Warnings boutiques are on thin ice

The numerous thinly-capitalised boutique fund managers in the Australian financial services market are likely to come under intense pressure as uncertainty in global markets continues, according to Australian Unity Investments (AUI) general manager, retail, Adam Coughlan.

Coughlan told Money Management he had detected “a worrying trend” among boutiques over the past few years to contribute less and less capital when partnering with larger institutions such as AUI.

“They’re not willing to put up much of their own money simply because they’re not willing to take the risk, particularly with markets as volatile as they are right now,” he said.

Coughlan said the issue could be traced to the large number of fund managers who left larger institutions during the raging bull market that preceded the sub-prime mortgage meltdown and subsequent global credit crunch.

“Given that mostly successful players have gone before them, many of the newer boutiques thought they simply needed to hang out a sign [saying they were open for business] and the money would flow. They didn’t feel the need to put up significant amounts of their own capital, and many preferred to go it alone.”

Since late last year, however, when financial markets worldwide began to get tumultuous, many of these boutiques have struggled to keep their proverbial heads above water. And, in Coughlan’s view, things could get worse.

“Flows have decreased significantly, and those boutiques that have been thinly-capitalised may be facing very testing times in 2008.”

Like Coughlan, BT Investment Management general manager and chief investment officer Dirk Morris said he believes it will be a struggle for many boutiques to stay afloat this year.

“World markets have entered a new phase and I think it’s fair to say we were all shocked by the magnitude of the financial crisis,” he said in a presentation at the recent Securitor conference in Auckland, New Zealand.

“We would expect the weight of financials in Australia to continue to trend down and, for many boutique managers, there will be a painful adjustment.”

Morris pointed to early victims of the sub-prime crisis (smaller, leveraged players such as MFS, Allco and Basis Capital) and predicted there would be “more pain to come as rates and the Australian dollar stay high”.