Adapting For The Future: Boutique Asset Management Post-2017

A three-pronged attack of encroaching regulation, lower returns from actively managed funds and the rise of passive investment appears to strike at the heart of the boutique asset management industry. Yet the opportunity for boutiques has never been greater. Their size, ability to specialize, and level of flexibility puts them in a prime position to deliver growth where larger competitors may now struggle.

The recent rise of tracker funds, designed to diversify against risk, have benefited from global quantitative easing (QE) and central banking strategies. However, the hunt for investment alpha in an era of near-zero interest rates will favour boutiques that offer agile active management portfolios. Recent global macro events may create increased volatility and therefore opportunity, but successfully managing increased levels of risk will require flexibility and experience, as well as an increased use of technology to placate nervous investors.

However, boutiques not only have investor concerns to address. The intention to shine a light on opaque industry practices and provide end investors with greater transparency has resulted in a global web of regulatory complexity. Previously boutiques have looked to sell side brokers for protection however the regulation is rapidly switching focus, with asset managers now in the front line.  Nowhere is this more evident than in Europe.

MiFID II will deliver a raft of new regulations affecting asset managers from January 3, 2017. But while the name of the regulation may be known, it is only now that boutiques are establishing exactly what their obligations are and more importantly, how their firms can respond to the deluge of regulatory text.  As investors increasingly move away from their home market bias, this regulation will not just affect boutiques based in Europe.  Global regulatory concerns have increased from just 17% in 2013 to 68% in 2015 as rising fines, increased demands and growing complexity challenge a boutique’s ability to operate across multiple jurisdictions.

Regulatory complexity has become so great that any firm that tries to tackle it alone will struggle to meet the requisite resource requirements in staffing and investment in technology.  Traditionally, boutiques would be at a disadvantage due to fewer resources and more manual processes, while asset management Goliaths could spread compliance costs across a larger revenue base. However, technological innovation is paving the way for new and unique partnerships that enable even the smallest of firms to balance the demands of transitional change with the certainty of regulatory compliance. This possibility levels the playing field and may well tip the balance in favour of the boutiques’ ability to compete. Larger firms may have had an advantage over resources, but their investment strategies are less agile, and legacy technology can be cumbersome, inflexible, and expensive to replace.

There will be huge data demands on firms of every size, requiring greater knowledge and comprehension of regulation by every employee, not just the compliance officer. This will affect every aspect of the business from models and processes to even investment strategies.  Better risk management and lower operational costs mitigate risks, while new levels of transparency and accountability will enable firms to extend their product range and geographic reach.  The result will be more mature investment strategies and a broader scope of investments unfettered by asset class or geography.

These developments may well support boutiques ahead of other asset managers. Their ability to react nimbly to investment opportunities as they arise is diametrically opposed to the diminished risk appetite of the sell side and the cross-border, cross-asset restrictions and conflicts of interest that hem in institutional asset managers.  Technology will be the prerequisite to the boutiques’ success.  As active fund management comes under the spotlight, boutiques may be well positioned, but this will require suitable partners to rise above the completion and use regulatory challenges as a flight path to growth.

This report, co-funded by SunGard’s Asset Arena 360 and TABB Group, details the findings of a survey conducted in May 2015 of 110 participants. More than 50% were boutiques and a third were institutional investors who trade global products, with nearly 90% trading in Europe and over three quarters trading US product.