Sometimes our Investment Manager Research team is asked whether we are biased for or against boutique investment managers as compared to larger-scale managers. In a word, no. Generally speaking, bias is a four-letter (“bad”) word. We aim to be open-minded and apply our selection process consistently across manager types.

 

What Is a Boutique Manager and Why Are We Talking About Them?

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A boutique manager is loosely defined as a smaller, specialty, or custom-focused investment manager offering investment products or services. The term is borrowed from the retail industry, where a boutique store typically offers unique or customized products. This contrasts with so-called big-box stores that offer products catering to a mass audience. Some investors develop a positive association with the term boutique, because it evokes the exceptional experiences they have had at boutique stores. But investing is not retailing. We would encourage investors to look beyond a simple label, and rather than associate all boutiques positively, investigate whether the perceived benefits are in place, as well as the richness of the firm’s resources.

 

Potential Benefits of Boutique Managers

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• The firm may be a specialist in a particular asset class, fostering deep expertise and avoiding distractions from other responsibilities.

• Smaller firms may be more straightforward entities, perhaps less bureaucratic, and more dynamic.

• Boutiques may be willing to offer enhanced customization for investors in separately managed accounts (SMAs). Some firms are willing and able to treat each account uniquely, perhaps restricting certain security types or companies from the portfolio or targeting a certain level of risk.

 

Drawbacks or Considerations of Boutique Managers

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• A firm that specializes in one asset class may be faced with more severe investor outflows when the asset class is out of favor, challenging the extent to which it can resource the investment team or, at the extreme, threatening the financial health and viability of the firm.

• Professionals in smaller firms often have many and varied responsibilities. For example, a portfolio manager may also assist with running the business, potentially taking time away from portfolio management.

• Do they have the resources necessary to maintain a competitive edge?

 

What Does It Mean To Be Well-Resourced?

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Let’s consider a thought exercise. Let’s say you enjoy analyzing and selecting individual stocks for at least a portion of your portfolio. Do you think you would do a better job (i.e., have better investment performance) if you had access to some of the following: staff of professionals you could direct, robust data sets, sophisticated software, and direct access to company management? I think most of us would choose to have those things if we could get them. As it so happens, when you invest in an actively managed mutual fund, exchange-traded fund (ETF), or separately managed account (SMA) you are indirectly tapping into a firm’s resources. In our view, some firms have more and better resources than others. Generally speaking, the larger the firm, the more capital and scale they have to employ resources. However, some boutique firms are indeed well-resourced. Again, we would encourage investors to look beyond the label.

 

Below are some traits we have identified among well-resourced firms

 

• Sufficiently staffed investment teams. This may include portfolio managers, research analysts, risk managers, traders, and other supporting staff. We like to see investment professionals having a small enough scope that they can dive deeply into their area of expertise. Investment teams managing fewer portfolios may need fewer analysts. Consider the below hypothetical example for equity analyst coverage.

• Investment professionals located in offices around the world, helping them understand local cultures and global supply chains, as well as being able to trade securities 24/7.

• Size and reputation that makes company management eager to dialog with the investment team. While companies cannot give inside information to favored firms, access to management may lead to enhanced cooperation and a keen understanding of the long-term business plan.

• Access to outside experts. Some firms have relationships with experts who may provide context that helps them better understand the economy, markets, and portfolio holdings. This may include former heads of state, central bankers, PhD researchers, physicians with specialized knowledge of drugs or treatments, and more.

• Robust software and data infrastructure. To keep tabs on individual securities and the portfolios holistically, asset managers tend to either buy or build systems. Firms with the necessary infrastructure and know-how can acquire proprietary data sets that may give them an edge in security selection or risk management. An example for equity portfolios may be real-time sales data from credit card transactions or web traffic. In fixed income, securitized investments come to mind as a data-heavy exercise, where some firms simply have more complete data and sharper analytical tools.

 

Best of Both Worlds?

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In manager research, we often seek the best of both worlds, such as managers that combine the benefits of certain characteristics, while also mitigating the usual drawbacks. Below are two prototypes of money managers that might fit the bill in terms of combining the potential benefits of boutiques with the potential benefits of larger, scaled firms. We do not limit ourselves to selecting only these types of managers but are rather providing them here as food for thought.

 

• Boutique manager or team that is somehow affiliated with a large, well-resourced organization, or that has gained sufficient scale such that its viability is not in question.

• Well-resourced organization with solid governance that, in some ways, functions like a boutique. Perhaps they have found ways to make the firm feel and act nimble and have appropriately incentivized their professionals, regardless of their large size.

 

Eyes on the 6 Ps and 40 Factors

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Boutique and larger firms are both subjected to the same 6P and 40 factor process employed by the LPL Research Investment Manager Research team. The 6Ps include: Parent, People, Process, Portfolio, Price, and Performance. The 40 factors are our lens for the 6Ps and a common language among our analysts. Each of the 40 Factors is scored green, yellow, or red, based on our objective, independent assessment. Rather than giving extra “points” for boutique firms, we take care to discern whether the firm (parent) and team (people) have the underlying characteristics that we view favorably. Below, we highlight the parts of our process most closely related to the boutique versus larger firm topic.

 

• Parent. We expect better parent companies to deliver better investment outcomes. Firms score better if they are stable, client-centered, well-staffed, well-resourced, well-run, and have minimal regulatory issues. For example, there are factors for organizational structure, ownership concentrations, challenges related to acquisitions, trends in assets under management, and employee headcount.

• People. When you buy a fund, SMA, or active ETF, you access the expertise of a portfolio manager or investment team. Thus, our team vets the people behind the strategy. We favor teams with depth of expertise, clear responsibilities, low personnel turnover, viable succession plans, and personal ownership of the portfolio.

 

Are There Studies That Compare Performance of Boutiques and Larger Firms?

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The academic literature on the relationship between manager size and performance is surprisingly sparse. One of the most frequently cited articles was conducted over two decades ago, and it would be interesting to know if the results still hold up in today’s market environment. For what it’s worth, Chen, Hong, Huang, and Kubik (2004), in “Does Fund Size Erode Mutual Fund Performance?”, find no relationship between firm size and fund performance, though they did find that larger fund vehicles have performance challenges in certain asset classes. More recently, Andrew Clare penned “Is There a Boutique Asset Management Premium? Evidence from the European Fund Management Industry” (2021). Clare finds evidence that boutique managers outperform larger fund groups, with the outperformance particularly pronounced in European mid/small cap and global emerging market strategies. With that study focused on non-U.S. portfolios, it would be interesting to see more evidence for U.S. investors.

 

The Punchline

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We think investors should go beyond the labeling of a firm as a boutique. Assuming that a firm is better solely because it is smaller or specialized may be akin to not differentiating between a custom clothier on Rodeo Drive or the thrift store around the corner. Both are small, but that alone is not the key factor. When we are evaluating managers, we go beyond the labels to examine whether the manager has attractive characteristics regardless of whether the firm is small or large.

 

 

• Important Disclosures

• This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing.

• Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk

• Indexes are unmanaged and cannot be invested into directly. Index performance is not indicative of the performance of any investment and does not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

• This material was prepared by LPL Financial, LLC. All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.

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