Small is beautiful: Why boutiques can (and often do) beat the behemoths

The investment industry still equates scale with success. But the evidence suggests that, in places where active management can thrive, smaller, owner-led boutiques often have structural advantages, argues Tom Caddick.

For years, the asset-management story has been written as a triumph of scale. Bigger platforms. Bigger brands. Bigger distribution agreements. And, ultimately, bigger assets under management (AUM). “Safe hands,” we’re told, are the ones attached to the largest balance sheets.

Yet in investing – which, let’s face it, is an arena where incentives matter as much as intellect – size should not be seen as an unqualified virtue. Indeed, there are times when it can be a handicap.

The world of finance has long documented a “small-firm effect” in equity markets: over long horizons, smaller companies have tended to outperform larger ones, albeit with meaningful cyclicality and risk[1].  And although that phenomenon does not map perfectly onto fund management, it does point to an important truth: the very conditions that can make small companies outperform (less attention, greater inefficiency and more room for differentiated judgement) are the same conditions in which small, specialist investment firms can thrive. 

These also happen to be exactly the conditions that mega-managers, by virtue of their scale, often struggle to exploit.

The ‘boutique premium’ is real
The case for boutiques would be easy to dismiss in favour of winner-takes-all bravado if it weren’t increasingly supported by data.

A key piece of evidence comes from large-scale performance analysis. A few years ago, Affiliated Managers Group (AMG), which partners with independent managers, revisited a proprietary study of nearly 5,000 institutional equity strategies over the 20 years from 1998 to 2018. Across 11 equity categories, they found that boutiques outperformed non-boutiques by an annual average of 62 basis points, and delivered 135 basis points of average annual net excess return versus indices.[2]

AMG’s work also highlights something practitioners would recognise instinctively: dispersion matters. The top decile of boutiques created dramatically larger excess returns, while the laggards detracted by far less. This suggests manager selection is vital, but also that the upside of getting boutiques right can be substantial.

Exhibit 2 in the witness box comes from academic research focused specifically on boutique-vs-mega comparisons in Europe. In a paper authored by Andrew Clare using European mutual fund data, boutique funds were found to outperform “mega” peers. This finding was particularly pronounced in European mid/small cap and global emerging market sectors, where the premium was economically and statistically significant.[3]

In the same study, the estimated boutique premium (boutiques minus mega active funds) ranged from 52-82 bps per year gross-of-fee, and 23-56 bps net-of-fee, depending on the risk model used. And importantly, the sector breakdown matters: boutiques were most compelling where capacity constraints and informational edges plausibly matter most.

This is not to say boutiques always win. However, it does imply something more practical: the industry’s default bias toward bigger being better is not as well supported as many practitioners and commentators believe.

Why size becomes a constraint
In theory, scale buys you research budgets, technology, risk systems and cheaper fees. In practice though, scale also buys you bureaucracy. 

Software engineers have long known this. They’ve even coined Brooks’s Law, which states that adding manpower to a late software project makes it later because coordination and onboarding swallow the gains.[4] And evidence from a real-world collective-intelligence setting suggests the same dynamic: on complex tasks, coordination costs can outweigh the benefit of collaboration. [5]

Bureaucracy, in short, is delay; it can act like a tax on investment outcomes.

There’s a useful parallel from outside finance. A widely cited study in Nature found that small teams tend to produce more disruptive ideas, while large teams tend to develop and refine what already exists. In other words: when the group gets bigger, the work often gets safer.[6] In asset management, you see a similar split. The bigger the organisation, the more it is built to manufacture consistency, govern reputational risk and defend existing franchises. The smaller the organisation, the easier it is to be genuinely different – but only if the culture is set up to allow it.

Large asset managers are rarely built to be single-minded. Their incentives are multidimensional: gather assets, protect the brand, retain clients, retain talent, satisfy internal stakeholders and avoid career risk. In this ‘everything’ mindset, genuine conviction can get lost.

Boutiques, by contrast, tend to be structured around a narrower purpose. Although there is no formal definition, a good working assumption defines investment boutiques as smaller, independently operated firms with meaningful management ownership, specialised offerings and relatively modest AUM. Even where the thresholds vary, the pattern is consistent: fewer products, fewer committees and fewer layers between decision and execution.

This matters because active management is not actually about having more information (something we should bear in mind as the latest AI wave hits). It’s more a game of having different insight, and then acting before it becomes fully priced. When opportunities are fleeting, or when the best ideas are in less liquid parts of the market, speed and capacity discipline become a source of edge.

Which brings us back to that small-firm effect. The small-cap premium, where it shows up, is strongest in the smallest companies and varies over time; it is not a smooth free lunch.[7] However, it illustrates how inefficiency clusters where fewer large players are able to operate efficiently. The same is true in active management: the more capital you must deploy, the narrower your investible universe becomes.

In European mid/small caps and emerging markets (exactly where the academic evidence finds the boutique premium most pronounced), capacity is not an operational detail; it is fundamental to the strategy.

