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.
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.
