When I took the call from Money Marketing asking me to write an article on the world of investment boutiques, I was in a Birmingham City centre hotel with Jeremy Lang and colleagues, hosting a presentation to two dozen stockbrokers and financial advisers. I agreed to write the article there and then but, to construct a theme for it, I decided I would ask our guests' opinions of investment boutiques and why they support them.
First of all, there was near unanimous belief that the rise of the smaller fund management group, at the expense of the bigger one, would continue. Our guests' views about how investment boutiques have established themselves so successfully in rec- ent years, why more and more people want to set up their own businesses and why investors are prepared to back these start-ups with their own funds, might be summarised as focus, freedom and failings. It is these themes that I would like to explore a little further.
To compete against other start-up companies, as well as the established industry players, your offering as an investment boutique has to be focused – and different.
In a crowded and mature marketplace, launching me-too products is not an option. General differentiation is crucial but having a clearly defined and focused 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 and by focusing on a particular asset class – in our case, UK equities – you can reinforce your own point of difference.
The last few years have seen more applications to establish new fund management operations than ever before as people seek the freedom of creating their own businesses. Success also breeds success. As word spreads about the benefits of working in an environment that you have created yourself, it can act as a very powerful motivator for others to establish their own investment boutiques.
It may work the other way though as 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 security of a big organisation.
We believe that creating and maintaining a working environment that gives you the freedom and flexibility you need to fulfil your best potential, is absolutely critical to delivering superior performance and service.
Finally, a major reason why the smaller groups are flourishing are the failings of the bigger groups themselves.
For too long, the big fund management 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.
Eight 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 cosy arrangement started to unravel when the big balanced managers began 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 capab-ility, their employers merely control the working environment. A capable manager in a more suitable, relaxed environment usually becomes more effective.
The result is that smaller fund management 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 has happened in the unit trust market too, with the proliferation of the multi-manager. These fund of fund managers owe no allegiance to the way that things were, preferring to allow smaller players to demonstrate their ability.
At the end of our Birmingham presentation, as our guests drifted off, I spoke to one adviser who commented on how lucky we were to work in an environment that was of our own making and which had achieved in its aim of delivering performance for investors.
I agreed and was about to take him up on these points when his taxi arrived. His parting observation was that he found it ironic that while the number of fund management companies keeps expanding, there was an almost continuous contraction in the number of truly independent financial advisers. I had never really thought about this before but shall mull it over until -or if – I get another phone call from Money Marketing.