Innovative solutions add to attraction of boutique fund firms

Despite sustained consolidation in the asset management industry, and increased adoption among wealth managers of the ‘preferred partner’ approach – which favours large fund houses offering a broad product suite – strong demand for innovative investment funds has attracted much interest in mid-tier and boutique fund management groups. These have been able to stand out from the crowd by developing appealing thematic or sustainable investing product offerings.

“End clients have become very price focused and with increased market volatility are looking for new stories,” observes Diana Mackay, managing director of global distribution solutions at Broadridge. As a result, professional fund selectors are not just looking for skills traditionally required from asset managers, such as risk management, ability to pick stocks, and good operational process, but are also seeking persuasive messages which resonate with clients, she says. 

New look

This new dynamic emerged from our analysis of fund flows, over the past 12 months, from PWM’s panel of selectors, which includes fund platforms acting as gatekeepers to banking and asset management groups managing more than €3tn ($3.4tn) of client assets. 

The composition of our top 10 brands table has acquired a significant new look compared to last year’s analysis. 

While M&G, Invesco and Wellington all advanced positions within the top 10 most popular brands, heavyweight Fidelity and Amundi featured in our champions’ league of leading brands for the first time. 

Dutch firm Robeco, with a robust track record in the ESG space and €171bn in managed assets, consolidated its mid ranking position, while UK-based Hermes IM, managing £36bn ($45bn) and renowned for its strong ESG framework, jumped to seventh position, up from 23rd.  

This reshuffle has done little as yet to disrupt the entrenched strength of the world’s largest fund house BlackRock (excluding its ETF business iShares), which has attracted the most of our panel’s assets since the start of our analysis in 2015. BlackRock has made a strong push into thematic investing, launching several thematic ETFs two years ago, as well as actively managed funds in 2018, to meet increasing demand among wealth managers.

Large vs small 

Strong consolidation in the industry continues, although at slightly slower pace, with M&A activity involving 137 deals and $1.3tn of assets under management in 2018, versus 141 deals last year, according to Freeman & Co, the New York Investment Bank. 

While some of the biggest deals in the past were driven by empire building, primary drivers of mergers and acquisitions are now skills, scale and market position, according to the analysis of deals of the past 20 years carried out by Amin Rajan, CEO, Create-Research. 

“The current wave of M&A is focused far more on profitability and the survival of asset managers in the face of the relentless rise of passive investing, and far less on radical changes in the existing business models,” says Mr Rajan. 

But large houses are not necessarily favoured by fund selectors. PWM’s analysis shows a clear trend among our fund selectors to allocate less money to big names and gain exposure to a broader range of houses and funds. 

Over the past 12 months to the end of October 2018, our fund selectors have allocated assets across 102 brands, up from the 70 and 90 of previous years. The total number of funds they have selected has increased to 180, from 160 last year.

“There are probably more problems than benefits to scale,” believes Lee Gardhouse, CIO at UK fund and investment platform Hargreaves Lansdown. 

“This kind of desperate move towards very few big fund houses is not necessarily in end investors’ best interest,” he adds, pointing to difficulties of making swift changes in large portfolios and likely higher costs, as building the position moves the market price. Usually changes within asset management houses are bad, says Mr Gardhouse.

“Change will almost certainly lead to fund managers leaving, or to spend time thinking about their role within their business and the team structure, as opposed to just being 100 per cent focus on picking the right companies.”

And this aspect is crucial, as a key requisite for selecting a fund is the long track record of the individual manager. This can be found both within a boutique or large firm, although it is easier to find in smaller boutiques, adds Mr Gardhouse, where the manager is willing or able to take big bets relative to the index. 

Adding value

“Scale is very important. However, ultimately, the managers able to innovate and generate investment alpha will continue to be successful, independent of their size,” believes Thomas Otbo, Group CIO, at Nordea Wealth Management. 

The bank has selected its preferred partners among asset management houses of all sizes, maintaining a “strong strategic relationship” with its internal asset manager, Nordea Asset Management.  

