(20-Jan-2005) Distribution drives boutiques into fast lane
Strong performance has become the byword for boutique fund managers. But performance is not a winning factor unless the boutique can bring in the funds to manage in the first place.
As many managers have learnt first hand, securing distribution is just as important a consideration as returns if boutiques are to be successful.
452 Capital principal Peter Morgan says his group’s decision to link up with Colonial First State was key to its success in what can be a very fickle industry.
“We tried to set the business model up correctly and we got a huge lift by joining Colonial,” he says.
“That deal proved to deliver a distribution boost to us and we could add to Colonial’s sector offerings.”
Morgan says if the Colonial deal hadn’t come off, 452 Capital would have hunted around for another institutional partner.
“However, this deal was a win for them and a win for us,” he says.
“It took Colonial a decade to build its business, but there is no reason why we can’t do the same in less time.”
Another boutique fund manager that decided to join forces with a major institution to boost distribution is MacarthurCook.
It joined forces with St George Bank, a move MacarthurCook managing director Craig Dunstan says was part of the distribution strategy before the fund manager opened its doors.
“We had a strategy in place that we were going to form a relationship with somebody like St George,” Dunstan says.
“On day one this meant we had the leverage off somebody else.”
Stephen Hiscock of Melbourne-based SG Hiscock also recognised the importance of securing distribution. He formed a relationship with Equity Trustees, which handled the boutique’s back-office while providing a distribution base.
“This was important as our name meant nothing in the retail market except to some researchers,” Hiscock says.
“We hadn’t achieved any distribution at this point, so we had to perform.”
Morgan says 452 Capital’s distribution strategy is constantly evolving as the Australian funds management industry is still small.
“There is constant evolution in funds management as the industry is not a commodity,” he says.
“Running a boutique fund management operation is not like running a Harvey Norman franchise.”
The managing director of perhaps the most successful boutique of recent times, Platinum Asset Management’s Kerr Neilson, says strong performance works in conjunction with achieving distribution.
“We find 90 per cent of people will not make a decision about investing, so they need someone to help them,” Neilson says.
“They look for someone like an adviser who will find it easier to access the funds through a platform and we are on platforms.”
Interestingly, a quarter of all inflows into Platinum come from overseas, he says. This equates to about $3 billion of the funds under management.
The company has also stuck a distribution deal with MLC, which is another source of funds.
Of course, the irony for boutiques is that their distribution strategies can be too successful.
One of the selling points of boutiques against their larger rivals is the flexible, quick-reacting nature of their operations. If the funds become too big, the boutiques start to replicate their larger rivals.
Neilson says individual funds getting too big is not an issue for Platinum at present.
“As you get bigger it is difficult to get rides out of smaller stocks,” he says.
“But right now big stocks are overpriced when compared to smaller stocks.”
In the long-term stocks will rebound, which creates more investing opportunities.
“In the US there is some value now, but you have to be careful not to become an index-hugger,” Neilsen says.
“You also have to avoid investing because things go in and out of fashion, so that is why our funds are still wide open.”
Hiscock has already closed one fund to new investors.
“We set a cap at 75 per cent of what we wanted to raise and then closed it to new investors, but left it open to existing investors,” he says.
“It is a hard choice. If you close too early you can offend existing clients, which is why we have left it open for them.”
Hiscock says the key to managing the size of a fund is to know the limit before you start looking for inflows.
Morgan says it is early days for 452 Capital when it comes to capping funds. He also points out that a fund manager can be on top one day and forgotten the next.
“We can never rest on our laurels,” he says.
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