The Polarization of Asset Management

Institutional investors need full-service mega-managers and niche boutique firms—but not much in the middle, a new survey says.

(December 20, 2012) – The majority of asset managers see their industry splitting into two camps: massive, full-service firms and specialized boutique shops, according a survey by IT firm SunGard. 

A full 70% of the 126 managers surveyed believe in the “Big Squeeze” phenomenon—middle-tier players losing ground while the major firms grow and niche boutiques proliferate. 

“Today, a greater number of institutional investors are seeking non-traditional sources of alpha,” SunGard’s report said. “This has increasingly led to a two-tiered marketplace, with large multi-service asset managers controlling the lion’s share of activity, and the remainder going to niche players, including independent boutiques.” 

The managers surveyed said they see being owner-operated as the single most compelling advantage of small firms. Owner-operated shops, of course, strip away the moral hazard of managing other people’s money, and brings the firm’s interest into closer alignment with investors’ interests. And top asset managers at small firms are demanding some skin in the game, according to one respondent: “The best people simply will not stay with firms that do not provide some type of ownership.” 

Nearly half of respondents credited the rise of boutiques in part to a backlash against large funds. At least one manager brought up former Goldman Sachs’ banker Greg Smith’s report that his colleagues referred to clients as “muppets.” 

In August, the head of Massachusetts’ $49.2 billion public pension system told aiCIO he saw serious potential in the emerging manager space. “That’s an area we want to broaden our outreach to,” said Board Chairman and State Treasurer Steven Grossman. 

Large or small, one expert maintain that the future is bleak for asset managers across the board. Charlie Ruffel, managing partner at Kudu Advisors and aiCIO’s founder, titled a November column “The Death of (Most) Asset Managers.” He estimated roughly 10 out of the top 50 asset management complexes in the US are still relevant for the evolved demands of institutional investors. “Most asset managers are looking into an abyss,” Ruffel wrote. “For most managers, stagnation will replace prosperity. To survive, let alone thrive, radical rethinking needs to replace complacency. We are about to see a great concentration of institutional assets in a handful of firms.”