Most start up boutique investment management firms fail. Many are doomed to fail before they source their first client. Start-ups can fail for any number of reasons. Misplaced confidence regarding the uniqueness or strength of their investment capability. Inflated expectations and or lack of understanding of their addressable market. Sub optimal distribution and or marketing plan. Poor investment performance.

An unlikely candidate to join the ranks of the few that might succeed is Tom Waterhouse’s newly established asset management business Waterhouse VC. This may seem like a bold statement given the business clearly lacks many (if not most) of the traditional cost of admission factors for new entrants. The founder has no prior experience of running money, his business is thinly resourced, and the flagship Gambling Fund goes against the ethical investing industry tailwind making an already small addressable market even more niche. Waterhouse VC however, possess many of the harder to acquire contemporary critical success factors required to grow a successful investment management business.

The market for investment management services has changed enormously since Australia’s first wave of boutique (employee owned investment managers) close to twenty years ago. Most of these firms specialised in long only domestic equities. Their addressable market was huge; an institutional market comprised of multiple superannuation funds, and a retail market made up of a small number of large bank or insurance owned advice firms. Both markets had a disproportionate allocation to domestic equities. Gatekeepers (asset consultants and retail research firms) had huge influence over the allocation of dollars to money managers. The boutique model was new and trendy and these gatekeepers were quick to endorse them.  Money management had a mystique and its exponents were trusted. The combination of these factors created a demand / supply mismatch skewed heavily in favour of money managers.

Today’s market is very different. The demand / supply imbalance has reversed. The addressable market has been shrinking as both large (e.g. industry funds) and small (SMSFs) investors adopt more of a DIY investment approach. Notwithstanding the closure of a number of boutique firms and funds managed by larger firms the supply side remains bloated across most asset classes. Being experienced, having a large investment team, a long track record, a credible investment process……etc. is no longer enough to guarantee success.  These attributes can no longer be considered critical success factors. For most asset classes these are now no more than cost of admission factors.

The critical success factors for investment managers today reflect the changes that have taken place at the addressable market level. The mystique and trust the traditional long only equities industry once enjoyed has been eroded. This is partially due to active managers consistently failing to meet their objectives. The bigger asset owners have brought in-house large portions of their portfolio which were previously outsourced. Likewise, better informed and technology enabled individual investors are also taking on more responsibility for managing their savings.  It is no longer enough for a money manager to be known to large asset owners, their consultants and research houses. With end investors getting closer to their investments they want to know more about the individuals and firms managing their savings. Brand, therefore, at both the human and corporate level is becoming more important than ever.  Money management firms looking to expand from the business to business institutional market to the higher fee and faster growing business to consumer retail channel are struggling.

Investors today are only interested in genuinely new and clearly differentiated expertise.  This expertise needs to be easily understood but at the same time difficult to implement themselves. This simplicity but difficult to replicate hurdle is a very challenging one for money managers. Investors want to know about the firms (and the individuals) managing their money. Building a recognised end investor or consumer brand is also proving to be a big challenge. The investment industry in the broadest sense (i.e. money managers, large asset owners, gatekeepers….etc.) has spent most of its existence talking to itself and each other. The end investor has been at best a secondary consideration. The approach to investor communication is standardised across the money management industry and has shown little change over the past 20 years.  A lot of it is expressed in a language few outside the investment industry bubble can understand. It can be boring and unappealing, particularly to the next generation of investors. The industry has by and large failed to recognise this and as such has failed to adapt to the new critical success factors.

Waterhouse VC is a relatively uniquely placed new boutique in that it starts its journey with a number of these new critical success factors in place. Firstly, the Gambling Fund is a unique offering. Secondly it is easily understood. It is a play on the rapidly growing gambling industry.  Thirdly, there can be no doubting the business founder Tom Waterhouse and his family connections have a level of gambling industry knowledge few can match. Fourthly this information edge cannot easily be acquired, making his investment strategy difficult to duplicate. Fifthly, the Waterhouse name is both a widely recognised one and instantly associated with the Gambling Fund’s investible universe. In other words, the business already has a recognised human brand element. Finally, the founder has a form of tied distribution via his 100,000 plus subscriber tipping business. None of these on their own are a ticket to guaranteed success, but in combination at least gives the business a significant head start.

