People running, selling and selecting fund boutiques reveal six rules for staying small but perfectly formed.
Actually be a boutique
Let’s get this one out of the way early: what is a boutique? It is probably small, but define small. A minnow in one market could be mid-size in another. A familiar example is Liontrust in the UK, whose thwarted takeover of GAM was an attempt to make one small asset manager into a less small one (Liontrust has £31bn AUM and would have reached £53bn).
‘It’s probably when you get to between £10bn and £20bn that you stop being a boutique,’ said Hugh Elwes, managing director at Stephens. ‘Premier Miton has got £10bn under management, but I wouldn’t describe it as a boutique. It’s a business with lots of different strategies in it. I suppose the minimum size, you know, which is going for £30bn to £40bn, that’s not a boutique either.’
A better measure than AUM is specialism.
‘Ultimately, it’s as simple as focus,’ said Tim Warrington, chair of the Group of Boutique Asset Managers (GBAM).
‘I think boutiques are very focused on what they do. The boutiques that are successful, are those that have maintained that focus, and that can be in a particular investment process or in a particular product type or asset class. Then size becomes a derivative of that focus. What kind of products are they going to run and be successful with, and how big should that reasonably get?
‘Those boutiques that stick to their knitting and keep that focus, by and large, endure. Those that try and add all manner of bells and whistles and say, “well, we’re good at long-only, shouldn’t we do a long-short?” Those are the ones that then tend to trip themselves up subsequently.’
Paul Williams is head of international business development at US-based firm Polen Capital, which has $66bn worldwide and $10bn in its international business based in the UK.
‘Clients are very comfortable in knowing exactly what we will do for their portfolio, and for that, we believe we can charge an active fee that’s acceptable, and we will continue to do that,’ said Williams. ‘I think you’ve got to find what the relevance is in that particular portfolio structure, and that’s not always easy.’
Boutiques can certainly grow, but how many different strategies could all sit under one specialism? And, crucially, how big could funds get without losing what made them special? More on that in a bit…
Time and time again we see success breeds success breeds failure – Gary Potter
Get management right early on
‘The skills you need to run money are not the skills you need to run people,’ said Warrington.
‘They are a long way apart, and I, to be perfectly honest, in my time in the industry, I haven’t found that many people who were good at both.’
Boutiques are founded by fund managers. The best investor is the leader of the boutique. In the early days it can make sense to lead from the front, establish the product and build a track record.
But, says Warrington: ‘The boutiques that really thrive are the ones that are able to identify what are the leadership skills that they need, and then allow the investment talent to focus on the thing that they’re going to do really well. Thereafter, the tension is always in a boutique, between the talent and the leadership, when they are not necessarily one and the same. That is the tightrope that you walk in a boutique.’
One of GBAM’s members is Devon Equity Management, founded by former Jupiter manager Alexander Darwall. Darwall’s role is chief investment officer. But he brought in Richard Pavry, a fellow Jupiter colleague as the CEO, ‘to run it and to do the people bit and that’s a smart move’, said Warrington.
Understand your new place in portfolios
Pitching for panels has got harder. Boutiques like to talk about being differentiated. Great, so they should be. But portfolios only have so much room for differentiated. The competition is passive, more vanilla equity funds and other boutiques fighting for a smaller share of the portfolio pie.
‘They’re not passive, and of course we have been living through five years of passive madness,’ said Gary Potter (pictured above), former co-head of the multi-manager team at BMO Global Asset Management. ‘Everybody’s driven by price, not quality or investment return. I think the client outcomes are about number six on the investment list where it should be number one.’
Potter liked to select boutiques. ‘Bigger is seldom better’ he said, and boutiques were often where you would find talented investment managers due to the ‘lure of full intellectual freedom’. But boutiques find themselves in a world that has become less comfortable for those that, by nature, are very active.
‘Boutique fund managers may be featuring less and less in conventional portfolios as the trend towards the commodification of investment gathers pace.’
Williams said Polen is ‘incredibly consistent’ with its messaging to clients. ‘Clients or allocators, or fund selectors will know the role that we will play in their portfolio, and we will pretty much never deviate from that. That’s exactly what we do, so they can rely upon us to deliver a particular investing style to their portfolio, and so that’s what they like about it.’
Get the right distribution
Let’s talk about asset building. ‘The best time to invest in a boutique is when the managers are creating a track record, not living off it,’ said Potter.
‘You want to be in when the excitement’s happening. When it’s £100m and it grows to £250m you outperform by 20%, 30%, when the really good manager’s done a good job.’
Managing size becomes another issue. But how are you getting those early assets?
Polen launched a Ucits version of an existing US product in 2012. It did not get traction with European clients until it had built a three-year track record in the new structure. In 2015, ‘It started to pop on people’s radar screen,’ said Williams and Polen signed a deal with iM Global Partner, which is also a third party distributor, that became a shareholder of the business.
‘They class themselves as a multi-boutique distribution outfit, so they have offices in certain European centres. I would say we absolutely have a distribution relationship with them, and they’re great partners, but also we use them for areas where I think there are higher barriers to entry, so Spain, Italy, France, where you need a local language speaker, a local licence, etc.
