Pressures make going tough for multiboutique managers
By Drew Carter | November 12, 2012
The multiboutique investment manager structure has come under increased pressure in today's low-return environment, with burdens such as additional organizational complexity, overlapping capabilities and obstacles to providing solutions or outcome-oriented strategies.
Sources said examples of the effects of those pressures include:
- a possible split of Western Asset Management Co. from parent Legg Mason (LM) Inc. (LM), spurred by disagreements over retail and defined contribution distribution;
- the recent shedding of affiliates at Old Mutual Asset Management; and
- a decision at Allianz SE to give greater freedom to Pacific Investment Management Co. LLC and integrate its remaining boutiques earlier this year.
“The model has been challenged,” said Yariv Itah, partner at money manager consulting firm Casey, Quirk & Associates LLC, Darien, Conn. “You can reap the benefits in asset management only as long as you add value.”
When most manager holding companies were set up five to 15 years ago, they aimed to help small firms with generational transitions or liquidity issues. “Once the generational transition has passed, affiliates start to ask, "What holds us here?' If there's nothing the parent can answer, that's a problem,” Mr. Itah said, speaking generally about multiaffiliate firms.
Added Kevin Pakenham, veteran investment banker and co-founder of London-based boutique advisory Pakenham Partners Ltd., “Also, we're in a relatively flat (returns) environment, so the attraction of owning asset managers as a growth business is much diminished. Since the multiboutique structure requires an awful lot of corporate management, the question must be asked whether it's worth the trouble.”
Experts note that no two holding company models are alike, and that these models do offer some benefits. Parent companies can add value over the long term by expanding affiliates' geographic or client reach (especially into retail, where costly infrastructure is a barrier to entry), offering solutions or creating efficiencies of scale in mid- and back-office operations, something Mr. Itah said is “more difficult to do than it sounds.”
All money manager business models are under pressure, not just the multiboutique one, said Amin Rajan, CEO of CREATE Research, Tunbridge Wells, England. While he expects some firms to struggle with — or even abandon — the multiboutique model, at the same time, other managers are flocking to it. About 35% of medium and large investment managers have adopted the model; he expects that figure to reach 55% by 2015.
In the meantime, parent companies are tweaking their models, Mr. Rajan said. “One or more of three adjustments are already evident: increasing operating leverage via greater back- or middle-office integration; developing a centralized capability to develop multiasset-class products that offer broad diversification within a single vehicle; and improving client proximity,” that is, becoming trusted advisers to clients so relationships don't end after a few years' underperformance, Mr. Rajan said in an e-mail.
The complexity of these parent-affiliate structures amplifies the struggles facing all investment managers, experts said.
For example, it's harder for multiboutiques to focus distribution, said Aymeric Poizot, Paris-based head of Europe, Middle East and Africa in Fitch Ratings Ltd.'s fund and asset manager rating group. About three-quarters of new business is won by the top 10 managers in each asset class, according to research by Fitch.
“For an asset manager today, you need to be extremely focused — on distribution, the products and competencies you put forward, and where you invest resources,” Mr. Poizot said, adding that he puts the limit on areas of expertise for a firm at seven. “When you are a salesperson for a multiboutique organization, you can't sell 15 or 16 affiliates with three or four core competencies for each,” he said. “You can't be credible about everything. You need to be selective.”
John C. Siciliano, managing director in PricewaterhouseCoopers LLC's global asset management consulting practice, New York, said increased competition is producing “more "have-nots' than "haves'” across the industry, which means firms need to do even more to stand out. Providing solutions or so-called outcome-oriented strategies — such as liability-driven investment, multiasset inflation-protection or defined contribution default strategies — ought to be one way for these firms to differentiate themselves. “The multiboutiques theoretically have strategies that span the range of what's out there” to provide solutions, Mr. Siciliano said.
You'd think that would be true, Casey Quirk's Mr. Itah said. “However, multiaffiliates have yet to figure out how to put all of their capabilities together in a way that's coherent to the market. I don't think anyone has solved this puzzle yet,” he said.
“The multiboutique model was perfect when investors were buying (investment) bricks,” said Fitch's Mr. Poizot. “Today, there is more and more demand for global products, multiasset products, and the boundaries between asset classes is blurring. It's very challenging within an integrated organization to (bring together different investment teams to create solutions or new products). Imagine what it's like when they don't share the same (profit-and-loss statement).”
John T. Hailer, president and CEO-U.S. and Asia at Natixis Global Asset Management, Boston, doesn't agree that multiaffiliates are at a disadvantage in the solutions business. NGAM has nearly tripled its AUM to $344 billion over the last decade, despite the dot-com bubble bursting and the global financial crisis. He credits the asset increase to the firm's multiboutique model, centralized distribution and, especially, a manufacturing tool the firm has dubbed “durable portfolio construction” used to build multiasset strategies that minimize risk.
NGAM has been able to extend its affiliates' reach into new regions and sectors, Mr. Hailer added. The firm plans to launch retail funds in the U.K. in January, and in October opened a Hong Kong office to support its growing business in Asia. A Seoul office is expected to open in January.
“Asia is definitely a push for us, and it's been a great part of our growth in recent years,” Mr. Hailer said.
In September, BNY Mellon Asset Management made two adjustments to its affiliates to make the firm more competitive. The similarities at LDI specialist Insight Investment Management (Global) Ltd. and currency manager Pareto Investment Management — as well as complementary differences — allowed a closer tie-up between the two firms to boost solutions capabilities, said Curtis Y. Arledge, New York-based CEO of BNY Mellon Asset Management, which had $1.28 trillion in boutiques as of Sept. 30.
The move allows Pareto clients to more easily tap into Insight's rates and liability management expertise, while Insight benefits from Pareto's currency expertise as it expands from being a primarily U.K.-based firm to competing globally.
Meanwhile, a shuffling of Standish Mellon Asset Management's high-yield debt team to Alcentra NY LLC was driven by changes in banking regulations around the world and the opportunity that presents to investors, Mr. Arledge said.
“As you have regulatory changes globally ... the capacity for banks to provide capital to borrowers in the subinvestment-grade space is being severely reduced (which represents) great opportunity for our clients” to fill the gap, Mr. Arledge said. “We've now created one of the dominant credit providers in the subinvestment-grade space.”
With regards to the adjustments at BNY Mellon Asset Management, Fitch's Mr. Poizot said: “These examples show that it's (very) difficult to have boutiques work together; you have to bring them together to force cooperation.”
This article originally appeared in the November 12, 2012 print issue as, "Pressures make going tough for multiboutique managers".