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An academic report said that smaller asset managers can provide better alpha returns for clients with their investments and funds than larger companies due to the pressures of the industry.

The factors were outlined by the Group of Boutique Asset Managers (GBAM) in a study and paper by Professor Andrew Clare, Professor of Asset Management at Bayes Business School (formerly Cass Business School).

Clare’s work focused on the European asset management industry in 2020, which the report said also integrated findings of earlier research into US boutiques in 2015 by American financial services company AMG.

The report could prove insightful for the industry as it looks to move into the next cycle after the easing of interest rates and possible new geopolitical risks and opportunities that could emanate from the incoming second Trump administration.

The 2015 paper focused on whether the smaller asset managers were able to offer different levels of service and investment strategy from major global players and whether this meant they received better returns for their clients.

“If you are a small fund manager then really, you live or die by your performance."

The study showed that “risk adjusted returns tended to be higher for boutique asset managers compared with the risk-adjusted returns generated by non-boutique managers”.

“The AMG results could be due to the more focused ownership structure of the boutique funds, where the fortunes of the owners of the boutiques may be more closely aligned to those of their third-party investors,” it said.

The possible reasons for a higher alpha could be that the companies can be more nimble with strategy and respond to market events or disappointments more quickly than majors.

“If you are a small fund manager then really, you live or die by your performance,” said Clare. “So, if you have been in existence for some time, it is likely you are doing something right and you have good performance. I think it is more likely that you will find alpha in these sorts of places than in the general asset management industry.”

The GBAM network described itself as a collection of firms that have a limited range of products, a close relationship with clients, and a relatively flat organisational structure.

Because of this, GBAM firms tend to be small to medium-sized, entrepreneurial, flexible and responsive to changing market conditions. Members tend to focus on the manufacture of investment products rather than mass distribution. Ownership tends to be in the hands of founding partners.

The group launched a video series looking at the key factors determining boutique asset management outperformance versus larger counterparts.

Which is best?

US financial services behemoth Vanguard said in a paper earlier in 2024 that delved into which they preferred that the answer was not cut and dry when it came to choosing fund managers of various sizes.

They said both had their advantages and that smaller firms offered different capabilities to the major players. Vanguard put the reasons they looked into when choosing into three categories – resources, culture, and incentives.

“While various ownership structures can be effective, we have found that employee

ownership tends to correlate with better firm profitability and growth."

For resources that was “The quality of a firm’s research resources”. “Do they perform proprietary research or rely on outside sources?”

For culture, “How well does a firm rate on ethics, stability and the diversity of its client base?” and for incentives “a firm’s ownership structure and remuneration policies”.

“While various ownership structures can be effective, we have found that employee ownership tends to correlate with better firm profitability and growth,” said Vanguard. Several boutique asset managers do have this structure.

The company’s conclusion was in opposition to the research though, “Firm size notwithstanding, there is no such thing as the perfect fund management firm and both boutiques and behemoths have their advantages. Neither automatically leads to better performance outcomes,” they said.

At the beginning of 2024, the Financial Times warned that the “peak may have passed” for boutique managers and that scandals including the Woodford debacle may have robbed the sector of its shine. However, it specified that it often still had the edge when it came to active investment.

“Boutique managers do not have the benchmark constraints

that are associated with many institutions."

Despite these negatives, other sources also highlighted the many benefits that boutique firms have, which reach back several years.

“Boutique managers do not have the benchmark constraints that are associated with many institutions – and this is the reason that the performance of boutique funds has been strong,” said Gavin Haynes, Managing Director of Whitechurch Securities in a 2017 article on the topic from Morningstar, entitled “Can ‘Boutique’ Investment Firms Outperform Larger Rivals?, which focused on high profile at the time boutique launches and how this was changing the market. It argued that larger investment houses “tend to have more of a focus on marketing and attracting flows into their funds”.

“This can result in fund managers managing significant sums of money, which can become a problem if it compromises their investment approach,” said the report.

Haynes said the culture – of entrepreneurship and cooperation – that typically dominates within smaller companies creates a better environment for fund managers.

These are backed up by many of the stats shown in Clare’s 2015 study. It found that boutiques significantly outperformed non-boutiques with the average boutique outperforming the average non-boutique in nine of 11 equity product categories, by an average annual 51 basis points. Investing exclusively with boutiques across all categories would have created 11% greater wealth for clients over the last twenty years, as opposed to investing with non-boutiques it said.

The average boutique strategy outpaced its primary index in nine of 11 equity product categories, by an average annual 141 basis points after fees.

Numerous academic studies showcasing the benefit of boutique operational implications should be considered.

 

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