Several panel members express a preference among their clients for strong brands of large firms, offering comfort and perceived protection against risk, while others appreciate their ability to discover hidden gems, with innovative investment processes. So, it is important for fund selectors to offer both types of firms.

A strong brand might “get you in the door, but we will only invest in the specific fund if it fits our investment strategy and is able to generate alpha,” states Nordea’s Mr Otbo.

To build a strong brand, a firm needs a long and robust track record across a broad range of products, strong investment processes and strong operational set-up, being able to innovate. But even smaller, niche boutiques can build a robust track record and reputation, he adds. 

Looking forward, there are two main areas for innovation, believes Mr Otbo. One is on the technology side. Investments in trading technology are growing, enabling asset managers to optimise execution. “Ultimately, better execution will allow improved returns, especially for strategies with high turnover, such as systematic strategies.” 

On the product development side, one area of focus for innovation is around sustainability. “ESG is becoming increasingly important and we are seeing a rise in demand from our clients,” says Mr Otbo.

Fund selectors have also had to enhance analytical capabilities in this rapidly growing space, to distinguish between true and fake sustainable strategies. 

ABN Amro Investment Solutions, the multi-management centre of expertise at the ABN Amro group, first selected an ESG fund in 2003, and today relies on a team of SRI experts which, in collaboration with the manager research team, provide ESG financial and extra-financial analysis for external strategies.

FundQuest Advisor, the specialist fund selection arm of BNP Paribas Asset Management, introduced ESG as a new criterion five years ago, enabling clients to give an ESG footprint to their portfolios.

The unit analyses and rates the asset management company that runs the fund, in addition to the fund itself, all from an ESG standpoint. This means some funds labelled as SRI or ESG in the market have been poorly rated by FundQuest precisely because the asset manager was not following best ESG practices.

Quantity not quality

Some fund selectors are concerned about the huge proliferation of products in the market. “Too many firms engage in “me-too” products which do not add value for end investors,” says Luca Dal Mas, senior fund analyst at Aviva Investors. 

“Adjusting existing propositions to align with long-term market changes is probably the best way to innovate,” he says, pointing, for example, to plain vanilla funds that have added a relative value allocation to cope with expected long-term lower returns, both from equities and bonds.

Despite product proliferation, it is still possible to come up with new investment solutions, says Neil Massie, head of wholesale marketing at Fidelity International. 

“It comes down to your ability to anticipate and interpret client needs,” he says. “Clients want to see clear functional differentiation in the product range – the ability to meet very specific risk-return needs. But what they have historically seen is clustering around similar ideas and themes.”

Technology has acquired a crucial role on the marketing side too, enabling asset managers to use data to target services very specifically to clients.

Thanks to improved technology, a targeted marketing approach resonates particularly well with clients, explains Mr Massie, as they only receive information about the firm which is truly relevant to them. “It’s a small point, but this tailored approach serves as a reminder that service can be a valuable differentiator and source of innovation.” 

Digital tools are also expected to bring much more to clients and investors in terms of reporting, communication and information, says Bernard Aybran, CIO for multi-manager portfolios and funds of funds at Invesco. He also sees room for innovation in wrappers and investment solutions and warns against the risk of “one man shows”, bringing risk and instability.

With significant price pressure in the industry, asset managers are having to work much harder to differentiate themselves and demonstrate their value proposition to end investors, regardless of the company size, says Broadridge’s Ms Mackay.

Innovation can cover new ways of thinking or different approaches to service, she says. Fund selectors are looking for organisations that stay away from the one-size-fits-all approach, but can understand the distributor’s business, and demonstrate a knowledge about their own funds and the market. 

Brand building

Building and increasing awareness of a brand reflecting the firm’s culture and strategy tops the agenda of most asset managers.

What has become clear to these fund houses is that a structural change is taking place in the industry. As pension schemes migrate from defined benefits to defined contributions, the role of the individual in assessing and choosing brands is increasing in importance. 

