At Nedgroup Investments, this has been important to us for many years. When it comes to selecting fund managers, our Best of Breed™ investment philosophy is at the very core of our business. It is how we select the managers who we think have a sustainable edge and it is a considered, meticulous process that we have spent years refining. While our objective is to identify fund managers who are experts in their field so that investors can benefit from a wide and diverse set of skills, we tend to prefer to partner with “boutique” fund managers who are independently owned.
We believe the fund managers that we identify as the best fit for our funds not only have the nimbleness to make effective decisions, but they can also fully focus on delivering on the strategies they are experts at.
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 multi-generational 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 multi-generational 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.