24th November 2013
It has become common currency within fund management to suggest that the ’boutique’ mode of operation is a good thing. Managers perform better when they are given the freedom to invest with conviction, away from benchmarks and centralised investment committees. And the flow funds shows that investors are rejecting small in favour of big – and of course established fund managers, and asset managers themselves are striving to become as big as possible.
What is at the source of this apparent conflict?
This week saw Aberdeen take over SWIP, as the Telegraph reported – bringing it an additional £136bn of assets and, with total assets under management of around £336bn, making it the largest listed asset manager in Europe. Chief executive Martin Gilbert has clearly concluded that big is better. Plenty of his fellow CEOs want to follow suit: A recent PwC survey found that 39% of CEOs were planning M&A activity with other fund managers over the next 12 months.
This reflects findings in the most recent Investment Management Association survey, which showed that big fund houses were taking the lion’s share of money. The top ten firms now manage 54% of all assets under management and the concentration in the top 100 funds has grown. In contrast, boutiques have seen their fund flows rising more slowly.
And yet it is still widely agreed that boutiques may be a better way to run money.
Certainly, Neil Woodford, Tim Russell, Chris Rice and other managers who have departed big companies to set up boutiques seem to agree. The key to this apparent conflict is regulation, but investors also don’t want to risk their money in new funds and ventures.
Andrew Power, lead RDR partner at Deloitte, says that the rise in passive funds – previously largely unused by financial advisers because they paid no commission – has contributed to this phenomenon. Passive investment is a scale business and therefore a few large, lower cost funds have picked up a lot of inflows.
He says that the increasing focus of financial advisers on financial planning rather than investment advice is also playing a part: “It has reduced the emphasis on stock and fund-picking. It has also seen a growth in model portfolios, which are more likely to be populated by larger well-known asset management groups,” he says.
The platforms themselves must also bear some responsibility, says Power. Groups such as Cofunds and Skandia have reduced the number of funds they are offering on their platforms. This is both cause and effect, he says: “When they analyse where their flows are going, it only goes into a concentrated number of funds. It costs them to keep funds on the platform, so they have started to reduce the number of funds.”
Gavin Haynes, investment director at Whitechurch Securities also believes that changes to the way funds are bought and sold is contributing to a focus on larger fund management groups: “Regulation is leading to more and more advisory firms insisting their advisers follow centralised buy lists,” he says “which restrict advisers’ choice. DIY investors will also often follow buy lists of recommendations on execution only platforms.”
Tim Cockerill, head of research at Rowan Dartington says that it is not just regulation at work, but also a longer-term reaction to the credit crisis: “The shake out from the financial crisis sifted a lot of the good from the less good when it comes to fund managers. Those managers with many grey hairs seemed to be having a better time of it as experience paid off. As a result I think investors, in the broadest sense, migrated to those funds with the better records, lower volatility, established managers etc.”
He says that in times of trouble clients believed that generally they would be safer with the likes of Fidelity, M&G or Schroders than a small less well known investment house.
Haynes agrees that the move to larger fund companies also has some elements of a ‘flight to quality’. He says: “It does appear that better performing funds are attracting the majority of flows, with more advisers outsourcing to dedicated fund selectors (who make the investment decisions for them and thus their clients), there is a shift towards “ best of breed” fund managers attracting more mony. With the advent of platforms and outsourcing, there is a greater propensity to switch, so it is not as easy for underperforming funds to retain money through investor inertia.”
Does it matter? Haynes believes it may become an issue as favoured funds in many areas become unwieldy or, as is increasingly the case, close to new business. Most recently, Schroders has hard-closed the Cazenove UK Smaller Companies fund as trade website FundWeb reports. This comes hot on the heels of the soft-closure of its stable mate, the Cazenove UK Opportunities fund. Many of the Aberdeen and First State emerging market funds are now soft-closed.
A move to larger funds is a natural reaction to the regulatory climate and a difficult and unpredictable investment environment. However, as funds close and the environment improves, investors may well start thinking more creatively about their fund choices in future.