Is there a Boutique Asset Management Premium?
In 2020, Professor Andrew Clare from the Cass Business school, in partnership with the Group of Boutique Asset Managers1 (GBAM), published a study titled “Is there a Boutique Asset Management Premium?”2 This paper contrasts the returns from boutique firms with those from larger firms and presents evidence of a “boutique premium.” The authors attributes this premium to various factors, including more closely aligned interests with investors and specialized market expertise. These findings resonate with us, reinforcing our belief that niche specialization can significantly enhance investor value. Understanding the risk premium is pivotal to our investment process. Below, we delve into our perspectives on the reasons behind this premium, its defining characteristics, and the most effective strategies to access it.
From our perspective, the boutique premium in asset management compensates investors for the unique risks associated with boutique firms. These risks include operational and institutional challenges such as key person dependency, limited resources, and less robust infrastructure, alongside risks tied to niche market exposure, like higher market concentration and sensitivity to sector-specific shocks. Conversely, these boutique firms are often more focused and staffed with highly skilled teams, offering the potential for higher returns by leveraging deep expertise in specialized markets with capacity constraints. Additionally, a crucial component of this premium, which isn't linked to risk, is the heightened alignment of interests with investors. Thus, the boutique premium reflects the added risk and potential reward from investing in these specialized, operationally lean firms where effective management and strategic market positioning are critical to success.
Boutique asset management firms often excel in niche markets with capacity constraints where deep expertise and personalized strategies can generate superior returns. However, they might not always be the best choice for accessing areas of the market where size and broad capabilities are necessary. In sectors where extensive reach, significant capital, and a diverse set of asset management skills are crucial, larger investment firms have a distinct advantage. These firms can leverage their size and resources to efficiently manage large-scale investments and provide a wider array of investment options, which boutique firms, with their more focused and limited resources, may struggle to offer. This emphasizes the importance of selecting the right type of management firm based on the specific demands and scale of the investment area.
Boutique asset management firms outperforming larger investment firms is similar to small, specialty restaurants excelling over big restaurant chains. Just as these smaller restaurants focus on quality and unique culinary experiences, boutique firms leverage specialized knowledge and align closely with investor interests to deliver superior returns. However, like specialty coffee shops that thrive on artisanal approaches but might struggle where the scale of large chains is required, boutique firms are not always the best choice in market segments where extensive reach, significant capital, and diverse asset management skills are essential. In such cases, larger investment firms, akin to major restaurant chains, have the advantage of leveraging their size and resources to manage large-scale investments and offer a wider array of options.
Another finding from the paper is that the boutique premium is marked by significant variability in performance across different boutique firms. In this context, we would argue that choosing the right manager becomes crucial for effectively harnessing the boutique premium. Due to the high variability in outcomes typical within boutique asset management, comprehensive research into managers is essential. This involves identifying individuals or teams with a proven track record, deep market insights, and strong risk management skills. Such research helps investors distinguish between managers who can consistently use their niche expertise to generate superior returns and those who may underperform due to operational inefficiencies or poorly aligned market strategies. Additionally, close monitoring is vital given the significant operational and institutional risks associated with boutique firms. Ongoing oversight ensures that managers stay aligned with investment objectives and remain adaptive to changes in market dynamics and regulatory environments, thus balancing the potential for higher returns against the increased risks typical of boutique investment settings.
At Farview we would also advocate that adopting a multi-manager approach can significantly enhance the risk management strategy when investing in boutique asset managers by diversifying across different managers and strategies. This approach of careful portfolio construction helps to mitigate the concentration risk that often comes with boutique firms' specialized focus. By allocating investments among several managers, each with expertise in different niche markets or sectors, investors can spread their risk and potentially reduce the impact of any single manager's underperformance. Moreover, a multi-manager strategy can also provide a broader exposure across various economic environments, thereby smoothing out the returns and reducing volatility. This diversification not only helps in safeguarding against the idiosyncratic risks tied to individual managers “key person risk” and their operational challenges but also enhances the potential for capturing varied opportunities for alpha generation across different markets and investment styles.
In conclusion, the study "Is there a Boutique Asset Management Premium?" highlights that while the boutique premium can yield higher returns, it also presents distinct risks, underlining the necessity of meticulous manager selection and strategic diversification. At Farview, we do not exclusively invest in boutiques, nor do we prioritize them above all. Each investment is assessed individually to ensure the best fit, irrespective of the firm’s size or structure. We also emphasize a multi-manager strategy and rigorous oversight to effectively manage these opportunities and risks. Our approach extends beyond simply selecting the right assets—it involves detailed risk management and portfolio construction to achieve the best investment results for our clients.
The Group of Boutique Asset Managers (GBAM) is a global network of independent specialist asset managers who collaborate to improve their presence in international marketplaces. Farview is a member of GBAM. More information can be found at https://www.gbammanagers.com/
The paper "Is there a Boutique Asset Management Premium?" presents evidence from the European fund management industry. It was authored by Andrew Clare from the Centre for Asset Management Research, Faculty of Finance, The Sir John Cass Business School, City University of London, London, UK. The article is available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3542243