What matters most when allocating to boutique managers?

by: RMI Investment Managers

Date: Aug 22, 2018

The investment management industry has witnessed major change over the last few decades with the advent of the boutique investment manager contributing significantly to this change.  We look at how advisors and fund managers view this area of the market and how they are allocating capital to boutiques.  In order to fully understand these trends, RMI Investment Managers conducted a client survey of various types of retail financial service providers (FSPs).

 

By far the majority of respondents were independent financial advisors (IFAs)/wealth managers and discretionary fund managers (DFMs).  A significant proportion of the IFAs advise on more than R1 billion worth of assets while the majority of DFM respondents manage assets worth more than R5 billion.  14% of DFMs surveyed manage assets worth in excess of R50 billion.

 

The investment manager selection process

 

There are a number of factors that can influence a capital allocator’s decision in the manager selection process.

 

The survey revealed that for the majority of respondents, “investment manager tenure” is the most important factor, across advisor and manager participants.  A “long-term track record (greater than 5 years)” and “ownership structure” was also deemed integral to the decision-making process across respondents.  Clearly time horizons matter; these three aspects indicate that accountability over a period of time is highly attractive to capital allocators.

 

Interestingly, there was a significant divergence between the importance of brand between advisors and managers.  For the majority of advisors, a trusted brand ranked especially high in terms of importance whereas managers appeared to be indifferent to this factor.  This discrepancy makes sense given advisors deal directly with the end client, so it would be difficult for them to recommend a brand with which the client is not entirely familiar or comfortable.

 

Small allocation to boutiques

 

When it comes to allocating to boutique managers, only a small number of survey participants actually do.  Almost half of the advisor/wealth manager group hold less than 10% of their assets under advice with boutiques.  Respondents cited “unknown brand and investment team” as the main reason for the low allocation.  This reaffirmed the findings on the importance of branding to advisors.

 

For DFMs and multi-managers however, this was the least important factor.  For them, concerns about “key investment manager risk” were top of the list.  Key man risk is not uncommon in the industry; a firm’s employees are its greatest asset but can also be a major liability.  Should a key investment professional decide to leave, it can place the business at risk of losing clients and/or assets.  It is not impossible to be adequately prepared for such an eventuality, and is clearly a factor that should not be overlooked.

 

DFMs apportion a far higher percentage of their assets under advice to boutiques compared to the advisor group; encouragingly, half of DFM respondents hold between 10-25% of their assets under advice with boutiques.  On a positive note, 50% of advisors stated that they are looking to increase their allocation to boutiques in the next 12 months with the remaining 50% looking to keep their allocations as is.  Encouragingly, none of the survey participants indicated that they would be decreasing their allocation.

 

Ownership important in boutique selection

 

For both advisors and managers, ownership structure matters when it comes to selecting a boutique investment manager.  Portfolio managers owning a stake in the business was cited as the second most important selection factor across categories.   Again, accountability stands out as a major part of the decision-making process.  Having significant “skin in the game” suggests that the manager’s goals are more closely aligned with those of their clients and this appears to give allocators greater confidence.

 

The groups differed in their choice of the top influence on their investment manager selection process.  The DFMs and multi-managers selected “a robust investment process” while advisors choose a boutique manager based on their ability to offer “niche investment strategies”.  The latter speaks to the industry-wide trend that is developing: boutiques need to clearly distinguish themselves from the market by offering solutions that are noticeably differentiated from the more traditional options offered by the larger players.

 

Demonstrate differentiators

 

Furthermore, articulating and actually demonstrating these key differentiators is critical; this stood out across categories as the best way in which boutiques can gain a greater share of assets from IFAs, wealth managers, DFMs and multi-managers.  With a rising number of boutiques entering the fray in South Africa, it is imperative that a boutique manager demonstrate exactly why it is different from its peers.

 

What matters in manager selection?

 

Based on the survey results we can conclude the following key focus areas for boutiques:

  • Differentiating features and niche capabilities matter to all FSPs;
  • A trusted brand is particularly important for the advisor market; and
  • Track records influence the manager selection process.

 

Boutique managers are becoming an increasingly relevant force of competition for the more traditional fund houses, and the industry as a whole needs to be aware of how they are changing the investment landscape.  We believe the survey has added value to the evolution of the industry by identifying critical factors considered by asset allocators when it comes to boutique investment management.  Investing with boutiques can offer many advantages in complementing large manager allocations.

 

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