for corporate affairs at Evelyn Partners, says the peak may have already passed for boutiques.

“Only a few years ago, ‘boutique’ asset managers were looked upon highly favourably by advisers and private investors, who liked the idea of entrusting their wealth with entrepreneurial, performance-focused smaller businesses, owned by their fund management teams and without the layers of management structure seen at large firms,” he says.

“But recent times have seen some boutiques struggle. Emerging market-focused Somerset Capital is winding down after losing its largest mandate and Ardevora, the boutique formed 14 years ago by former Liontrust managers Jeremy Lang and William Pattison, has just announced it is to cease managing money for external clients. 

“Other players have been swallowed up in industry M&A, with recent examples including Crux Asset Management, the business founded by veteran manager Richard Pease, being snapped up by Lansdowne Partners, and publicly listed Premier Miton buying UK equity specialist Tellworth Investments.”

Only a few years ago, ‘boutique’ asset managers were looked upon highly favourably by advisers and private investors, who liked the idea of entrusting their wealth with entrepreneurial, performance-focused smaller businessesJason Hollands, Evelyn Partners

Tyndall head of partnerships James Sullivan says that while regulation has always had an impact on the asset management industry, “it was never deemed to be as oppressive as it is today. Boutiques have always faced certain headwinds that the behemoths of the industry were better equipped to weather, but that’s not to say it is easy for large businesses to maintain or grow market share”.

But Sullivan says that while regulation poses a challenge for boutique companies, it may also present an opportunity. This is because he feels that in the current regulatory environment, there is a much greater focus on funds that deliver, or make clear they aspire to deliver, “clear outcomes” for clients, and his view is that “smaller, more nimble” firms are more capable of pivoting to products that meet those needs than are larger companies. 

While Kenny sees regulation as a challenge for boutique companies, he says the increasing ability to outsource some or all of these functions means the costs associated with running a small fund house are more variable than fixed. 

Direction of travel 

Central to Kenny’s optimism around the outlook for boutique fund houses is his view that the adviser market will move in the same direction in the coming years as the institutional market did in the late 1990s.

He says: “A couple of decades ago, institutional fund buyers moved to portfolios that were mainly passive, but had some active for specific purposes, and as part of that shift the active they own tends to be provided by boutiques, as they are specialists. I think the same trend is starting to happen in our part of the market, especially as investors don’t care as much as they used to about the brand name running their fund — they care more about outcomes now, and that is positive for boutiques.”

Hollands view is that the rise of passives poses a threat to all asset managers, but that the larger companies, while troubled, have “industrial scale and having a broad range of products across different asset classes, does mean that in times when a particular asset class may be out of favour, there are other products that will be relevant”.

He adds: “Big companies also have more scope for cutting costs in tougher times than small businesses with already lean models.

“In the past, it was commonplace for successful fund managers who built a track record at larger businesses to choose to peel off and strike out on their own, once they had established a following. That has become much harder at a time when the costs of running a business have risen, attracting clients is a challenge, and clients’ advisers are also a lot less inclined to follow a manager to a new start-up business since the Woodford debacle.”

Rise of the giants 

Malcolm Arthur, a director at Spring Capital, which handles distribution for boutique asset managers, says one of the major challenges faced by boutiques in recent years has been consolidation in the advice space.

One of the things that the bigger fund buyers place a lot of emphasis on is the governance of the boutique — they want to know if there is someone in the firm that can challenge the fund managersMalcolm Arthur, Spring Capital

He adds that the increased tendency of companies to outsource the investment management function to model portfolio or discretionary fund providers, where each investment manager may require a fund to be already at a minimum size before they can invest in it, creates a chicken-and-egg scenario as they are unable to grow to a sufficient size to attract buyers, but also cannot get the buyers without reaching a certain size.

In the past, the solution had been to market to individual independent financial advisers, each placing small amounts of capital into the fund. 

Arthur says: “The problem is that there are fewer people out there now to invest those smaller amounts. What we have started to do is to offer a special share class with lower charges to investors who come into a fund earlier.

“At a time when there is a lot of scrutiny on costs, this appeals to a lot of the fund buyers out there, including some of the bigger buyers. But it is certainly the case that we didn’t have to do that 20 years ago when I started Spring Capital, and obviously it means lower margins at the start,” he continues.

“One of the things that the bigger fund buyers place a lot of emphasis on is the governance of the boutique — they want to know if there is someone in the firm that can challenge the fund managers.” 

Kenny says he believes this trend has gone one step further: “Realistically, if you want to launch a fund now there needs to be two named fund managers, people want the reassurance that it’s not all about the ego of one person. And more broadly, if you are trying to launch a boutique now, you need to have a few of those big buyers lined up before you start.”

The temptation for advisers to show they are looking far and wide for opportunities, in the age of consumer duty, should mean a boon for boutiques. Whether that is what plays out will be clear from the way advisers react to funds launched by established names such as Jupiter’s Whitmore and Richard Watts.

David Thorpe is investment editor at FT Adviser