Big firms add people, products and processes to reduce risk. Boutiques, on the other hand, can reduce risk by removing constraints that kill innovation, agility, and investment edge by recognising that more information does not always mean better decisions.
Most of us are trained to solve problems by adding. When you watch someone repair a wobbly Lego model, you’ll see our innate addition bias at play. We instinctively reach for another brick, as Leidy Klotz argues in his book Subtract, the smarter move is usually to pull out the piece causing the twist and rebuild with fewer parts.
Subtraction provides an unusual, but equally useful lens for understanding why boutique investment managers can have an edge over large ones.
The longer your decision chain, the broader your product shelf, the larger the capital you must deploy, the more your process becomes a machine for smoothing away exactly the thing you’re supposed to be paid for: differentiated judgment.
Boutiques are deliberately designed to have fewer moving parts.
The addition trap
Large firms can succumb to the addition addiction.
They:
- Add product lines to meet every client preference and every distribution channel;
- Add risk overlays to protect the brand;
- Add specialists to cover every sector, factor, region and scenario;
- Expand committees and communication lines so decisions are defensible and compliant, and everyone feels informed.
Each addition has its rationale in isolation.
Collectively, they create an excellent system, but is that system optimised to generate alpha, or broader client outcomes?
Subtraction is a bet on clarity. You can remove the layers that slow you down, the incentives that tempt you to gather assets past capacity, and the internal complexity that turns every investment decision into a negotiation.
This helps create decisiveness.
Information
At some point, more information stops improving decision making and starts degrading it.
Information can create noise, increase second-guessing, inflate the cost of choosing, and pushes you toward the most popular option. But this is not necessarily the best one.
The ‘right answer’ is rarely hidden at the bottom of an infinite research well. The marginal value of information declines with complex work, while the marginal cost of coordination rises.
Judgement under uncertainty and understanding the key drivers of assets and markets are usually far more important than an extra unit of information.
Investing is complex work. There’s never a single, stable “correct” answer; outcomes are delayed; feedback is noisy; and the system you’re trying to understand changes as you observe it.
In this environment, the cost of coordination can overwhelm the benefit of collaboration. Firms can appear to work harder – but decision making can take longer.
On the other hand, boutiques can decide sooner and make more pragmatic judgements over the ‘right’ level of information.
What good boutiques remove
So, what does a well-run boutique actually subtract?
- They can subtract layers. Boutiques can have fewer tiers between analyst insight and portfolio action – this can mean faster decision cycles and clearer accountability.
- Boutiques are also able to subtract product sprawl. A narrower range of strategies forces depth rather than breadth. It allows a firm to focus on their genuine edge.
- Elsewhere, they can subtract “committee compromise”. Committees have a role, but when they become the centre of gravity, portfolios usually drift toward consensus. Boutiques can keep the decision rights close to the people taking the risk.
- Also, boutiques can subtract asset-gathering pressure. The hardest thing to do in asset management is to turn away money when a strategy is working. Owner-led boutiques are structurally better placed to do so.
- Lastly, they can subtract complexity masquerading as rigour. They can focus on the few variables that matter and avoid turning research into a performance of busyness.
Each of these subtractions can help lead to genuine differentiation.
Less can be better
A word of caution and balance.
It would be disingenuous to argue that boutiques are automatically better. Smaller organisations can be fragile, key-person risk is real and operational infrastructure matters.
Some boutiques underinvest in systems and controls and call it ‘culture’.
These are legitimate underwriting questions. However, they are not a reason to default to size as a proxy for safety. In fact, they are precisely the kind of questions good due diligence is meant to answer.
The investment industry has a nasty habit of confusing ‘more’ with ‘better’.
But as Klotz says, improvement often comes from subtraction; from removing the things that quietly degrade the system and, more importantly, the outcome.
By Tom Caddick, Managing Director of Nedgroup Investments
