Boutique asset managers are focused by definition, yet the most successful firms see a control of limits and barriers extending beyond strategy. Control is a critical element of their operations which, when exercised well, can allow a fund manager to take precise steps when growing their investor base, changing their cost base and expanding their reach across geographies and strategies. Ensuring that data is well managed, secure and accessible to the right people within a firm allows it to exert control effectively.
In just two years, regulation has become the top concern for boutiques, cited by 68 percent of managers in 2015 compared to just 17 percent in 2013. Eighty-nine percent anticipate the Markets in Financial Instruments Directive II (MiFID II) will impact their business while the Foreign Account Tax Compliance Act (FACTA) and the Dodd-Frank Act also remain a key concern at 18 percent and 13 percent respectively.
Having the proper procedures in place to determine who is able to make decisions, gives a firm confidence in its actions. To achieve that, fund managers must be able to look across the entire investment lifecycle, knowing who can see what and who can decide to do what. Having a complete picture, gives clarity over what is within the mandate and what impact a decision is going to have on the overall portfolio, and from an exposure point of view whether a decision is suitable for the portfolio.
In line with those controls is the need for a full picture of data within a fund manager so the future course of action can be set with complete confidence. This works towards minimizing costly mistakes while enabling managers to seize an opportunity because they know that they are working on a systematic basis. For boutiques, working with relatively concentrated levels of assets under management, the impact of smaller errors is proportionately greater and more visible.
To support this enhanced control, the siloed approach to technology in which risk, compliance and order management are run across a number of separate systems needs to be addressed. Effective management of process and data requires the establishment of control within well-connected systems, bringing all of that data together so that the running of pre-trade checks, for example, can simultaneously be conducted to establish compliance from a regulatory point of view and from a mandate point of view.
It allows the portfolio manager to delve into the details of investments with a complete picture of exposure and improving their management and optimization of the portfolio, while their ability to see and drill down into data makes for a richer investor reporting.
About 35 percent of boutique fund managers will have grown their infrastructure out early and opted for a best of breed approach to building out their systems, starting with what would have been cutting edge infrastructure. A further 35 percent of firms never quite get to that point technologically and therefore operate using a combination of some systems but with a lot of manual intervention. Firms that evolve around each of those build outs have a lot of inherent risk in the models. They end up with a siloed approach to data. The interfaces between those solutions can be hard to manage as they try to achieve straight through processing. There is no single person to call when something goes wrong, so vendor management is more complex. A fund loses credibility and the ability to scale. Managers need to target a function-rich but integrated offering that mitigates some of the vendor management problems. It allows them to build a more complete picture of where they are generating returns and also the degree of risk being taken on from an investment risk and an operational risk point of view.
We are proponents of a partnership approach to data, using the cloud to provide protection and security. While some firms may be able to do this in-house, we would certainly advocate boutique asset managers retaining their core competency around investment management and looking for a reputable partner who can deal with data security and data protection issues more effectively.
Limit control is about investing and staying within the parameters, but also painting a full picture of a firm using clear delineation. Managing reputation through good infrastructure, good partners and data is a major asset for a firm and should be protected under its fiduciary responsibility to clients.