Why boutiques stay lean – and why it matters
Yet if boutiques have an edge, why aren’t they more dominant? Aside from the philosophical issue that successful boutiques can eventually outgrow their label, it’s also because selection in our industry is not particularly meritocratic. Platforms, consultants, gatekeepers and operational due diligence all have warped incentives, creating a friction between theory and practice.

A 2025 survey of 87 mainly European boutique asset managers by Bayes Business School and the Independent Investment Management Initiative found boutiques themselves cite four advantages: independence, focus, client alignment and agility. Yet they also identify hurdles: distribution, achieving critical mass for larger allocations and the way consultants and platforms accommodate (or don’t accommodate) performance-fee structures.[8]

A separate Universal Investment survey (2024) adds colour on what boutiques typically do to cope: many plan to expand internationally, often through regulated fund structures, and many lean on third-party providers to handle the operational burden of new markets and regulation.[9]

Ultimately, boutiques can stay lean precisely because they can outsource non-core functions and keep the investment team focused on investing. The industry’s size bias becomes self-reinforcing: large firms get the shelf space, therefore get the flows, therefore look safer, and therefore get more shelf space. Allocators, advisers, platforms and consultants should stop using size as a proxy for quality.

If you want one principle that explains why boutiques can be better, it is this: aligned incentives create better behaviour – and the downstream outcomes from better behaviour compound. AMG’s “boutique” classification includes criteria such as meaningful principal ownership and a pure focus on investing; Clare’s research similarly notes that boutique structures may align owners’ fortunes more closely with investors’ outcomes.[10]

This alignment shows up in how boutiques behave. They live or die by performance, not by distribution muscle. They can run capacity limits credibly because they don’t need every strategy to be a perpetual asset-gatherer. And they are more likely to preserve a clear philosophy rather than dilute it to suit an ever-wider client base.

Large firms can try to replicate these attributes. But it’s difficult to manufacture owner-operator psychology inside a large-scale asset manager where product proliferation and quarterly flows are the oxygen supply.

From theory to practice
So what constitutes a better selection lens? It is less about admiring brand names, and more about interrogating structure and fit. 

You should ask questions like: Who owns the firm, and how are decision-makers paid? How narrow is the remit – and is the strategy capacity-aware? How does the culture handle being ‘different’? Where is the edge plausible? 

The answers to these questions will reveal important nuggets around co-investment skin-in-the-game and incentive time horizons. Genuine edges are usually found where liquidity and attention are scarce, and low portfolio turnovers, repeatable processes and a willingness to look wrong before being right are all positive signs. Equally, mid/small caps, emerging markets and other less-efficient segments are where scale most often becomes a constraint.

All of this matters because the only durable way active management adds value is by being meaningfully different – different holdings, different time horizons and different risk exposures. After all, if you’re not meaningfully different from the peer group or benchmark, then you are paying active fees for passive exposure.

There is a deeper point, though: the industry has centralised around what is easy to distribute, not necessarily what is best to own. And yet investing is not a procurement exercise. It’s about compounding, and compounding rewards the structures that make good decisions easier, and bad incentives harder to hide behind.

Scale will always have a place. In passive, in beta building blocks, in operational infrastructure and in certain highly efficient markets where cost is king, big remains beautiful. Yet when taking genuine active risk, and in parts of the market where judgement and agility still matter, we should be more open to a simple possibility: small isn’t a disadvantage; it may just be the real advantage.

[1] Survey of the Small-firm Effect, Norges Bank Investment Management, 2012
[2] The Boutique Advantage: Overlooked Outperformance, AMG. 2019.
[3] Is there a Boutique Asset Management Premium? Evidence from the European Fund Management Industry. Journal of Asset Management, Clare, A 23(1), pp. 19-32. 2022
[4] Brooks, F.P. Jr. The Mythical Man-Month: Essays on Software Engineering. Addison-Wesley, 1975 (20th Anniversary Edition, 1995).
[5] Straub, V.J., Tsvetkova, M. & Yasseri, T. The cost of coordination can exceed the benefit of collaboration in performing complex tasks. Collective Intelligence, 2(2), 1–16 (2023). DOI: 10.1177/26339137231156912.
[6] Wu, L., Wang, D. & Evans, J.A. Large teams develop and small teams disrupt science and technology. Nature 566, 378–382 (2019).
[7] A Survey of the Small-firm Effect, Norges Bank Investment Management, 2012
[8] The case for boutiques: A survey of boutique asset managers, Bayes Business School, Clare, Andrew D. and Hristova, Dani and Stewart, Sebastian, May 29, 2025.
[9] Asset management boutiques poised for international expansion – but more support needed, Universal Investment, Sept 03, 2024.
[10] Is there a Boutique Asset Management Premium? Evidence from the European Fund Management Industry. Journal of Asset Management, Clare, A 23(1), pp. 19-32. 2022