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Small firms make it big

Press and commentators love to speculate about which small fund group is set to become the next leviathan.

Headlines such as Who&#39ll become the next Jupiter/Perpetual/Fidelity/Schroders? have been commonplace in the trade newspapers and weekend financial press.

If we are to believe these art-icles, the aim of all small fund management groups is to grow as fast as possible, expanding their range of products, funds and services. Once a dominant position in the unit trust and Isa sales and Pep transfer league tables is achieved, this enables them to broadcast to everybody about how marvellous they are and why everybody should buy their funds.

Why should small fund groups want to be big ones? Does big mean better? Do you get better service, fund performance and quality of staff if you are part of a big fund manager? Of course you don&#39t. One only has to look at the casualty list among the big groups to see that, all the time, talented people are leaving to establish their own businesses.

Bigger fund managers often spend more time worrying about what is leaving via the back door than what is coming in through the front door. The rise of the smaller fund management group at the expense of the bigger groups will continue. I believe there are four main reasons for this and why more and more people want to establish their own businesses and, more important, why investors are prepared to back these start-ups with their funds.

First, creating one&#39s own working environment is more conducive to delivering better performance and service. In a small firm, you live or die by what you do or do not deliver. There is no hiding place.

This concentrates the mind wonderfully. Having to compete with other start-ups as well as the established industry players means that your offering has to be different. In a crowded and mature marketplace, launching me-too products is not an option.

Second, while general differentiation is crucial, having a clearly defined investment process is more important than ever. Clients have become more discerning, wanting not just results but a clear understanding of how these results have been achieved.

By developing and articulating a clear investment process, you can reinforce your own point of difference. That is what we have done. Our three proprietary investment pro-cesses, along with our people, are the most important assets we have. This is what makes us different.

Third, success breeds success. There are now more applications to establish new fund management operations than ever before. A few well publicised success stories of people managing to create their own businesses from scratch can be a very powerful motivation for others who are thinking of taking the plunge.

It does also work the other way, of course. A few well publicised failures could dampen enthusiasm but on balance an essentially entrepreneurial business such as fund management should always have a long list of talented people prepared to take the risk of leaving the sec-urity of a big organisation.

Ironically, the fourth and final reason why smaller groups are flourishing is down to the bigger groups themselves. For too long, the big firms have got away with relying on their brand names and distribution channels while providing poor performance. Complacency has set in. What is happening in the UK pension fund industry is a salutary lesson to them and worth retelling here.

Six years ago, when we established Liontrust, breaking into the UK pension fund market without a track record was considered impossible because the big five balanced pension fund managers had the market sewn up.

Traditional pension fund consultants and trustees were unwilling to take a risk and try new managers. But this started to unravel when the big balanced managers started underperforming and new consultants, often from the US, entered the market and challenged convention.

They looked at the industry in a fresh way and were willing to give smaller niche players a chance to prove they could deliver better results. They recognised that capable fund managers are not defined by their employers. They themselves have the capability, their employers merely control the working environment. A cap-able manager in a more suitable, relaxed environment usually becomes more effective.

The result is that smaller fund firms have broken into the market traditionally monopolised by the big balanced managers. This will continue.

In our view, the age of the big balanced manager is over. It is starting to happen in the unit trust market too. New US-style multi-managers are coming in. They owe no allegiance to the way things were, preferring to allow smaller players to demonstrate their ability.

Nigel Legge

Joint chief executive, Liontrust Asset Management

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