Empowering boutiques: Opportunity in change
In the first of a series of three articles, Brian Allis, asset manager sector head at State Street Global Services, writes about the opportunities facing boutique managers.
In the current low-yield environment, many investors are turning to smaller, specialist boutique asset managers to give them timely exposure to new sources of alpha and fast-growing niche markets. But, as boutiques deal with increasingly complex regulation, how can they stay focused on their core investment capabilities and generate attractive returns?
A series of three articles will explore the prospects for boutiques, their need to overcome limitations in their internal systems and the growing range of outsourced services that are available to help them do so. These articles draw on the results of a global State Street survey of 164 boutique asset managers conducted by the Economist Intelligence Unit and completed in March 2012. This research examined the views of boutique managers (those managing up to $50 billion for the purposes of this survey) on themes such as the key factors currently driving institutional investors’ decisions, the effect of the changing regulatory environment globally, and strategic goals and challenges facing boutiques over the next few years.
Opportunity in Change
In the wake of the global financial crisis, investors are re-evaluating their asset allocations. Many are now looking to find uncorrelated sources of alpha that provide the potential for significant returns, while minimizing their overall exposure to risk through greater diversification. Indeed, boutique managers surveyed by State Street cited risk aversion as the most important factor driving decisions among institutional investors, followed by yield. To achieve this balance between risk and reward, they are turning to barbell portfolio structures – structures that combine efficient beta exposure with allocations to high-alpha strategies.
Filling the beta portion of the mandate is typically accomplished with index portfolios and exchange traded funds. Identifying new alpha sources, however, is a challenge that plays directly to the strengths of boutique managers. As investors realign their thinking and portfolios post-crisis, boutiques can distinguish themselves through their ability to generate alpha in fresh new ways, with their focus on specialised asset classes and niche strategies. Furthermore, their creativity and nimble size may give them an edge over larger competitors in terms of innovation.
Indeed, boutiques could be described as the speedboats of the asset management world, with lean organisational structures and specialist approaches that allow them to respond quickly to changing market conditions and new opportunities.
Based on our research, boutique managers are relatively optimistic about their future growth prospects. The majority of managers expect to see assets under management increase by 8 percent or more over the next two years, and the prospects in Asia Pacific are particularly favourable. In Asia Pacific, boutiques have the opportunity to thrive in a fast-moving and entrepreneurial environment, particularly as there are typically fewer large, developed managers. Overall, 67 percent of boutique managers in APAC expect to grow assets by 8 percent or more over the next two years, compared with 57 percent in North America and 52 percent in Europe.
Boutiques are adept at creating new strategies and sub-strategies within their particular regions and spheres of expertise. As we will explore in the next article in this series, bringing those products to market in a timely fashion can prove challenging. Indeed, the increasingly complex environment in which boutiques operate threatens their ability to capture the available opportunities.
For more details of how boutique managers view their operational effectiveness, see the full report at www.statestreet.com/vision.