Boutique fund firms face model dilemma
Costs are rapidly increasing for asset managers, with regulatory pressures a major contributor. And while there are opportunities for specialist boutique firms, particularly in Asia, such players now face new challenges and may have to review how they operate, say market participants.
The rise in regulatory oversight post-financial crisis is rippling through the industry, with boutiques having to face up not only to regulators but also other external bodies, says Elspeth Todd, Asia-Pacific head of investment manager services at State Street.
Entities want to know more about fund managers’ risks and controls as well as evidence of decision-making processes – things that boutiques typically haven’t had to worry about in the past, she notes, speaking at a recent webcast hosted by AsianInvestor.
“That changes the profile of the type of person you need in an organisation and it increases your expenses,” says Todd, who is based in Sydney. “Your technology may not be able to keep up with the information requests coming in.
“It’s a hard time right now for boutiques to understand how they’re going to [meet these requirements].”
Ed Lopez, executive vice president of SunGard's asset management business, makes a similar point. Boutiques don’t have the same scalability and staff of bigger firms, he notes, and lack in-house regulatory/compliance expertise or big IT budgets to be able to buy best-of-breed IT solutions – hence the importance of outsourcing.
Peter Sartori, chief investment officer at Singapore-based boutique firm Treasury Asia Asset Management (TAAM), agrees costs and regulation are growing, but argues there are ways to mitigate them.
“On the regulatory side, it’s become more challenging and expensive, but it depends on what model you operate under,” he said during the webcast.
Treasury Asia has a partner company in Australia – Treasury Group – that specialises in supporting boutiques in terms of compliance and other operational functions. That has made it easier to, for example, work on upgrading its fund management licence in Singapore over the past six months or so. “If we didn’t have a partner supporting us, this would be far more challenging that’s for sure.”
It has also helped that TAAM is already licensed in Australia, which has a relatively tough licensing regime, adds Sartori (pictured right).
However, he disagrees that big firms always have better technology. “At big firms I’ve worked with there were legacy systems that were hard to change. And when we launched eight years ago we had the opportunity of looking around for the best systems and buying them off the shelf.”
Lopez confirms that SunGard, as a tech vendor, has had to modify its solutions to meet boutiques’ needs.
It has typically developed systems for the “big, tier one” asset managers, which will have had them in place for 10, 20 or more years. “We’ve found we’ve had to modify our strategies and solutions to meet the needs of boutiques. We need to provide cheaper, more nimble and more easily deployed solutions.”
As for how to best address the current environment in terms of operating models, State Street’s Todd argues that the TAAM approach is likely to be the most successful to cope with markets “for several years to come”.
The cooperative model, as she describes it – where boutiques are grouped together with mutually beneficial interests while retaining their niche skills and expertise – is “a very powerful model for being able to adapt to changes”, says Todd.
That said, “it may have complications in terms of how you would unwind or might want to break away from the grouping”, she concedes.
“But I’ve seen a number of organisations take this approach very successfully to mitigate the challenges of regulatory changes, specific exposure to one area of the market, and to leverage joint technology decisions.”
To listen to the webcast, please click here.