Just a few short years ago, boutique asset managers enjoyed a well-established reputation as the home of high-conviction investing and true active management. Then came the MiFID regulations – chief among a steadily rising pile of red tape – plus a number of high-profile failures for boutique firms. The rise of model portfolio solutions has also conspired against smaller asset management groups. Do boutiques boast the same pulling power today?
The collapse of Woodford Investment Management in 2019 was a reputational low point for boutiques – shining a bright light on some of the potential risks of having decision-making concentrated in a small number of people. Cracks in the model were also revealed as emerging markets-focused manager Somerset Capital wound down after losing its large St James’s Place mandate while a stellar reputation was not enough to protect Ardevora managers Jeremy Lang and William Pattison. Crux Asset Management and Tellworth Investments, meanwhile, are among those to have been bought by other groups as they struggled to remain independent.
Of course, the broader environment has worked against active management in general. According to the Investment Association, tracker funds have jumped from a 10.5% share of overall assets in 2014 to 24.1% of assets in 2024. Assets have drained from active management and index funds, supported by strong performance from large caps, have captured the moment.
“Boutiques typically consist of small teams where individual accountability is high and where decisions can be made quickly and efficiently.
High accountability
Nevertheless, it is clear that many fund managers still believe in the boutique structure – for example, 2024 saw Ben Whitmore and Kevin Murphy leaving Jupiter and Schroders respectively to set up a value boutique. There are also plenty of success stories among boutique asset managers – the likes of Evenlode, Fundsmith and Polar Capital on the equity side, for example, while TwentyFour has built a strong reputation in fixed income.
Ben Mackie, senior fund manager at Hawksmoor Fund Managers, continues to see a bright future for boutiques and believes the current regulatory environment may actually be a help rather than a hindrance, creating a greater emphasis on funds that deliver. “We strongly believe certain managers are structurally better placed to deliver alpha than others,” he says. “Boutiques typically consist of small teams where individual accountability is high and where decisions can be made quickly and efficiently.”
For his part, Dan Brocklebank, UK head at Orbis Investments, believes the independence of thought found at boutique managers could prove particularly important in the current market environment. “Investors today face a unique ‘market mix challenge’,” he points out.
“Global markets are increasingly concentrated in a few large, US-based companies. Investors in global tracker funds are thus becoming more dependent on the performance of a small number of companies. Similarly, many large active funds have high exposures to these same names, resulting in high correlations between the largest funds. This makes achieving true diversification difficult – and many clients may be less diversified in practice than they believe.”
Structural advantages
While larger fund houses can offer economies of scale, boutiques tend to have other structural advantages. “Managers at boutique houses tend to have high levels of alignment with investors – either by having ‘skin in the game’ or by operating within a corporate culture and remuneration structure that incentivise the delivery of good performance over asset gathering,” says Mackie.
While Woodford continues to loom as a salutary warning, boutique asset managers should indeed have greater flexibility to impose capacity constraints. They are not, in general, beholden to external shareholders demanding the delivery of a linear increase in profits year on year. This means they can take a longer-term view.
“The ability to respect capacity constraints is greater at boutiques where the imperatives of profit-hungry shareholders are less pronounced,” Mackie continues. “This is a crucial point as running less money confers a manager with a liquidity advantage in terms of moving in and out of positions and nimbly shifting the portfolio around.
“In contrast, running too much money shrinks a manager’s opportunity set. Boutiques are often single-strategy houses where the fund launch is led by the investment team, as opposed to the marketing department, recognising a particular opportunity or specific skill set.”
Malcolm Arthur, founder and director at Spring Capital, agrees that boutiques tend to be more focused on investment. “They will stick to their investment approach more rigidly, while smaller teams may be nimbler and make faster decisions,” he adds. “In addition, they will more than likely adopt a high active share, which will help advisers and investors looking to balance portfolios with passive exposure.”
Concentration risks
All that said, to be successful, boutiques do need to take advantage of the flexibility the set-up affords them and investors need to be alert to some of the problems that have caused such businesses to fail in the past. Boutiques need to be careful who they partner with, warns Arthur, adding: “Having capacity taken up with a particularly big client on a low margin – where one decision-maker can pull the plug on a big chunk of assets overnight – is a risk.
“Again, this a challenge that has long beset smaller fund managers. To be successful over the longer term, boutique managers must continually examine ways of diversifying their client base to reduce concentration risk.”
Investors should also look to ensure that power is not excessively concentrated in the hands of one or two senior managers. A stable compliance department is vital. Equally, it is important that the proper structures are in place to ensure that skilled fund managers can get on with their job, rather than being caught up in the day-to-day administration of running a company.
Fund selectors are likely to be suspicious of a superstar fund manager. “Hubris is very dangerous in asset management,” says Hawksmoor’s Mackie. “We look for managers who blend humility with the requisite confidence – and pain threshold – to stick to their investment process and to focus on absolute returns as opposed to benchmark-relative ones through the inevitable difficult times.”
Ultimately, a boutique structure is not a panacea. It needs to be managed properly to allow the fund manager to thrive – but, when that happens, it can be the optimal structure for investment performance. “The departures of popular fund managers from big-brand names in the past few months suggest that the temptation to set up a boutique will always be there,” says Spring Capital’s Arthur.
“Some will succeed and others will fade. Many have meandered along with minimal AUM – but these have either underperformed, failed with their distribution strategy or found there is not a market for their product, whatever they may think. Yet, for those fund managers who have experience working for a larger group and a track record of adding value, who understand the client base, get their distribution strategy right and have researched their target market, there is no reason why they cannot succeed.”
