Boutique Asset Managers Adapt and Grow in a Turbulent Environment

Today’s volatile, turbulent market is driving boutique asset managers to examine technology that will enable smarter performance and transform investment decision making. Automation, speed, robust operational efficiency and processes, together with sound data management are all absolute musts for boutiques seeking business models that will help them more effectively manage market shocks caused by political impact or other market events of magnitude.

Dramatic changes in the low-interest environment mean the only certainty is more uncertainty, particularly in light of major political decisions worldwide that may have long-term economic effects. In addition, the proliferation of passive investment strategies from larger traditional asset managers - still operating with high management fees, have led investors to examine and challenge their current investment choices. Both the larger institutional asset managers and individual high-net-worth investors are looking to boutiques for talented and innovative active investment strategies, attracted by their agility and niche domain knowledge. They are seeking active, specialist opportunities, to diversify investment portfolios in which to invest – in the pursuit of higher returns. Boutiques have a competitive advantage in being able to actively manage their portfolios by taking high conviction positions or offering downside protection. Boutique fund managers are also solely focused on risk-reward decisions, resulting in alpha-generating returns. This is in contrast to larger institutional fund managers who also have to focus on non-investment factors and where bureaucracy can mean they take longer to buy into and sell out of a position. Making it more challenging to take advantage of market changes. Additionally, internal investment policies may mean there is less flexibility to diversify away from their core investment focus.

Historically some boutiques have outperformed the benchmark and the benefits boutique managers are able to offer are a combination of talent, agility, focus and responsiveness to opportunities in the market, exclusivity and closer quality client relations, since many boutique fund managers hold a large equity stake in the firm and often have invested their own personal assets into their funds.

Shake Up of the Industry in US & UK

Demand for effective risk management and reporting tools, as well as compliance and investor relations solutions, is expected to increase dramatically in light of new findings from the UK’s FCA. In recently published interim findings into the UK’s asset management industry, which manages nearly £7tn of institutional and individual investors’ assets, it found a lack of clarity and transparency around investment tools.

For example, it found fund performance is not always reported against an appropriate benchmark and price competition is weak in a number of areas of the industry. Strengthening the duty for asset managers to act in the best interests of investors, reforms around accountability, a simpler fee structure and measures to help retail investors identify the most appropriate fund are all recommended.

Conversely in the US, President-elect Trump is showing signs of favoring the deregulation of the asset management industry and increasing interest rates. The shifts in general focus on deregulation, tax cuts, and stimulus, should help the revival in US corporate earnings. That may create a greater range of growth opportunities for investment strategies to tap into.

Institutional investors and consultants alike see a change in regulation as the most disruptive force with potential for opportunity for asset managers.

How will this impact boutique asset managers?

Boutiques tend to be closer to their clients and boutique asset managers are seeing enormous demand for transparency around decision-making from both their high net worth clients and institutional investors. The days when firms were managed on spreadsheets are diminishing. When institutional investors look at boutiques as a potential investment management partner, either through a direct mandate or through an allocation to an established fund, they do not rely purely on investment strategy.

They also look for due diligence, robust quality in their technology platform and the capability to enable straight through processing, transparency in compliance processes and effective risk management and regulatory reporting. Boutique investment firms must operate at an institutional grade level.

The importance of operational rigor is not only an operational issue – far more importantly the right technology and processes create greater strength in the investment process and in risk management.

They also enable efficiency and the potential to scale up the business. Headcount is a challenge for firms of every hue in finance under the current economic environment. As firms come under cost pressure they are being forced to do more with less or at least more without additional resources, while they grow assets.

Technology is a key tool in streamlining the organizational structure by enabling data to flow from the front office through to the back office. As regulatory pressures increase there is a greater requirement for trades to be tested as they are placed and for the decision-making process around them to be documented. The increase in pre-trade compliance and in the amount of data reporting that needs to be done is simply impossible to process manually. The smart firms are tackling this from a holistic viewpoint and utilizing technology as a key part of that equation. FIS see key advantages to that approach as those solutions can be established using managed services allowing the firm to concentrate on its core activities.

Access to data is a key part of the process and in today’s investment environment greater amounts of data are available. Having the tools in place to aggregate that data and derive knowledge from it is key. As trading desks move to multi-asset class capabilities and multi-asset strategies become more commonplace getting a complete picture of markets simultaneously is fundamental to conducting business. The technology ecosystems firms want are single solution sets from single providers that can provide straight-through-processing to make these strategies market-beating.

We see opportunity in the future for talented and entrepreneurial managers who are often able to exploit market opportunities that are not available to larger managers. They are the next-generation asset managers, and can grow into their future at their own pace and become bigger managers over time.