Investing: Boutique Manager

There are people come out of financial institutions to offer their skills. Sometimes, they’re people who have struck out on their own, leaving the security of their jobs in larger financial groups. These start-ups are called boutique fund managers.

‘Boutique’ suggests up-market exclusivity on a small, personal scale. Boutiques tend to be small in size, especially at the inception stage and the house is identified with one or two key individuals who own and run the company. The fund managers’ track records are their companies’ best and probably, only advertisement. Their focus is managing money first and marketing second.

Size isn’t the critical defining feature of boutique managers; it’s their independence from the influence of the parent or related companies within the same financial group that sets them apart from the ‘big boys’. Often, conflicts of interest may arise in a large financial group comprising stock broking, banking, investment banking and fund management operations.

Clients are boutiques’ only source of income; this is a real motivation to perform, unlike bank-backed houses that may still rely on their parent or related companies for survival.

The alignment of customers’ and fund managers’ interests gives comfort to investors that boutique managers stay focused on what they’re paid to do, which is making money. The success of a boutique fund manager is critically dependent on their promise to deliver in terms of performance. Therefore, commitment and focus is critical.

To ensure survival and success, boutique fund managers have to differentiate and carve a niche for themselves. This is done by way of specialization in specific asset classes or investing philosophy and styles.

Since they have come out to compete with asset management companies backed by financial institutions, they had better have differentiation points. Those who succeed have a large following pertaining to their investment styles and philosophy.

Given the size of boutique managers, most of the back-room operations involving the administration and investment operations are outsourced to third parties, thus freeing fund managers from administrative work for better focus on investing.

Having a small fund size also allows the fund manager to be nimble; they have ability to move in and out of markets quickly in response to market events. A smaller team and the absence of intermediaries between the fund manager and client translate to a closer client-manager relationship. Boutique managers also don’t have the advantage of a well-known and trusted name, an extensive distribution network or the protection afforded by layers of organizational structure.

Furthermore, the fund manager has to somehow win the prospective client’s trust. Thus, customer service is important as investors are the fund managers’ only source of income and they’re dealing with financially literate investors. Boutique fund managers also offer consistency in investment style since the owner-manager isn’t likely to leave the company. But the characteristics of boutique managers do present apparent weaknesses in terms of custodian and key-man risks. The absence of backing from a financial group is both a benefit and potential disadvantage. However, key-man risk is a risk faced by any small business, not just boutique managers. Boutique managers risk going out of business if they suffer consecutive years of losses as a result of poor performance.

These risks may be outweighed by the benefits of boutique managers. It is believes the services offered by this group of money managers will be in greater demand as more investors realize the benefits of diversifying across different styles and managers.