Two-thirds of respondents to this month’s Off The Record survey stated that their fund did not have any restrictions on allocating to boutique asset managers.
Half of respondents allocated capital to managers with less than a three-year track record, while three-quarters allocated to managers with less than €1bn of assets under management (AUM). A Spanish fund invested with managers in both categories, but said: “We request that the manager has some of [its] money in the fund, and that we can have access to the manager.”
Twenty-one respondents allocated capital to more well-established boutiques (more than five years’ history, but less than €5bn AUM). A Swiss fund said: “We [place] importance [on] a long track record of demonstrated ability to deliver high risk-adjusted returns, and an asymmetric return distribution, on a meaningful pool of assets. We will consider managers who demonstrate this track record from approximately €500m AUM, if they have a best-practice operational setup.”
Manager views on the risks associated with boutique varied. Business failure of the manager and a lack of institutional standards in systems and processes were key risks, with the first considered the most severe. By contrast, fewer than half of respondents were concerned that boutique managers did not have a long enough track record for analysis, while too few limited partners was seen as a greater risk.
More than three-quarters of respondents did not consider it essential to employ consultants to select a boutique. “What is essential is to avoid the principal/agent problem. Bringing the required manager selection skills in-house is a preferred solution,” said a Swiss fund.
Where used, 13 respondents felt consultants were capable of making informed selection decisions from the broad universe of boutique managers. A Dutch fund commented: “[While] consultants should perform the research, the responsibility to review the results is still mandatory at the asset manager/pension fund.”
Twelve respondents believed that boutique managers - even smaller managers with long histories - could justify charging higher fees than large institutions. “The management fee should cover running costs,” said a UK fund. “These may be higher for smaller institutions with a lower asset base to spread them over.” However, most others insisted that higher fees were justified only by alpha or better risk-adjusted returns, and one said that even with such outperformance they expected fees to come down as the manager grew. One respondent said high fees were “part of the problem” of boutiques.
More than half of respondents felt a traditional capital allocation as a limited partner in a product/strategy was the best way to gain exposure to boutique managers. Four respondents felt a capital allocation in a product/strategy with a revenue-sharing agreement to be the best way, one respondent favoured an ownership stake in the management company, and six respondents a combination of the three approaches.
The majority of respondents believed that there were genuine benefits associated with allocating capital with boutique managers that compensate for the risks and the practical challenges. A German fund stated: “Smaller size makes them more manoeuvrable and [they] tend to be owner-operated, [so] they have a stronger incentive to perform and act entrepreneurially.”
“If [they] are able to show track record from a previous similar strategy, then it might be beneficial to act as [a] seed investor with early-stage managers,” added a Danish fund.
However, not all respondents shared these views and a Swiss scheme remarked: “Big and ‘old’ asset management companies often have better possibilities to diversify and to juggle with the fees than early-stage managers, who have not yet acquired their reputation.”
More than three-quarters of respondents thought that the ‘multi-boutique’ model could retain the advantages of boutique asset management, while mitigating some of the risks. “A bigger money pool [in which] to invest gives bigger diversification possibilities, which can diversify the risks,” said a Swiss fund.