Everyone Wants to Buy a Boutique Asset Manager. If They All Do It, There Goes the Alpha.

Facing anemic future growth, asset managers are going after specialist firms — and raising the prospect of killing the golden goose along the way.

Illustration by II

Illustration by II

Bankers, consultants, and other advisers say asset managers who are looking to differentiate themselves with actively managed strategies that can’t be easily replicated are increasingly on the hunt for independent boutiques. But if everyone makes the same move, these investment styles could soon be filled to overflowing — reducing what made them special in the first place, people in the business say.

Jay Horgen, president and CEO of Affiliated Managers Group, said that during the past decade asset managers were given strategic advice that was essentially the opposite.

“It feels like we’re back to the future,” said Horgen. AMG has been investing in independent managers for more than 25 years, mostly through minority stakes. “The prior advice was that managers need scale so they can lower fees. It caused a lot of attention to be diverted to scale products and took the emphasis away from the skill aspect of it, which would include fundamental analysis and a thoughtful strategic view of where the world is going. It has almost left for dead some of the liquid alternative managers, such as long/short, all in the name of, ‘You don’t need to be in these products.’”

As institutional investors rotate to using active and niche strategies in their portfolios, however, asset managers have had to change their strategic direction as well, he said.

Horgen said the risk in acquiring or taking a stake in a boutique is killing it altogether.

“You have to make sure you don’t destroy the essence of those firms,” he said. “We’ve always had a first principle, which we borrowed from the Hippocratic oath — ‘first, do no harm.’ At a lot of organizations, the orientation is that everybody should do it our way. But that destroys the individual cultures at these affiliates. Acquirers need to leave them alone, but they don’t.”

Robert Lee, who covers traditional and alternative asset managers for KBW, told clients in a research note this week that one of the things managers need to do to protect their business is to develop “a broad array of capacity-constrained strategies as a way to protect ‘alpha’ and pricing.”

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Kevin Quirk, principal at Casey Quirk, which is part of Deloitte, warned that while that strategy makes sense on its face, it could have unintended consequences.

“On the larger end of the business, there is an oversupply of large branded asset management companies. On the other end, you have smaller focused business that are all about active returns. At some point those businesses will be capacity constrained, and if they exceed that, it will be a drag on performance that will affect fees and future flows into the business,” he said. “The trick for these single capability, active-oriented investment managers, and the industry as a whole, is to find that optimal point where they can maximize the economics and performance.” That’s not easy, he stressed.

Horgen said that in the past five years, he hasn’t seen much competition for managers, except in private markets such as real estate, private equity, and infrastructure.

“If there ends up being a lot of capital going after independent firms, you’ll start to see people that will want to seed new businesses,” he said. “You saw all these seeding firms at the height of the hedge fund market. That has almost all dried up, but it will come back if there’s enough capital,” he said.