?The future of asset management: David Shrugged
David Spence, Fair Oak Capital

Large multi-line asset management firms have been getting bigger through mergers, acquisitions and aggressive asset-gathering marketing. A recent study by Towers Watson concluded that the twenty largest asset management firms manage a monstrous 41.9% of the industry’s total AUM. In a size- obsessed asset management world, is big the only beautiful

Why focus on independent specialist asset managers
A number of analysis and research pieces have historically tried to assess the potential competitive advantages of independent managers versus those which are publicly listed or owned by a specific bank, insurance company, private equity firm or other multi-business-line financial conglomerates . Similarly, news articles and academic research have tried to identify potential competitive advantages of specialist managers, focused on specific segments of the investment universe vs generalist investors .

Our interest in independent and specialist managers is the result of recent changes in the market, particularly the growth of multi-strategy alternative managers. Leading alternative investors, particularly very successful private equity firms, have led, since before the global financial crisis, a significant consolidation process, acquiring teams or organically expanding into other alternative investments such as real estate, corporate credit or direct lending. Consolidation and organic growth supported by very strong marketing teams have created multi-hundred billion managers focused on non-traditional assets . 
The competitive advantages of independent specialist managers
Specialist managers focus strong specialist teams on targeted investment areas. This concentration limits AUM growth but facilitates faster reaction times and speed of execution when market opportunities present themselves. Independent specialists may also benefit from a larger relative investment universe and less competition, as multi-billion AUM funds compete for a limited number of large or scalable opportunities while fewer specialist managers can focus on niche areas or geographies, with limited competition.

The ownership and staffing of independent, specialist firms should also have positive consequences for their ability to be innovative. Consider that most specialists are owned and staffed by professional personnel who have considerable experience in larger firms, and, quite often, a passion for investing in their chosen market without the constraints that size and a commercial focus on AUM brings. Correspondingly, they will implement their own tried and tested investment processes across the whole firm and are free to refine and further develop them focusing on performance rather than AUM growth. 

Freedom, brought about by independent ownership, can help an asset manager unleash their skill. Independent asset managers are free to source investments from multiple external counterparties; they usually do not have in-house product created by internal departments that they may feel obliged to support. Moreover, the asset manager can conduct his/her investment research without any in-house biases. Freedom to scour the market for superior product and freedom to conduct original research should encourage asset purchases fashioned by conviction untainted by attachment and bias.

Fees throughout the fund industry have been subject to increasing scrutiny. Investors rightly demand that asset management firms design fee structures which are reasonable and which align their interest with those of their investors. Independent specialists asset managers, who tend to be focused on alternative or more complex strategies, generally tick this box quite ably as a very significant part of their fees come from performance fees or carry rather than base management fees or other revenue lines. Similarly, partnership structures and employee ownership have the potential to ensure long-term focus and alignment of interest with investors.

An independent specialist manager which fits the profile we have described above will benefit from the sponsorship of sophisticated investors, institutional and private. As a result, good communication between investor and asset manager will be considered a vital competitive advantage and will be nurtured by the manager. Investors are likely to benefit from regular and meaningful conversations with informed senior market-savvy personnel as much as the manager will value input from investors about their market views, challenges or opportunities and general long-term objectives.

The benefits of the independent specialist asset management business model, some of which were noted above, have not escaped the attention of industry heavyweights. Jack Inglis, CEO of Alternative Investment Management Association (AIMA), suggests that entrepreneur-led smaller asset managers are “often the cradle of the industry's innovations, being able to invest in niche markets without capacity concerns”. Inglis ventures further to add that, “Frequently, they are among the industry's best-performers”.

Has Goliath killed David?
Readers may believe that, at least in the context of our musings, this has indeed been the case. The number of new independent asset management firms being opened has slowed with several reasons being cited such as the recent increased burden of regulatory compliance or the lure of achieving economies of scale and an increased bottom-line through M&A activity . 
However, this view will ignore a non-trivial number of managers who, by making a significant personal capital commitment, leveraging new technologies and offering an attractive long-term professional opportunity to like-minded professionals have managed to create this new breed of independent, specialist firms. These managers also see the regulatory overhaul implemented since the global financial crisis as a potential positive development, generating a barrier of entry to less capitalised competitors and offering potential investors the benefits of a truly institutional platform able to support their operational requirements. 
Investors who want to have the opportunity to work with independent specialists have reason for optimism. Many of the teams who set up their stalls in pursuit of their desire to achieve professional fulfilment and performance for their investors are proving to have a strong case to remain. We should expect fewer but stronger Davids. 

Written by David Spence
David Spence has worked in financial services for over 20 years. He spends his time undertaking Business Development duties for Fair Oaks Capital. Fair Oaks Capital was launched in October 2013. In June 2014, Fair Oaks’s inaugural fund was listed on the London Stock Exchange with a size of $114mm. Today, Fair Oaks Capital manages approximately $2bn of investors’ capital and has fifteen staff in its London and New York offices. The firm is wholly owned by its principals. Fair Oaks has a single business line – asset management – and there are no conflicting internal businesses.