Boutique asset managers and family offices

Boutique asset managers might be at a disadvantage in terms of fundraising prospects vis-à-vis the big boys, but family offices know that what they lack in size they make up for in performance!

Are you an independently wealthy individual or family office looking for market-beating returns?

Have you set out to create your own fund management firm?

Are you an investor trying to understand the dynamics of the fund management market?

If you belong into any of these categories, this article is going to deliver a few valuable insights to you – including some unspoken, inconvenient truths.

Institutions don’t invest with boutique investment managers

Are you a corporate employee and budding entrepreneur who wants to build a fund management business? That’s great for you, but don’t plan anything based on the erroneous belief that large institutions will provide you with any backing.

Unless you hail from truly exceptional circumstances and already have strong relationships in the space, your chances of securing funds from the big boys are slim to non-existent.

There is little incentive for capital allocators at large institutions to take big risks on small fledgling fund managers with little to no track record. The team allocating capital to your new fund won’t receive huge bonuses if you perform well but they would certainly have to answer some tough questions if you failed. From the perspective of a corporate employee, the risk/reward profile for allocating to an emerging manager is poor. What’s more, even if they were inclined to do so, they probably wouldn’t be able to achieve the size of position necessary to move the needle, because virtually no investor would agree to be bigger than 25% of the fund’s total assets. Never mind the fact that institutional allocators are literally inundated with pitches on a daily basis.

It’s not impossible for new managers to secure institutional investment, but the odds are stacked against you. With this in mind, boutique managers are well advised to concentrate their efforts elsewhere.

Why family offices like (and seek out) new fund managers

New, smaller managers (often called “boutiques”) might be at a disadvantage in terms of fundraising prospects vis-à-vis the big boys, but what they lack in size they make up for in performance. That’s why there IS a market for them, and it’s this strength in particular they should utilise during their early phases of development.

According to a 2018 study conducted by US-based Affiliated Managers Group (AMG):

“Boutique active investment managers have outperformed both non-boutique peers and indices over the last 20 years.”

The chart below shows the average annual outperformance of boutiques vs non-boutiques:

Some of the factors driving this outperformance are obvious. Smaller fund managers tend to have smaller funds, which means they are more agile and don’t share the same restrictions of larger funds in terms of position sizing. For example, a smaller fund might be able to take a material position in a smaller capitalisation issue, whereas a larger fund would find it difficult to gain exposure large enough to make an impact.

But there are also deeper factors at play. The report highlighted the following factors:

• Investment-centric organisational alignment. The founders of investment boutiques have little desire to build empires, which means the investment process takes front and centre stage in all aspects of the business. Staff numbers often remain low, while back-office functions are outsourced to ensure that the firm’s organisational structure remains focused on the business of investing. An aside of this is that boutique managers are often nimble with fewer layers of management bureaucracy and are therefore better able to tailor their products to their clients’ needs.
• Alignment of interests with clients. Boutique investment managers often have a large portion of their net worth invested in the portfolios they manage and/or a stake in the fund management company itself. This skin-in-the-game mentality ensures that managers’ interests are aligned with those of their clients. The ability to take ownership of their performance also means that the boutique structure often attracts the very best investment managers.
• Principals are committed to a long-term orientation. Co-ownership and a strong ethos of collective endeavour help to bind personnel together and lead to longer management tenure than is often the case with larger asset managers. There is a lot to be said for a stable, long-term operational environment, free from the continual restructuring and reorganisation that is the hallmark of larger firms.

These are just some examples – there is a LOT to endear boutique asset managers with family offices. Don’t forget that many family offices are owned by entrepreneurs, who will naturally gravitate towards managers who are in turn entrepreneurial. What’s more, family offices tend to rely heavily on personal relationships, so they will value the one-on-one interaction they receive from boutique managers. Most family offices would struggle to develop that level of rapport with a large institutional asset manager.

Last but not least, there is one outstandingly important advantage to investing with boutique managers and new managers that family offices absolutely love.

Boutique investment managers unearth unique investment ideas

Family offices are looking for unique investment ideas that will help them diversify their portfolio and generate a positive return. Given that the large cap space is inundated with research from a myriad of analysts and investors, they are unlikely to develop an edge in that market. However, the Small- to Mid-Cap (SMID) market does offer this possibility – and there are plenty of boutique asset management firms out there that know their way around that market very well indeed.

At Sarnia Asset Management, we know that the lower market capitalisation bracket of European stock markets is less efficient, as it is less well covered and the quality of fundamental research in some pockets of the market can be poor. Additionally, some degree of market fragmentation exists in European Small- and Mid-Caps due to regional, cultural, and socio-economic differences, which can exaggerate any inefficiencies. In combination, those factors can lead to the mispricing of European Small- and Mid-Cap stocks.

As a new fund manager, we can’t offer to host you in an expensive office in Mayfair and we won’t take you on a hunting trip in Scotland. We do, however, passionately believe that we have more interesting investment ideas than most anyone in this industry. As one family office told us: “Most of the ideas you just presented to us, even we had never heard of – and we usually know of most things!“

Join us on our journey

Launching a new fund manager is never easy, but there are some distinct advantages available to us:

• Agility: Having set up a fund management business from scratch, we were able to choose the perfect domicile for our funds. This gives us the ability to tailor our funds to the needs of our clients, giving us a distinct edge over the competition.
• Drive: We are an entrepreneurial team, and EVERY team member is highly motivated and incentivised to deliver fantastic products for our clients.
• Networks: We are leveraging our extensive network of contacts built up over decades’ worth of experience in the investment arena to help build our business.

PLUS, you can simply shine through having better ideas than others – and we believe we have them.

Don’t believe it yet?

Keep following this blog, and you’ll see some of what we are talking about in action over the coming months.

Disclaimer:This blog is intended for informational purposes only. This blog is not intended to invite, induce or encourage any persons to engage in any investment activities and is not a solicitation or an offer to buy or sell any stock, investment product or other financial instruments. If in doubt, please seek financial advice from an independent financial adviser. Sarnia Asset Management is licensed by the Guernsey Financial Services Commission (GFSC). Past performance is not an indication of future returns. Investments carry risk, including the risk that you will not recover the sum that you invested.