Who will be brave enough to support the smaller managers?

Goodperformance can mean a lot of things, but not necessarily support from financial advisers.

“Look,” as one leading boutique fund manager says, “I wish it worked that way, but it doesn’t. There is, in many cases, no real fund flow when a boutique manager produces consistent top-quartile returns. Well, there certainly hasn’t been in my experience.”

Another top-performing boutique manager comments that their top-of-the-chart returns didn’t add to fund flows, either. “You think you’ll have people bashing the door down with applications, but it just doesn’t happen.”

If there’s one thing that boutique fund managers can agree on, it’s that finding your name at the top of the league tables is not going to guarantee support from financial advisers and research managers.

How many advisers are prepared to chase better returns for their clients instead of sitting back and supporting the big brand-name managers?

There is an old adage in IT circles that “no one ever got fired for buying an IBM” — well, surely the same could be said in funds management, “no one appears to get questioned if they stick with the large brand-name managers”.

Surely it is just coincidence that it is the big managers that support the dealer group conferences each year.

With conference budgets that are way out of the reach of smaller managers, it is hard for smaller managers to support dealer groups in the same way that the big managers do. And then of course, there are some research firms who charge managers to be reviewed — a system that again must favour the managers with deep pockets.

When we’re talking about boutique fund managers, we are talking about small, focused, flexible managers that have the potential to provide investors with very good returns.

Part of the shift to boutique managers by big investors, such as the large corporate and industry superannuation funds, has been their disenchantment with returns from larger more established managers, who can struggle to move multi-billion dollar portfolios about efficiently in what’s becoming a very concentrated Australian share market.

Evidence of the support from institutional investors comes from the fact that boutique managers have attracted a $12 billion slice of the $520 billion invested in superannuation.

While there is no single definition, boutique fund managers can best be described in terms of the following characteristics. They specialise in the management of a single asset class — in this case, Australian shares; they have relatively low funds under management; they have relatively small investment teams; and they focus on investment management and outsource other services.

One boutique manager estimates that it could take a large manager with $10 billion under management over seven months to buy or sell a position in a stock (with a market cap of say $1.2 billion) in the course of normal trading volumes, whereas a boutique manager could buy or sell the same position in two days — to say nothing of the fact that the $10 billion manager would end up with a 20 per cent holding in the company.

While some market pundits may question whether the limited team size translates into the manager being under-resourced, I think there is plenty of evidence to show that boutique managers are usually resourced with highly capable individuals, who have many years of experience gained with large prominent organisations. And importantly, boutique staff often have an equity stake in the business, giving additional motivation and focus.

In recent years, there has been increasing press coverage highlighting the view that boutique managers offer the potential for higher returns than their mainstream counterparts.

Assirt recently published a paper in which it compared the one-year performance of a group of boutique managers against larger managers and the report showed the boutique managers outperforming the brand-name managers by approximately five per cent per annum. With potential excess returns of that magnitude, it doesn’t seem right that retail clients are largely missing out on that potential.

There are obviously some more ‘forward-thinking’ advisers who are taking a keen interest in expanding their clients’ investment potential, because both Assirt and van Eyk Research have, in the past 12 months, started to produce research reports on boutique managers.

To borrow a political slogan from yesteryear, “isn’t it time” that more financial advisers started to look at delivering the best possible returns to their clients?

Many of the advisers that I talk to tell me their clients place the upmost faith in their advisers’ recommendations. How many times have you heard an adviser comment that “my clients do whatever I tell them to”, or words to that effect?

If advisers have that much respect and influence, as they certainly do, then why do so many advisers stay in their “comfort zone” by sticking with the large brand-name managers?

Surely it must be time that more advisers broke away from the herd and started to actively support the up-and-coming managers — the so-called leaders of tomorrow. In doing so, advisers will have some very satisfied clients whose long-term wealth will be boosted by stronger returns.

John Hamer is head ofwealth managementservices, ChallengerInternational.