What's the difference between boutique and institutional fund managers?
Morningstar's Tom Whitelaw discusses the differences between boutique fund managers and their institutional counterparts, with the aim of dispelling the myth that you can judge these books by their covers.
The conventional wisdom is that boutique fund managers are more nimble and less constrained when managing investors' capital, and therefore able to produce better returns.
To test this assumption, we segmented the 71 large-cap Australian share strategies we have assessed and compared the performance of those we classify as boutiques (majority-owned by their principal investors) against their institutional rivals.
After removing geared and passive options from the sample, we were left with 64 strategies – 42 of which can be classified as institutional, and the remainder boutiques.
The latter tend not to have lengthy track records, and only eight of the 22 boutiques had 10-year returns at the time of writing.
Nineteen do have five-year histories, which does cover a period of very testing market conditions.
The data summarised in Table 1 over the page shows the median for both sample groups. (Using the median helps reduce the effects of outliers that can skew the average.)
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The table shows that the performance track records of both groups have been broadly similar.
Over the three and five years to 31 May 2012, for example, the boutique fund managers as a group underperformed the institutional offerings by 30 and 18 basis points respectively.
This is likely to be attributable in part to the ongoing fee. In general, the management fees charged by boutiques are higher.
The Indirect Cost Ratio shown includes the effects of any performance fees.
Boutiques are more likely to levy these performance-related charges, which reduces their net performance if they have done a good job.
Boutique strategies also tend to be more concentrated, which helps explain some of the risk statistics in Table 2.
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The institutional offerings tend to be more index-aware, as shown by the lower tracking error and R-Squared ratios.
The institutional funds therefore tend to own fewer mid- and small-cap stocks, which reduces their overall volatility.
As the upside and downside capture ratios indicate, however, the riskier boutique strategies have captured more of any market outperformance, but have given back more during downturns, attested to by the overall performance figures.
In very general terms, this means that over the short time period boutiques have offered higher return potential, but with higher accompanying risk.
However, investors have to pay slightly more over time, whereas institutional funds were cheaper – albeit less exciting.
These results are, however, influenced by a comparatively small sample size and a lack of longer-term data. It's important to note that there are excellent fund managers in both the institutional and boutique spaces.
This is highlighted by the fact that two of the fund managers to whom we have assigned Morningstar Analyst Ratings trademark sign of Gold are institutional, and the other two boutiques.
Each segment also contains a large number of very average investors, and performance and risks which range widely.
An important element in our qualitative research process is assessment of the parent organisation, where we see well- and poorly-managed businesses in both segments in fairly equal measure.
So to conclude, whether a large-cap Australian share fund is offered by a boutique or an institution is likely to have very little bearing on the ultimate investment outcome.
Tom Whitelaw is the research manager at Morningstar.
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