Larger players in the asset management industry now have access to expert fund managers specialising in certain investment strategies with a proven track record in generating alpha.

At the same time the industry continues to move towards greater consolidation as smaller players are hit disproportionately hard by the financial crisis and are ripe as merger and acquisition targets.

These are some of the conclusions reached in a report* by Celent, a Boston-based financial research and consulting firm.

The financial crisis and equity market downturn have added momentum to trends altering the structure of the asset management industry, concluded the report. Investors have become more demanding and are scrutinising investment performance more closely.

“They are not ready to pay extra fees to alpha-generating funds that merely generate beta. They are allocating a greater proportion of their assets to low-cost index exposure funds and a smaller proportion to potentially alpha-generating funds,” said the report.

Multi-boutique is emerging as the most popular operating model, according to the Celent report. “The practice of creating an entrepreneurial culture within investment teams and putting them in charge of making investment decisions, coupled with the backing of a large company which provides auxiliary functions such as marketing, distribution, compliance, risk management and other functions is a compelling operating model,” stated the report.

About 30% of asset managers in Europe have adopted the multi-boutique/integrated boutique operating model and more are expected to in future, said Celent.

Multi-boutique asset managers in Europe have assets under management (AUM) averaging €150 billion ($203.86 billion) compared with the average AUM of €300 billion ($407.72 billion) of integrated producers or large asset managers average. The average AUM size of multi-boutique asset managers is expected to grow faster, predicted the report.

Outsourcing of non-core activities was another area highlighted by the report. The focus is now on achieving operational excellence. Outsourcing is seen as a way for asset managers to rid themselves of non-core activities allowing them to focus on investing.

In Europe six countries account for almost 80% of AUM. In 2009 the UK came top with 30% followed by France with 24% and Germany with 12%.

According to the report institutional clients accounted for the majority of AUM: 66% of the market in 2007 and 2009. In 2009 insurance companies had a 45% share of the market and the share of pension funds fell to 27%.

Regulation, said the report, is going to be crucial for asset management and evolution of multi-boutiques. The European Union’s alternative investment fund managers (AIFM) directive means that asset managers will be under greater scrutiny and will need to enhance their risk management capabilities, concluded the report. If regulation becomes even tougher, multi-boutiques could suffer and there might be upheaval and forced consolidation in the industry, the report warned.

* Structural Changes in the European Asset Management Industry: The Rise of the Multi-Boutique Model, from Celent, a Boston-based financial research and consulting firm.