Breaking into dealer groups’ approved product lists (APLs) does not come easily for boutique fund managers, who need to secure ratings, be placed on platforms, and gain the support of advisers before they can thrive.
With the vast majority of advisers – if not all – steering clear of unrated funds, the first step on the road to success for any boutique fund manager is to earn the approval of a research house.
However, getting the tick of approval from one of the major research houses is anything but easy, with Ellerston Capital and Realm Investment House head of distribution and investor relations, Andrew Seddon, describing it as “one of the big barriers to entry for boutiques”.
“To get funds rated, you have to be screened in by the research houses,” he said. “So, if you look at the fixed interest space – out of all the funds that wanted to be rated and get a new rating, only one manager got rated, or screened in, which was Realm.
“Another 45 funds [according to Zenith research] got screened out, so it’s getting harder and harder for boutique fund managers just to get a ticket to the game, because unless you’ve got a rating, most advisers – easily 95 per cent – are precluded from using your fund.
Hard and getting harder
With the demise of van Eyk and the departure of S&P from the market, boutiques have been left with fewer options to turn to be rated.
Seddon believes the barriers to entry to the market for boutique have increased.
“There used to be S&P, there used to be van Eyk, now in the retail market, you’ve got Morningstar, Zenith and Lonsec,” he said.
“If you can’t get screened in by one of those three research houses, it makes it very difficult to get traction.
“From a distribution standpoint, one of the things the research houses look at is distribution, because they don’t want to screen in a fund and put a rating on a fund unless that fund is going to appear on a lot of the major platforms that their clients use.
“So [for] each platform, you’ve got to get a $10 million pledge [to get on]… so the barriers to entry for a boutique fund manager is now so high, it’s so hard and it’s going to be harder and harder going forward.”
Boutique fund support provider, Fidante Partners general manager, Cathy Hales, agreed that getting started is far from easy for boutique fund managers.
“It can be tough for new boutiques to get established and even tougher for boutiques that are going on their own,” she said.
“They face operational challenges and industry perceptions, including whether they have robust operational systems and administrative support in place, an appropriate compliance and risk framework and marketing and distribution capabilities.”
Distribution
For Prime Value Asset Management chief executive, Yong Quek, the challenges of getting access to distribution networks are great.
“A lot of the distribution channels are controlled by the big banks, AMP and IOOF and the like,” he said.
“So what that means is that for us to be successful, we need to focus on the market segments that we can add value… so we appeal to direct private clients, high net worth and sophisticated investors… but it would be somewhat harder for us to get on the approved product lists of the majors.”
Compliance
In the post-Global Financial Crisis (GFC) era, Fidante Partners allied, WaveStone Capital principal, Catherine Allfrey, said the importance of the back office has taken on a greater significance among boutique fund managers.
“The thing that’s really changed since the GFC is the whole compliance aspect,” she said. “People are really focused on compliance and risk, and they want to know you have the best systems, that there’s no problems with ASIC.”
Allfrey said that by outsourcing the back office functions through Fidante Partners, “they deal with all the regulation, the auditing and all the compliance matters”.
For more on boutique funds management see – Fragmentation of advice sector to open doors for boutiques.