‘From 2015 we started to increase assets. Then fast forward to 2019 when I joined, and we were about $700m,’ Williams said.
Today the non-US business arm, ‘is just a stone’s throw away from cracking the $10bn mark’, he added.
Warrington is also the chairman of Norwegian boutique Skagen. He said building boutique AUM from the ground up took a particular breed of fund salesperson.
‘In those early stages of setting things up, you need to be brave and you need to be comfortable with uncertainty and risk. It’s definitely not for everybody.
Citywire’s recent distribution pay survey backs up the idea that taking a risk on a smaller firm can lead to higher rewards.
‘The point about a boutique is that if you’re taking entrepreneurial levels of risk, then you would expect to receive entrepreneurial levels of reward. Some people like that, some people don’t,’ Warrington said.
But don’t get too big
We said we were going to talk about size. So here goes.
Two recent boutique collapses occurred because of a narrow client book. Ardevora had built £11bn AUM on what Stephens’ Elwes (pictured above) describes as ‘lumpy’ institutional mandates which proved very un-sticky. Somerset had two-thirds of its assets in a mandate run for UK wealth giant St James’s Place – which then took it off the mandate.
If a narrow client base is an existential risk, why not try growing yourself out of danger? A firm with €10bn could drop to low single figures, but a firm with €40bn is, while still small, in a materially different position.
The problem is that growing exponentially on the back of a winning fund, or two, can end up being counterproductive.
When you get to a certain scale, you start to think in terms of AUM growth, and I don’t think that’s healthy for clients. I genuinely don’t. – Paul Williams, Polen
‘Time and time again we see success breeds success breeds failure,’ said Potter. The bigger a fund gets, the harder it is to manage – at least in the concentrated way that made it successful in the first place.
‘Boutiques do not have any incentive to grow beyond a certain point, particularly if it’s detrimental to performance. The number of managers I’ve met in my life who say, “Well, we can only manage up to about £750m or £1bn”.’
The fund management business, said Potter, needs to be comfortable with that. ‘The boutique manager will often have an eye on capacity, even before they start the fund. When sales and marketing get hold of things it usually means not-great things for the fund manager’s performance capability.’
One boutique described as a ‘a very nice, profitable business’ by Elwes is Guinness Asset Management.
It has built its AUM to £10bn. ‘That’s been grown organically from scratch’ he said. But, he added, while boutiques can still make a profit, ‘you have to be bigger than you used to be, and you have to perform’.
Polen’s Williams says the firm ‘doesn’t want to grow AUM for the sake of growing AUM’.
‘We don’t have a stated ambition to be the top 20th biggest manager in Europe over the next five years. That’s not really what it’s about for us.
‘There’s always an element of what is the AUM that you can function at from an economic perspective. But when you get to a certain scale, you start to think in terms of AUM growth, and I don’t think that’s healthy for clients. I genuinely don’t.’
Buy-in or backing?
Staying with Polen, around a quarter of employees have a share. ‘We want to make sure that people have a good incentive to come to work, but we continue to offer that relevancy of product.’
A common problem boutiques face is not being able to continue beyond their founder management. Staff can simply not afford to buy them out when the time comes.
Last year Stephens was involved in two boutique transactions. One was selling Crux, the business created by veteran fund manager Richard Pease, to Lansdowne Partners.
‘The Crux transaction was a combination of the business obviously losing some altitude, but also wanting to try and find the right successor or manager to its founder, Richard Pease, who was 63 and approaching retirement,’ Elwes said. ‘And it so happened that Lansdowne wanted to go into retail.’
The other was the purchase of Tellworth by Premier Miton. Tellworth’s Australian parent ‘lost altitude’ and Tellworth itself lost AUM, from £1.4bn to about £700m. ‘It was a classic decision that a boutique has to make: do you rebuild and put some more money in, and go again, or do you fold yourself into a home where you just manage the money and don’t run a whole business?’ Elwes said.
Skagen’s is ‘a fascinating story’, said Warrington ‘of not being able to do it the way we thought we would’, meaning a buyout.
‘[We hoped] that somehow the next generation of investors would be able to take on the firm from the outgoing generation of founders. Of course, the numbers were just too high and we didn’t want to get in a place where the investment talent was more worried about the debt that they had to service than running the properties in which we had invested our money.’
Private equity can provide a ‘bridge’, ‘where they come in and help the founders exit, and that the next generation step up over time. We didn’t see quite how we could do that for Skagen, but it’s definitely a model that has worked for some.’
Then there is the model used by the likes of Affiliated Managers Group which takes a stake in partner-owned businesses. ‘It’s an interesting model that allows a founder generation to exit, and then the next generation to come in and run it in a sort of partnership,’ Warrington said
In the end, Skagen decided to join a multi-boutique. It’s a model which, he said, ‘depends very much upon the owner and the owner’s ability and willingness to commit to maintaining that underlying boutique structure. We were fortunate. We sold to Storebrand – Norway’s oldest financial institution.’
A key question was: ‘Will they allow us to run money in the way that we have always run money?’ Skagen has been in the multi-boutique for five years ‘and that’s been a resounding “yes”’.