Effectively marrying the specialization of a boutique firm with the scale and profitability of a larger organization, multi-affiliated asset managers are taking on an increasingly visible role in the money management industry.
With unique business models, however, come unique challenges. If the union between parent company and affiliate clicks, the sky's the limit. But if cultures clash or functions become overly redundant, it can be a recipe for disaster.
"The multi-affiliate model has a lot of positive attributes, but being easy to run isn't one of them," said Cindy Zarker, an analyst at Cerulli Associates in Boston and author of the recent study "U.S. Multi-affiliate Marketplace."
Ms. Zarker examines the cast of characters who comprise the multi-affiliate sector, presents case studies, and cites best practices - paying particular attention to ownership models, the degree of control versus autonomy, and marketing and distribution approaches.
In a multi-affiliate relationship, the parent company delegates all security selection and analysis to self-managed but affiliated managers, usually through the parent's taking a stake in the affiliate. Parent organizations don't always drive the search process, however. Sometimes independent managers seek out parents, either for capital or distribution.
About 20 multi-affiliates exist. They are investment companies that have arrangements with, or own stakes in, other investment management firms to sell their products. Recognizable names like Allianz, State Street Global, Axa, Mellon, and Ixis lead the field. Companies like Old Mutual and Nuveen occupy the mid-tier, and a few ambitious start-ups, such as Convergent Capital, have emerged recently.
These are a minority in the mutual fund industry to be sure, but they often offer a strong performance record and a sustainable revenue stream. Much of this can be traced to the entrepreneurial spirit this group embodies, Ms. Zarker said.
And this inspires her study's chief finding: the fact that cultural difference between parent and affiliate can be a big obstacle to success. "Cultural issues are a real inflection point, for better and worse," she said. "Getting the right fit between the parent organization and the affiliate is critical."
Boutique management firms are by nature home to independent-minded personalities, who typically do not stray far from the temperaments of their star portfolio managers. Parent organizations, meanwhile, tend to be more bureaucratic, more focused on the bottom line, and usually more concerned about compliance issues.
The overriding goal of these relationships, however, is to give the affiliate the latitude to do what it enjoys best, managing money. The parent steps in only to give support on issues for which the affiliate may lack the necessary resources or desire.
Executives at the parent organization, however, always walk a fine line between disciplinarian and indulgent father, and the affiliate must try to deliver performance within a more structured environment.
Complete functional harmony can prove elusive, she said. Redundancies are bound to occur, so it is a matter of allocating sacrifice. "It's a less efficient model, but it's one that's aimed at producing strong investment performance, so there's a tradeoff," she said.
Functions to be centralized vary from multi-affiliate to multi-affiliate. Only rarely would a parent centralize a piece of the trading function, depending largely on the affiliate's willingness. Overall, most centralization occurs in the back office, "potentially operations, potentially Web site maintenance," Ms. Zarker said.
"Retail distribution is also more apt to be centralized than institutional, which tends to operate at the affiliate level," she said, "and perhaps some fairly strong compliance practices could be centralized." None of the multi-affiliate companies surveyed by Cerulli, however, operated a completely centralized distribution model.
There is no single blueprint for centralization, and personalities again play a large role. Some affiliates might be perfectly willing to give up the marketing function, for instance, but others may enjoy tinkering with that side of the business. "It really comes down to the right partnership and compromise on both sides of the table," Ms. Zarker said.
Multi-affiliated asset managers divide into two camps, the study found. Product-focused parents seeking to expand their investment capabilities, for example, might pursue unaffiliated subadvisers as they grow, but revenue-driven parents are likely to remain "pure" multi-affiliates. Multi-affiliates are also divided on the issue of ownership. Some parents accept a minority stake only with the intent eventually to acquire a majority interest or 100% ownership, but others are content with a small stake
After all the difficulties are considered, however, the multi-affiliate model's greatest attraction may be its flexibility. As Ms. Zarker said, it does not have to be an all-or-nothing proposition. For some money managers, she suggested, the model may be a path to managing just a piece or two of the business.
"Maybe they need to build out an area of expertise," she said, "and integrating an acquisition entirely isn't the answer, [but] operating them as a multi-affiliate is. It's another way of looking at how to run an investment management business and build out your capabilities."
