Boutique isn't about size, it's about focus — like a laser.
It means having a focus on a particular investment strategy or asset class or market philosophy. Having this kind of obsessive focus can provide a number of advantages: flexibility, nimbleness, independence, as well as a possible advantage in alpha and, depending on the platform, active interest from gatekeepers.
But boutique can be done wrong, and that can cost you.
These were some of the messages about boutique asset management delivered today by a panel moderated by Carolyn Clancy
executive vice president of FundsNetwork
, at the 2013 MMI Fall Solutions Conference
, hosted by the Money Management Institute
at the Grand Hyatt New York.
Clancy's panel session was titled Is Boutique Better?: A Look at Strategies for Emerging Managers
. The other panel members included: Cooper Abbott
, co-chief operating officer and executive vice president of investments, Eagle Asset Management
; Matt Embleton
, principal, director of mutual funds research, Edward Jones
, and Mark Meisel
, senior vice president, Northern Trust Global Investments
The presenters had a lot to say on the subject. Finding and understanding new managers was declared a priority by all the participants: Clancy, who deals with over 700 fund managers via FundsNetwork
; Abbott, who works with Eagle's nine boutique-like investment teams; Embleton, who leads a team of 25 fund analysts who conduct the due diligence regarding which funds should be placed on the Edward Jones platform, and Meisel, whose firm helps boutiques launch products and build up their distribution.
Also important to note, Embleton talked a bit about Edward Jones' efforts to develop its own line of funds, which involve finding a solid team of subadvisors.
Clancy started off the dialogue by asking the apparently simple, yet surprisingly hard question: just what is a boutique?
Meisel had this to say on the subject:
We don't think of it as matter of size. What differentiates a boutique is a large focus on a particular asset class, investment style or way of managing money. Very often, we actually do look for some smaller firms at times.
Size isn't necessary as part of the definition. There are big firms that have this laser focus. Their investment process is the same no matter that asset class they are employing.
Embleton had this to say:
It's not about size, it's focus. There are a lot of different money managers with different ways of doing things. A boutique is focused on a particular investment style, a particular asset class, and not taking [its] eye off the ball from that.
It is really that expertise in a particular style of asset class that I think defines a boutique.
Meanwhile, Abbot talked on the issue in this way:
It is a very exciting time to be a boutique. The technology available now makes it such that scale has changed a lot on the investment management side.
A boutique is first and foremost focused on the asset management side of the business. Managers are first. Distribution is important, but not a primary focus.
It is not about being all things to all people. Not filling nine investment style boxes on a nine box grid.
I think the best investments are done in relatively small groups who are able to work within their own cultural practices. They can be more organic. By virtue of being a boutique, that often says to me that you can be a bit more flexible, more organic in terms of building out the investment teams, a little less rules-based.
Clancy then asked the panelists about the standards related to due-diligence.
Embleton and Meisel said that standards were primarily the same: track records, resources, right people, and so on. Deeper dives are taken, though, in areas related to back office and operations. Does a firm have a compliance officer and program that works for the business it is in? Can they execute?
During the course of the conversation, Meisel brought up the subject of his company's small emerging managers initiative. He and his colleagues believe that small startups have an alpha edge, and the initiative is designed to search them out. For this program though, it is actually possible to be too big. The program's cut off point for domestic equities is $2 billion; international cuts off at $3 billion and fixed income at $5 billion.
Gatekeepers have to be delicate while dealing with these small firms, the panelists said, because they have short, short track records and a short list of clients. There is a lot of interest in the financial backing for these firms: do they have the reserves to survive a downturn? (A big topic of interest after the financial crisis.)
Manager ownership in the boutique is also prized, of course, for the obvious incentive it provides for success.
Clancy then brought up the subject of best practices, i.e. the things to do to get gatekeepers on your good side, or at least, not get on their bad side.
Meisel advised boutiques to be "very pithy and strategic" in their conversations with gatekeepers.
"We are very hard to get in touch with because we have an open door policy," he joked.
He suggested quarterly, intelligent, strategic updates by phone. Talk about the best funds, not all of the funds, bring up a few of the most relevant and interesting white papers.
Also, no surprises.
"If there are any changes in your organization, you probably want to highlight that so an analyst making a recommendation isn't blindsided by it," he said.
Embleton advised audience members to not call Edward Jones unless they had at least $500 million. He also wanted to get update calls quarterly. No blind emails though.
"I hate blind emails, don't do that to us. I prefer a phone call, an interaction. I can connect you with the analyst who is responsible for that asset class, find out how they want to be contacted. Each analyst is different. Some might want email, others may want phone calls, otehrs may want meetings," he said.
In fact, Embleton said, it is rare for his team to turn down meetings with firms.
"We try to look under as many rocks as possible to find managers," he said.
Abbott advised boutiques to be "clever around the distribution channels," focusing on channels where the firm can get the most bang for the buck.
Also, he said, it pays to be patient. Respect the cycle of demand for products and be ready when it turns your way.
"You do have to be patient. Not everybody is going to want a small cap when you are selling it. Be aware of the demand cycle and be there when the ccle comes," he said.
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