Waterhouse VC may well end up joining the increasingly crowded boutique graveyard. The business has a lot to do to address its cost of admission deficiencies. It needs to be taking steps now to ensure its planned entry into the broader retail market in three years’ time does not end in failure. These steps include having the appropriate product design features, a credible investment approach and an understanding of where they are likely to find the pool of investors interested in such a niche strategy. Each of these are achievable and a lot less daunting than the critical success factor deficiencies facing most new start ups.

Fee pressure, investment management insourcing, growth in self-directed investing and increasing use of passive and listed fund structures.  These trends are well known and appear well established. The drivers and long term implications of these trends however are less clear.

Are all of these trends structural or are some cyclical? Are there are other less well known but equally important trends the market is missing? What lessons can be learned from established trends in offshore markets?   Incorrect interpretation of trends can lead to impulsive and poor decision making.

Our research goes beyond the headline industry data to create a framework for translating industry trends into estimates of the future contestable market for individual asset classes and products.

A $2.5 trillion savings market with future growth underpinned by a government legislated compulsory superannuation savings system.  Transparent, sophisticated  and strongly regulated.  On paper Australia surely is the “Lucky Country” for asset management firms.   Why then are there so many tombstones of those that came here and failed?

Buy, build, partner or visit regularly.  These are the four primary market entry options for prospective new entrants.  The correct option depends on a myriad of factors including the firm’s asset class specialty, access to capital, timeframe, funds under management capacity and fee requirements.

We help clients avoid the mistakes of others.  Choice of market channel (institutional, intermediary or direct), product, product structure and local service providers are decisions that should not be made based on desk based research and fact finding trips alone.  Milestream assists clients in making all these decisions fully informed ones.

Start-up asset management firms have many decisions to make.  For those requiring funding, distribution and administration support the choice of incubation partner is the most critical of all these decisions.  Identifying the optimum partner is difficult.  Convincing this partner that your proposition is one worth backing can be even more challenging.

There are multiple boutique incubators offering what appear to be relatively similar services.  However, they vary greatly in terms of the quality of their value proposition to prospective start-ups.    These firms have done multiple deals with new boutique firms and passed on many more.   The incubators therefore have a significant information advantage when negotiating terms with start ups.  Milestream helps start ups bring this information mismatch closer to equilibrium.  We compile short lists of potential partners, assist with introductions and preparation for meetings with those short listed and with the negotiation of partnership commercial terms.

They have been amongst the best-selling funds globally over the past five years. Recent and projected new fund launches suggest that the expectation is for this growth to continue.

But what exactly is a multi-asset fund? Why have they become so popular? How do intermediaries and end investors use them? What is the size of the current and likely future contestable market? What will the successful multi asset funds of the future look like? What is the future for traditional peer relative focused multi manager funds in a more outcomes focused market?  These are just some the questions we address in our multi asset sector study.

On paper it appears the optimal asset management business model. The alignment benefits of an employee owned boutique combined with the corporate infrastructure of a large institution. For the best part of a decade it was the model of choice for both institutional and retail investors.

The more recent evidence however suggests that this model is facing significant challenges. Growth has slowed, the number of boutiques trying to sever links with their corporate partner is rising and the high quality start-up count has significantly declined. Our research looks at the drivers of these changing market conditions and provides insights on the successful business model of the future.

In excess of 130 firms offering over 500 strategies. Institutional investors are hiring their own internal investment teams and allocations to Australian equities are declining.

The consensus view is that the supply demand imbalance is so great that fees will continue to decline and the number of active Australian equities providers reduce sharply. Our research goes far beyond these headline factors to fully quantify the addressable market for all Australian equity products (large cap, small cap, long short…etc.) across each market segment (institutional,intermediary and self- directed retail).

In a similar manner we quantify the supply side of the equation. Our conclusions are a challenge to the consensus view and provide clear direction for existing and potential sector participants.

The asset management industry to date has been built on product push and relative performance. Asset management firms created products that suited asset management firms with their validation based upon investment returns relative to peers and market indices.

The intersection of investors loss of trust in the asset and wealth management industries with technological enablement has meant a change to these critical success factors. Our research has identified the common traits of those firms displaying the strongest net flows and the lessons for other industry participants.