As the major fund platforms continue to “rationalize” their fund offerings, boutique asset managers are facing a critical “survival of the fittest” moment that threatens their relevance and, ultimately, their existence. Several years of shifting investor preferences away from actively-managed funds, increasing regulatory costs, thinning profit margins, and voluntary compliance with DOL rule standards have led broker-dealers, such as UBS, Morgan Stanley and Merrill Lynch, to cut back on their fund offerings.
Boutique funds are being disproportionately targeted for cuts due primarily to the lower level of assets they bring to the platforms. However, funds with a poor record, higher management fees, redundant strategies, or whose investment style has fallen out-of-favor are prime targets. Suddenly, the economics of running a boutique fund or fund family have soured and the sustainability of funds that are vulnerable to outflows has come into question.
Back to Square One
To survive in this new reality, boutique fund companies need to be able to make their case to fund platforms by clearly demonstrating their differentiated value propositions, which might include a unique niche specialization or superior client service. They may also be required to pivot by redirecting their sales force to new distribution channels. Regardless, there will be few opportunities for a second chance boutique funds without a good story to tell and a strategy for communicating it.
A Path Back to Relevance
The salvation for boutique funds may come from some of the very firms that are engaging in these draconian cuts. UBS Wealth Management, which has announced a 20 percent cut from its 4,200 listed funds as a start. They stated that, for the best interest of their clients, they are eliminating funds that have underperformed or have been unsuccessful in raising assets on their platform. However, they do plan on expanding the number of strategies covered by their Global Investment Manager Analysis team.
As part of that effort, UBS has expanded its emerging managers program to be able to offer high-net-worth clients investment product otherwise unavailable at rival wirehouses. The program specifically targets smaller, emerging firms with less than $2 billion in asset under management and a track record of less than 10 years.
It also targets promising, new strategies from established fund companies run by managers with only a one-year track record on the new strategy but who have a proven track record on a slightly different offering.
The expectation is that by nurturing these promising funds, UBS would be able to get in on the early alpha often generated in the first few years of a new fund, while providing its wealth managers with a unique product to offer their clients.
Nimble Firms Can Survive
This should signal to boutique asset managers, hoping to recapture relevance and a place on platforms, the need to hone their niche specializations even more to offer a strategy not widely covered on the fund spectrum – perhaps an ESG strategy, which is becoming more popular. Firms with established ESG strategies or strategies that are ESG without the label can sometimes be fast-tracked since there may be limited competition, especially in fixed income.
The bottom-line for boutique fund firms, who have been cut from a platform or who may be in the cross-hairs, is that it is time to take advantage of their nimbleness to reinvent their strategies. and reestablish their differentiation or find new distribution channels.