If you’re a boutique asset manager trying to win a subadvised mandate, how can you compete with a behemoth such as BlackRock or the luminaries of Loomis Sayles?
In short: pick your battles. In certain areas of the subadvised market, being a boutique is a bonus, in others, big is best.
With help from Gene Lui, principal at Genesys Research, and a host of speakers at the 23rd Sub-Advised Funds Forum, we shake down and size up the market.
So where should small shops not play? The variable annuity and insurance space.
‘On the variable annuity side, they tend to lean on the brand name for subadvisors because they sell an annuity product. That’s where the bigger names are going to have an advantage,’ Lui said.
Although this is undoubtedly a huge segment of the market, especially for new subadvised launches, the retail market is a much more welcoming place for boutiques.
‘Bigger firms have less of an advantage on the retail side,’ Lui said. ‘The bigger subadvisors that subadvise on the variable annuity side tend to have their own products on the retail side, so if they also subadvised on the mutual fund side, they would be cannibalizing their own retail products.
‘Most companies, such as Vanguard and American Beacon, that use subadvisors on the retail side, will shy away from big asset managers.
‘They tend to gravitate toward boutique shops… and they also tend to get exclusivity from boutique shops. For a company such as American Beacon, you probably won’t be able to manage a similar large-cap growth strategy for another advisor on the retail side.’
Small but mighty
Within this space there are certain asset classes and specialisms where smaller shops tend to win out. These are usually capacity-constrained mandates, such as small cap or emerging markets, which larger shops are not interested in or where they are impeded by their size.
‘On any kind of capacity-constrained mandate, it’s unlikely for a larger asset manager to pick up that mandate,’ Lui said. ‘You might find smaller boutiques willing to take the mandates at a small level specifically because they want a mandate.’
Nathan Thooft, a senior portfolio manager at Manulife Asset Management, agreed.
‘Sector opportunities or more niche opportunities, such as emerging market debt, bank loans or master limited partnerships, are narrower in scope, which the bigger folks may overlook as dedicated mandates because they are focused on the bigger dollars elsewhere,’ he said.
Tim Paulin, senior vice-president of investment research and product management at Touchstone Capital, said even larger-cap equity strategies could pose problems for big firms. ‘It’s really hard for a big firm to be a small-cap subadvisor,’ he said.
Still, small firms don’t have it all their own way. Their size can count against them too, both in terms of some asset classes and business models, specifically fees and marketing.
‘Scale doesn’t have to be an impediment in fixed income but a lot of the very large players in fixed income are making macro bets, such as what they think about credit or currencies, and they can get the relevant exposures without a bottom up approach,’ Paulin said.
Thooft agreed that more macro and often complicated strategies were better executed by larger firms.
‘The bigger players may have an advantage in certain areas of more complexity when it comes to operational issues and compliance things,’ he said. ‘When you think of absolute return products, would a smaller boutique have the same type of technology, risk tools, and compliance and operational background?’
Although boutiques’ willingness to offer exclusively deals make them attractive, their lack of scale can mean they have less flexibility on fees, which ultimately counts against them.
‘In terms of fees, the boutiques don’t get to dictate what the fee levels are because in the marketplace right now the advisors say, take it or leave it as a fee arrangement. That’s why wealth managers turn down subadvisory mandates because now they are able to pick subadvisors that can accept their fee level,’ Lui said.
Thooft said this dynamic was another reason for boutiques specializing in more specific asset classes.
‘It’s an argument for why those smaller shops focus on more of the niche asset classes where they can afford to charge a premium because not as many others are focused on it and it’s a higher cost asset class for subadvisors to acquire,’ he said.
Factoring in scale
For the newer product sets and types of strategy such as smart beta, have the big boys sewn up the market already or is disruption the friend of the underdog?
The answer is probably the former. Where anything is passive or index-related, scale is a factor. Pun intended.
‘If a boutique can protect its intellectual property, then it can put a moat around its business, but if it can’t, then a big-scale player that can do it cheaper might have the ability to take assets away from a smaller boutique player that may be more expensive,’ Paulin said.
Thooft agreed that cost and fee pressure meant smart beta subadvised mandates were more likely to be won by larger shops.
‘They have the scale, the scope and the assets to keep those prices so low that’s it going to be really hard for other interests to come in and dislodge them,’ he said.
‘It’s the big dogs – that have already shifted and have existing products in place – that are in the smart beta arena.’