 “Asset managers have started thinking about their brand, what it means and how they communicate that to end investors,” says Tony Gaughan, partner, UK Investment Management & Wealth sector leader at consulting firm Deloitte. This is in stark contrast to pre-financial crisis times, when advisers controlled the message delivered to end clients. 

Increasingly, fund houses are also assessing where future business might originate, to make sure marketing campaigns are targeted and aligned to their business growth strategy. This attitude has led them to explore new communication channels.  

For example, M&G has spent significantly on advertising on ski slopes and sponsoring the Chelsea Flower show, covered intensively by the media. Three years ago, UK hedge fund manager Winton took the unusual step of advertising its investment and risk approach on a large billboard above the London Bridge station entrance, featuring Little Red Riding Hood navigating her way through a forest. 

Even a firm with a long history and a well-established brand cannot afford to be complacent, explains Fidelity’s Mr Massie. “Clients’ needs change over time, so it’s important that our brand evolves to remain relevant. We seek to convey not just required skills and expertise but also show shared values,” he says. 

Hard to gauge

Hard brand factors, such as consistency of performance, process and demonstrable value remain central to the decision-making process for most professional fund selectors. But there are also some softer influences gaining importance, such as ESG credentials, that are not always quantifiable. 

 “A brand is first and foremost an element of differentiation, when players are competing with similar products and services offerings,” says Alain Berry, head of communication at Amundi. 

The French firm, created in 2010 through the merger of the asset management operations of Credit Agricole and Société Générale, acquired Pioneer Investments in 2017 and today manages almost €1.5tn in assets, the only non-US player among the 10 world’s largest asset managers.

Communicating values is important, but a strong brand also provides reassurance. “When difficult times arise, clients will always choose the brand they know, trust and prefer, and will avoid new, unknown or undefined players,” believes Mr Berry. 

Top 10 funds: buy and hold

Still at the helm of our 10 most popular underlying funds, to which PWM’s panel of selectors has allocated most assets, is AA MMF Aristotle US Equities, a fund sub-advised by ABN Amro Investment Solutions, also selected by FundQuest.

Five other funds have stayed in the top 10 ranking, demonstrating the long-term horizons of fund selectors when selecting strategies. These include M&G Global Macro Bond, rising to second position from seventh last year, Wellington US equity research portfolio, which also jumped two places, Marshall Wace TOPS and BlackRock European Dynamic, in similar positions to last year. 

New entries include funds from boutique firms Crux and Artisan, which manage respectively the European Special Situations and Global Value funds. None of the top 10 funds this year are ETFs, reflecting changing, volatile market conditions which favour active managers. The ETF that has gathered most inflows, Source Nikkei Eur hedged, ranks 25th, followed by two products tracking the S&P 500, offered by Lyxor and iShares.

The value of entrepreneurship

Successful boutique firms, competing against large fund groups and “super-tanker funds”, share several common factors, says Eric Syz, CEO at SYZ Group, the family-owned Swiss banking firm. 

These include relatively small numbers of products in focus areas, clearly defined process and investment approach, investment performance repeatedly delivered within or above expectations, and high quality administration, legal and operational processes. 

In addition, Mr Syz has also embraced “entrepreneurship, independence and willingness to go against the herd”. 

The firm positions its product offerings as “complementary and often as diversifiers to those of large players”. It built its brand in active management, particularly on the alternatives side. 

Its offering has been reinforced by the recent launch of SYZ Capital, a private market investment and advisory specialist. The new line will focus on selecting investment opportunities across private markets, providing tailor-made solutions through thematic funds and co-investment vehicles, as well as advisory services around financing solutions and capital structuring. 

While private markets represent an important part of the global economy, they are difficult for most investors to access, although they can deliver returns above those of traditional assets. From a global total of $80tn in investable assets, private markets represent approximately $5tn, including private equity, private debt and real assets, according to the firm. While investors have had access to hedge fund strategies for decades, private markets are still dominated by institutional capital.

“With SYZ Capital, we aim to democratise private equity investments,” claims Mr Syz.