“Performance first”: Mediolanum to bet EUR10 billion on boutique asset managers
Mediolanum International Funds (MIFL) is making a major wager on boutique asset managers, with EUR10 billion earmarked for investment in smaller firms’ strategies over the next five years.
More than EUR1.5 billion from these funds has already been parcelled out this year to a diverse array of UK and US-based managers seeking access to European markets.
The Ireland-based asset manager, an arm of Italian banking and insurance firm Mediolanum Banking Group, has amassed assets of almost EUR50 billion since it was established in 1997.
Last week, MIFL announced partnerships with two London-based firms, RWC Partners and Intermede, as well as Edinburgh’s Cadence Investment Partners. Two other equity mandates were agreed with North American managers SGA and NZS Capital earlier in March. These firms will gain access to MIFL's distribution platform in Italy, Spain, and Germany, as well as its network of connections to help them tap European markets.
Furio Pietribiasi, MIFL’s CEO, says that smaller outfits can offer better value for money through a combination of competitive fee rates, strong incentives to generate good returns, and a close focus on a small number of strategies.
“From our experience in the past, boutiques have always worked very well because they've been focusing on a very limited number of strategies, maybe one or two,” says Pietribiasi.
Research from AMG last year found that boutique active managers have outperformed both larger managers and passive indexes over the past 20 years, with better returns being especially noticeable during periods of high volatility.
“The only way to survive for boutiques is to generate returns, and their strengths are their returns,” explains Pietribiasi. “For a larger organisation, I'm not saying there is no pressure to generate returns, but clearly, when you have a very wide spread of strategies, you feel less pressure if a strategy loses assets compared to another one.”
Since boutiques are often founded by entrepreneurial portfolio managers who are also shareholders in the business, this gives them a “much stronger incentive” to deliver higher returns, according to Pietribiasi.
Pietribiais's objective is to invest "at least" one third of all externally-managed assets with boutique managers over the next five years. Currently, this totals EUR10 billion – but Pietribiasi expects this figure to grow significantly over time.
“When we are engaging with boutiques, what we contribute is making a difference to these boutiques in terms of AUM, and that difference is much more material than what we could be making with a larger asset manager,” says Pietribiasi.
MIFL can also arrange more attractive deals with smaller asset managers, thanks to the competitive environment in asset management.
“You can achieve very competitive fees, whereas probably with the large asset manager, you would need a different AUM to achieve the same economies of scale in terms of fees. From our perspective, this is very important because that scalability is transferred to our investors, and it's a much better solution: quality at a competitive price.”
Pressure from the rise of cheaper passive investing options has caused fund managers to drop their fees, with active equity managers cutting fees by an average of 15 per cent over the past four years, according to research by FundCalibre.
This industry landscape is also a source of opportunities for MIFL. “We have also recognised that the market has started offering more and more opportunities because of the evolution of M&A activity,” he says, noting that more and more asset management teams are looking to set up their own firms.
Some are predicting a tidal wave of new asset management firms will be launched in the post-coronavirus era. Evestment data shows that 300 new asset management firms were launched in 2009, the year after the global financial crisis. This was the highest yearly figure since 1954, with hedge funds and alternative investment firms making up most of the new launches.
At the larger end of the market, asset managers have been rushing to achieve scale in order to drive down costs against falling fees and profits. Last year, the acquisition of Legg Mason by Franklin Templeton created a funds giant with assets under management of USD1.4 trillion.
Pietribiasi says there is a big difference between the business models of boutiques and those of larger asset managers, which require scale to meet expensive distribution costs.
“I think that there is space for both, because when you look at the boutiques, they don't have the infrastructure and are not meant to become competitors of the larger players, where distribution is very expensive,” says Pietribiasi. “That's also why working with boutiques is not for everybody, because you need to have a lot of resourcing and infrastructure yourself to be able to work with boutiques.”
He adds: “The boutiques’ focus instead is on having one or two strategies, sometimes more, but then making their own strength the fact that they are focused, and having a team where their energy and resources are not invested in marketing, infrastructure, supporting the distribution, but rather dedicated to investment decisions.”
This also means that boutique asset managers often lack visibility, and makes the process of scouting managers all the more important.
“Selecting boutiques is not the same in approach as selecting within larger managers. The scouting process is much more complicated, because a lot of these boutiques are not necessarily on the radar of funds platforms, investment advisers, or data platforms. Getting to know them is very, very complicated and you need seriously very strong research competencies in order to scout them,” says Pietribiasi.
He says MIFL’s team of “seriously seasoned investors” with over 20 years’ average experience apiece meets with hundreds of asset managers a month, across all asset classes and investing styles.
First and foremost, Pietribiasi says they are looking for strong performance. “Our core premise is the performance – there is no deal if there is no performance. Performance first, and then we discuss the deal.”
MIFL is also embracing new technologies including artificial intelligence in order to analyse the behaviour and biases of an investment team. “We’re getting more and more sophisticated in what we are trying to do.”