Can ‘Boutique’ Investment Firms Outperform Larger Rivals?

Marriage and Warren’s decision to set up on their own is a well-trodden path: the Schroders managers follow in the footsteps of former colleagues Chris Rice and Tim Russell, who established Sanditon Asset Management in 2013.

During the same year, UK equity income star fund manager Neil Woodford left Invesco Perpetual to launch his eponymous business. Then in 2014, Richard Pease departed Henderson Global Investors to set up Crux Asset Management and brought his Bronze rated European Special Situations fund over to the new business.

Gary Potter, co-head of the multi-manager team at BMO Global Asset Management, expects more fund managers will take the plunge over the coming years. This is because consolidation activity has picked up amongst asset managers, marked by the recent mergers between Janus Capital and Henderson, alongside Aberdeen and Standard Life Investments. He suspects M&A activity will continue.                

Smaller Funds Offer Enhanced Performance

“Generally speaking, good fund managers understand that running a small amount of money tends to enhance performance. Quite simply, the bigger the ship the harder it is to manoeuvre into smaller coves,” Potter explained.

Potter’s sentiments are echoed by Shauna Bevan, head of investment advisory at RiverPeak Wealth. She noted that a fund manager with a well-established process and investment style can often feel stifled or unsettled following a corporate takeover. Likewise, they can grow frustrated with the bureaucracy that is associated with larger organisations.

“In that scenario, it is better for the fund manager to become the master of their own destiny,” she added.

Larger investment houses tend to have more of a focus on marketing and attracting flows into their funds. This can result in fund managers managing significant sums of money, which can become a problem if it compromises their investment approach. 

“I think quite a lot of purist fund managers want to set up independently because it means they can stick to their knitting and they are not being pulled in different directions. For example, having to do management and marketing,” Bevan added.

Boutiques Are Not Bound By Benchmark Constraints

Gavin Haynes, managing director of Whitechurch Securities, believes the culture that typically dominates within smaller companies creates a better environment for fund managers.

“Boutique managers do not have the benchmark constraints that are associated with many institutions – and this is the reason that the performance of boutique funds has been strong,” Haynes explained.

“The freedom allows the manager to back their convictions and not be constrained to hold shares simply because they form a significant part of the index,” he added.

Another important consideration is the alignment of interest that typically exists within boutiques between the fund manager and end-investor.

“The managers will, in all likelihood, have a vested interest in the fund’s success. Either because they commit a significant amount of their own money to their fund or because they are owner-managed businesses, meaning they benefit directly from success,” Haynes explained.

Potter and co-manager Robert Burdett felt so strongly about the advantages that smaller asset managers can offer, they launched a multi-manager portfolio that invests solely in equity funds run by boutiques. The F&C MM Navigator Boutiques, which started life as the Credit Suisse Multi-Manager Constellation portfolio in August 2001, has returned 205% since launch up to the end of May 2017. In comparison, the average fund in the Investment Association’s Global sector has risen by 146%.

“It is a particular way of investing – that is not to say that larger funds can’t do well, of course they can - but we have a philosophy which says that over the long-term it can be better to back smaller businesses, with smaller funds and outstanding quality managers,” Potter added. 

James Barber, head of investments at Epoch Wealth Management, acknowledges the advantages associated with boutiques but highlights the depth of resource that larger fund groups can draw on.

“Clearly there has been an ability within small teams to deliver strong performance. On the flip side, firms like Fidelity have huge analyst teams across the globe and I think that is clearly feeding through to portfolios. It comes down to the way the managers are running the strategies,” he said.

Fixed Fees Can Be A Drag On Performance

The success of a boutique ultimately comes down to its financial backing and how quickly its funds can reach critical mass. This is important because high fixed costs can impact the performance of small funds.

“When people launch funds they need to raise critical mass fairly quickly because you don’t want the fees to be a drag on the absolute return performance,” Potter added.

Bevan adds that fund managers who set up their own businesses must be careful not to get distracted by the day-to-day pressures associated with running a company.

“If a good fund manager has set up a boutique, an investor might worry that they are going to be distracted by rental agreements, electricity bills and setting up an HR department – all of the paraphernalia that goes with running the business. You simply want them to be devoted to running the fund,” she said.

If you are looking at a fund managed by a boutique, don’t be afraid to be selective: take a look at the company’s financial backing and track record. Whether it is a fund managed by a boutique or a large group, what kind of environment does the fund manager operate in? This is a key consideration, according to Haynes.

‘The culture of the organisation is something that is very important when I am selecting an investment manager. I want to invest with managers who are happy in their environment and incentivised to stay,’” he added.