Institutions or boutiques?

2 June 2009

The ongoing and very timely debate continues... who's better suited to weather the financial storm - the small, nimble boutique manager or the larger institutional manager? Jarrod Brown, CEO of Bennelong Funds Management, discusses why it's substance not size that really matters.

No one is immune to the global financial crisis - regardless of reputation, size or previous long-standing success. Lehman Brothers, Merrill Lynch and Babcock & Brown (to name a few) were all headline examples.

The Australian-sourced investment management market fell 10.7% or $345B during the December 2008 quarter. This marks a drop of 21% since the market peak in December 2007. FUM is now at the same level as September 2006.

Likewise, contributions into superannuation fell 24% from peak levels when the ‘Better Super' changes were introduced1.

Clearly, our industry faces challenges but while the halcyon days seem to have passed, opportunities will continue to exist.

Debate around who will survive these tough market conditions and emerge strong enough to seize subsequent opportunities is escalating. In the funds management arena, discussion is focused on size: will the small, nimble boutique or the larger institutional manager with sizeable funds under management weather the financial storm?

As the demise of the dinosaurs showed, size alone is not a determinant for survival, let alone success. When it comes to fund manager resilience, it's substance, not size that counts.

A sustainable business model

There are key factors beyond business size that can help ensure a fund manager's long-term survival. Embracing a sustainable business model is critical.

There are several acknowledged fundamentals of a successful fund manager.

  • Capital strength: a strong balance sheet, adequate capital reserves and/or a guaranteed source of funds inflow are critical parts of a successful funds management business. They can help the manager ride-out economic fluctuations, which can affect in-flows and performance over the short term.
  • A clear mandate to manage money: the manager needs to be able to do what they do best, manage money. Regardless of business structure, the asset management team needs to be removed from day-to-day operational distractions, ensuring they can concentrate on delivering quality investment outcomes to clients.
  • The opportunity and incentive to out-perform: the asset management team needs to have the freedom and support to make investment decisions and in turn, be rewarded in a manner which is aligned with investors' objectives.
Several research houses have thrown their weight behind the importance of a sustainable business model. Zenith, Lonsec and Standard & Poor's have all recently gone on record reinforcing the critical role that organisational sustainability plays in the long-term survival of a fund manager.

Quality people are paramount

The high degree of key person risk in an asset management team is well documented. We're not surprised when the departure of an asset management head is followed by outflows from the fund they once managed.

This key person risk means finding the right people with strong cultural alignment and water tight reasons to remain with the team (eg. part ownership, co-investment in the fund) will be critical. In their absence, staff retention and achieving alignment with investors will be challenging.

The rise of boutiques

The surge of new boutiques over recent years suggests that, at the very least, there's some dissatisfaction with the larger institutional players. Perhaps more importantly, the growth in boutiques has served to illustrate a continued desire to work in an entrepreneurial culture free from many institutionally-common distractions.

Respected industry figures, however, are predicting consolidation in the Australian funds management industry.

Whilst fund manager consolidation may be inevitable, the defining factor will be the business model; those with a sustainable business model will be the survivors and the institutional versus boutique issue will ultimately have little input into the outcome.

Once business sustainability has been challenged, all other characteristics of both institutional and boutique models should be open to review and assessment on their own merits.

At Bennelong Funds Management, our focus is not only on performing in today's economic climate, but equally on building a robust funds management business for the future.

Navigating through these turbulent markets is, undeniably challenging. But there are still plenty of opportunities in the marketplace and we remain focused on these.

1 Rainmaker Roundup, Edition 45, December 2008

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