The asset management industry has become increasingly populated by a new breed of boutique – the star manager start-up. With managers such as Neil Woodford (pictured) and Richard Pease leaving the relative security of large fund houses to establish their own shops, how do these new firms figure in the eyes of fund selectors?
Equilibrium Asset Management partner and investment manager Mike Deverell believes fund managers who have made a name for themselves at a big firm can benefit when starting up their own firm in terms of their investment process.
‘You tend to find that when a fund manager moves they have time to look at their process and so they can adapt and improve it. We saw it with Georgina Hamilton and George Godber when they joined Miton [from Matterley] and they instilled a new safety check for holdings that has worked well for them,’ Deverell said.
‘There’s also the benefit that fund managers at boutiques – whatever their origin – are more likely to be invested in their own products and therefore have some skin in the game. We like seeing that.’
Reputation is everything
Three Counties IFA Andrew Alexander thinks these companies will do well simply because of the way money will follow reputation, demonstrated recently when Woodford’s new fund attracted record inflows of £1.6 billion for a fund launch when his new venture opened to investment.
‘Why did the money flow to them in the first place? Even if performance remained strong people will move because the relationship was never with the house, it was with the manager,’ Alexander said. ‘If you have that relationship with the manager already, you will go with them. They will not change what they do and will try to replicate what they have achieved before.
‘Obviously it is an ego thing. When you have big names setting up their own boutiques it is simply a business decision to be able to control additional basis points they receive. I have no doubt they will do well but no matter how well known they are, they will not have the marketing capability that they used to have.’
Still a boutique?
Similarly, Charles Stanley investment analyst Stephen Peters feels that generally boutiques might not be able to compete fully with their larger competitors in terms of pricing flexibility.
‘You have to be careful about fees. With small firms they are less able to price more keenly because there is more of a pressure on one fund or a smaller stable of funds,’ he said.
‘Some of them can be keen to charge fees more appropriate to a hedge fund-type structure. That is a bit more unpalatable for us.’
Wellian Investment Solutions managing director Eric Clapton is wary of these firms as despite the fact that managers starting out on their own will usually have attractive track records, there is organisational risk at these start-ups. ‘Our concern is with key man risk,’ Clapton said.
‘We don’t have a problem with a chap being a genius at investment, but we concern ourselves more with the team. We like find managers housed in decent sized fund houses with different teams around them. With boutiques the problem is even though we admire them, we are not investing in a process but in one man.
‘We see consolidation in this space as well. There is always people breaking away on their own. But I can see in a few years from now we will see some of them reconsolidate.’
The challenges facing a boutique today
Ardevora founding partner William Pattisson says the real challenge for boutiques is not the initial start up but to actually grow and survive in such a competitive market.
Pattisson, who co-founded Ardevora with Jeremy Lang five years ago, said: ‘It is quite easy to start up as you get together some people, rent an office and it is all blue-sky thinking. But the question is can you survive in the long run? Post-credit crunch, people are wary about start-ups and you usually have to have a long-term track record in place.’
Additionally, he points to regulatory compliance as an overhead that can be more inhibitive to start-ups than larger, more established asset management firms with more resources.
He added: ‘Also, you have to think how you will structure your business. We didn’t want any sleeping partners or external shareholders. We were very keen to keep it pure.
‘I think as time goes on more boutiques will start out with a “backer” of sorts due to the costs they face. This will then mean less robust businesses as they will have an external shareholder. The nature of start-ups will gradually fade.’
Stuart Mitchell agrees, having founded SW Mitchell Capital in 2005, and added: 'I am sure the big guys who set out for themselves will be fine, I wouldn’t even call them boutiques.
‘The problem is much more for managers with a lower profile setting up their own firms and you don’t have so much money following you. When running a boutique it’s a constant battle. You never know if you’re going to survive.’