The rise of the boutique asset manager

Forty years ago, insurance and trust companies dominated the pension investment industry. But by the early 1980s, the landscape began to change as boutique asset managers started to take a growing chunk of the business.

Boutique managers were attractive to investors because they specialized in a type of asset or style of investing, says Zev Frishman, chief investment officer at Morneau Shepell Asset & Risk Management Ltd. The insurance and trust companies, he notes, were primarily conservative managers offering balanced investment solutions. Frishman notes that prior to the entrance of boutique managers, investors had less involvement in the intricacies of their portfolio construction.

“Clients would go to the insurance company and say: ‘Here’s the size of my fund. I want a certain return. Here’s my risk parameters. You go out and do what you can to get that return for me.’ They won’t specify whether they want value investing or growth investing.”

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But as boutique managers grew, pension funds, particularly larger ones, started changing their approach to investments, says Frishman.

Today, most pension funds will seek a consultant and run actuarial studies to find the best asset allocation that meets their return and risk requirements, he says. They’ll then seek specialized money managers that suit their style and asset allocation.

Pension funds have also changed their asset mix over the years, says Marcus Turner, a director and senior investment consultant at Willis Towers Watson. “Funds were primarily invested in equities and fixed income, but there’s been a transition to an allocation of real assets. It’s accelerated to the point that for years, real assets were referred to as alternative assets. But at this point, they’ve largely become mainstream.”

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And as pension funds explore non-traditional assets, they’re looking at newer alternatives such as hedge funds, private equity and smart beta, says Turner. He says smart beta, in particular, has started attracting the interest of Canadian institutional investors.

“Smart beta is a way of methodically slicing the market that isn’t based on your traditional cap-weighted factors,” says Turner. “It allows you to invest in other common factors, so you may have a smart-beta solution that identifies stocks with low volatility in the past cycle.”

What’s ahead?

The use of outsourced chief investment officers is gathering momentum, especially for small- and medium-sized plans, says Turner. “As pension liability becomes a significant component on the balance sheet, some companies are deciding they don’t want to be in the pension fund business.”

By outsourcing the investments of their pensions, companies can free up resources or work on their governance, says Turner. “Almost every company is facing increasing financial stress and strain and they’re looking for every opportunity they can to improve leverage level and look at how internal resources are applied. If you’re a tech company, the pension plan can be a distraction on financials and resources.”

Jann Lee is an associate editor at Benefits Canada.

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