How Boutique Managers Turn Narrow Focus Into a Weapon Against Mega-Managers

As the world’s largest asset managers see their asset piles soar into the multiple-trillions of dollars, smaller and boutique asset managers say they can find success by staying focused on what they do best — even if it means some clients look elsewhere for a particular allocation.

On the whole, smaller asset managers are struggling to keep up with mega managers. As of Dec. 31, 15 managers run more than $1 trillion in institutional assets alone, according to Pensions & Investments’ Largest Money Managers survey. And the big managers were growing faster than the industry as a whole: the 25 largest had a median growth rate of 13.3%, compared to 6.9% for the rest of the surveyed firms.

In addition to the sheer size of their asset books, the largest managers often have more to offer clients, both in terms of strategies spanning public and private markets, and ancillary services. Adding alternatives capabilities, for example, has been a key motivation for major acquisitions in recent years, such BlackRock scooping up private credit specialist HPS and Global Infrastructure Partners.

However, executives at small asset managers say that their lack of breadth can be sold as a positive to clients by emphasizing that the firm is laser-focused on what it does best.

Pzena’s pitch

Pzena Investment Management is one example of a narrowly focused manager finding success relative to larger firms. Pzena, which offers primarily value-oriented active equity strategies, had $80.6 billion of total assets under management as of Dec. 31, up 20.6% year over year, according to P&I’s survey. The Fresno County (Calif.) Employees’ Retirement Association recently selected Pzena over $572.2 billion RBC Global Asset Management for an emerging market equities mandate.

“I think being a niche boutique with a really clear focus and philosophy and style of investing has been a huge advantage for us over time,” said Allison Fisch, managing principal and president of the firm. “When people think of Pzena Investment Management, they think of disciplined, classic, value investors. And there’s something really elegant about that clarity of purpose and knowing who we are.”

“There are a lot of advantages to being a large firm that can be a lot of different things for a lot of different people, but I do think that sometimes it can be confusing to investors to understand what the area of excellence is in a very large firm,” Fisch added.

Pzena is not alone in recent client wins by firms with less than $100 billion in assets. In April, Cook County Employees’ and Officers’ Annuity & Benefit Fund, Chicago, hired Causeway Capital Management and Driehaus Capital Management to run an active international small-cap equities mandate previously helmed by Franklin Templeton. Causeway and Driehaus had $71.6 billion and $26.1 billion, respectively, as of Dec. 31, according to P&I’s survey, vs Franklin’s $1.68 trillion. In the same month, Plymouth County (Mass.) Retirement Association chose to allocate $40 million of its credit portfolio to $31.2 billion Brigade Capital Management, along with a $20 million allocation to $644 billion Ares. Larger firms — $224 billion Oaktree Capital Management and $798.8 billion Manulife’s CQS Investment Management — were also finalists.

A narrow focus

The emphasis on focused strategies that can make boutique managers stand out also means that the firms need to understand they can’t serve every client.

“For us, remaining a very focused, independent firm is really important to our culture,” said Elizabeth Eldridge, president of Glenmede Investment Management. “And we feel that it also helps us to be more aligned with our clients and our clients’ needs.”

Glenmede IM — which had $7 billion in AUM as of March 31, and is part of the larger Glenmede with around $50 billion overall, including wealth assets — has institutional product offerings for active equity strategies and derivatives. If a client comes to Glenmede asking for something outside of its expertise, the firm will work to figuring out how its existing strategies can complement the client’s goals rather than trying to spin up a new strategy or change the client’s mind, Eldridge said.

It’s a “consultative” approach, Eldridge said, rather than a hard sell.

“We’re not trying to be all things to all people. We’ve had those capabilities for a very long time, and so we’ve always remained very focused on them,” Eldridge added.

Leaning into a narrow focus can also be helpful for independent outsourced CIO firms, which are competing against OCIO and private wealth offerings from massive firms like BlackRock and Goldman Sachs Asset Management. Jonathan Hirtle, founder and executive chairman of Hirtle & Co. — a $27 billion OCIO firm serving both institutional and high net worth clients — said his firm doesn’t sweat losing potential individual clients to firms that offer more wealth planning capabilities. Instead, the firm wants to focus on clients who prioritize the firm’s investment expertise.

“Our market is saying look, I want everything we do to be ideal. … It’s not retail good-enough is good-enough stuff. That’s not the world we live in,” Hirtle said.

Being honest with clients

Knowing they’re not the right fit for a client’s needs doesn’t mean the manager or OCIO firm shouldn’t return their phone call. Instead, executives say, the firms should be upfront and honest with that client.

“We’ve actually had situations like that before where we’ve had clients in our strategies who want to take a more benchmark-sensitive approach — they’re looking for something with very low tracking error,” Pzena’s Fisch said. “And we’ll just be very honest with them about the level of alpha that we think we could create if we were to, for example, really limit our tracking error and do something close to a benchmark. It’s not our bread and butter. It can be done, but we’ll sort of say ‘this is what you’re going to sacrifice if you go that route.’”

“And I think that that’s how you get really strong client relationships over time — just being honest with your partners about the value that you can add for them and for their investors, and the places where using us doesn’t make sense,” Fisch continued.

For OCIO firms, the appeal of independence and honesty go hand-in-hand when trying to win over clients. Hirtle said the firm’s independent ownership structure — as opposed to an OCIO firm attached to a large, publicly traded asset manager — can be an advantage because clients don’t have to worry about conflicts of interest when their OCIO is choosing which strategies to include in an investment lineup. Other OCIO providers could be tempted to choose strategies from their parent firms, he said, although he ultimately doesn’t believe an upstanding firm would knowingly choose something that wasn’t the best fit for their clients.

“Real open architecture is a huge advantage, and (the non-independent firms) don’t have it,” Hirtle said.

Pensions & Investments