(20-Jan-2005): The rise and rise of the boutiques

In the dark days of 2001 and 2002, when investment markets were in the doldrums, a dismal performance by the big institutional fund managers left a lot of planners and investors looking for alternatives.

With their promise of being able to do things differently from what many had begun to perceive to be their sluggish, benchmark-hugging institutional cousins, an exploding number of smaller, niche and investment-focused fund managers started to appear on the radar.

By the end of 2003, funds under management of these fledgling fund managers and existing niche players like Keir Neilson’s Platinum Asset Management had gone through the roof.

Late last year, Morningstar head of consulting Anthony Serhan stated that since 1999, the boutique funds management industry has grown over 600 per cent in terms of assets under management.

He estimated the level of funds under management in boutiques is probably well over the $40 billion mark, which is about 5 per cent of the overall market.

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Serhan says it is hard to put a figure on the average size of a boutique.

“There’s any number of them out there now probably around the $500 million mark. There are a number of more established boutiques that now have several billion dollars of money under management. So it’s hard to put an average, but it’s probably around the $2 billion to $4 billion mark.”

Looking back on 2004, even though things improved dramatically at the big end of town, it appears the boutiques are still doing well. They are out performing benchmarks, attracting more money and new ones are still popping up.

Some boutiques, like Maple-Brown Abbott, have even gained so much in funds under management over the years the investment community has been forced to reconsider what a boutique actually is.

Boutiques were traditionally defined as small managers with relatively few assets under management.

According to research house Assirt, to pass as a boutique fund manager nowadays, you have to have a focused and simplified structure usually concentrating on one specific asset class and be partly or wholly owned by you or your partners and employees.

Nevertheless, the small assets rule still applies for most boutiques, with Assirt admitting the point at which a boutique manager is no longer classified ‘boutique’ is still a contentious issue.

This smaller size is characteristically sighted as one of the many advantages boutiques have over their institutional competitors, with smaller managers considered to be able to capture opportunities in the marketplace that may be missed by large managers, especially in asset classes such as small caps and hedge funds.

Also, according to Michael Triguboff, the managing director of up and coming boutique MIR, as a fund manager’s size increases, market costs incurred in trading transactions increase disproportionately, creating diseconomies of scale.

“The minnows, they can and so often do outperform the behemoths,” Triguboff says.

“You’d think a small company is just not going to compete against a large company. But in the funds management industry it’s all up-ended. A large manufacturer is not going to be able to compete with a small one.”

Assirt’s boutique manager report for 2004 adds that a boutique’s smaller size will allow managers to make investment decisions more quickly and buy and sell shares without the risk of moving the share price beyond the buy/sell target.

Full equity ownership also means boutiques are often run by individuals who will be directly affected by their decisions, increasing accountability.

And as boutiques are usually formed by one or two experienced fund managers who concentrate on one particular area of the market, they will often have more focus, with smaller staff numbers and less bureaucracy permitting less restricted decision-making.

“When there’s no third party non-executive directors, there’s no third parties involved in the business of funds management. You don’t want to have big brother who really doesn’t care about the funds management business making the big decisions,” Triguboff says.

Nevertheless, in the past year, some of the big institutional fund managers have still come up with excellent returns.

But despite good performance from the likes of AMP, BT and BGI, it was investment boutiques that continued to make the headlines — and the statistics are there to prove it.

According to Mercer Investment Consulting, in the year to June 2004, the average boutique manager outperformed the overall average manager by 1.3 per cent.

Over the three-year period to June 30, 2004, the average boutique manager outperformed the overall average by 1 per cent.

In the small caps sector, boutique performance was even better, with the average boutique outperforming the average manager by 3.8 per cent for the year.

Not surprisingly then, most of the newly formed boutiques or newly formed funds offered by boutiques in 2004 focused on Australian small caps.

According to research houses contacted by Money Management, there were fewer boutiques started in 2004 than the previous year.

However, the last 12 months have seen greater acceptance of boutique-managed funds on platforms and fund-of-fund line ups. The Advance multi-manager Australian small caps fund for example, which was launched in November last year, is made up entirely of three boutiques — Souls, MIR and Confluence.

In the platform arena, MacArthurCook’s Mortgage fund is now available on the Asgard platform and ING has added 452 Capital and Orion Asset management to its Optimix platform.

In November 2004, funds management giant Colonial First State announced it would add new boutiques including Perennial and Investors Mutual to its FirstChoice menu, as well as offering a new PM Capital Australian Share Fund and a geared 452 Capital Australian share fund.

As well as linking up with platform providers, boutiques are also increasingly forming alliances with other service providers.

Mercer Investment Consulting analyst Rashmi Mehrotra says boutiques are now more likely to outsource various functions to trustee groups and back-office providers.

“There’s an instant where a boutique manager sets up a product, but there’s also an instant when they outsource their distribution or marketing. But then there’s another type of boutique where they set up an investment capability but even the product and the responsible entity is outsourced.

“So that’s the starting of a trend in the boutique funds management industry to say ‘well, even that’s too hard, we’re pure investment managers, we can’t even set up a product’.”

Examples of some alliances include MIR using Equity Trustees and Investors Mutual, Orion and Armitage using the Treasury Group to act as their responsible entity.

In most cases, the alliances are formed to allow boutiques to focus on what they do best: make investment decisions.

However, it may not always be plain sailing for boutiques on the investment front.

According to Morningstar’s Serhan, it is the recent outperformance of small caps that turned things around for the boutiques.

He also says a lot of boutiques set up over the past few years seem to have a value tilt, and the last five years have been favourable to value as opposed to growth managers.

This is why Serhan says there could be a possible cooling down in the boutique fund management industry, especially if there is a decline in the performance of the current value market.

“If we look at the last year and you look at some of the stronger performers, certainly there’s a number of boutiques in there, but there’s also a number of large institutional names. Interestingly enough, over the last year it’s actually been the mid cap part of the market that has run just as strongly or stronger than the small caps part of the market,” he says.

Serhan says this does not mean boutiques have done poorly.

“I’m just making an observation that when you get a market where some of the large institutions or the large end of the market run, people will notice that and it will attract money back.”

According to Mehrotra, boutiques will continue to be strong into the future, no matter what the market does.

“For example, let’s look at Platinum. When it started back in 1994 there was a bull run and while the market was doing 30 per cent Platinum was only doing 15 per cent. Yes, it did underperform for a long time but 15 per cent absolute return was still pretty good. Did it get much money in? Probably. Now that it’s established, in the next bull run will it see any outflows? I don’t think so.”

She believes the proliferation of boutiques will not slow as there will always be experienced people working for institutional fund managers who want to break away and do their own thing.

This is why she and others don’t see any signs of consolidation in the funds management industry.

“Will there be consolidation? Probably not,” agrees Serhan.

“I’d say that’s because of the way the boutiques have structured themselves, when you talk about the fact that they have a lot of distribution through firms like your Colonial First States and they’ve outsourced most of their back-office functions, so if you like, their structure is fairly lean and mean.”

But for those boutiques that start to pull in more money than they can handle, Serhan has noticed an emerging trend: they are bringing out new product lines.

Specific examples include Investors Mutual’s new diversified value fund, which will invest in overseas as well as Australian shares.

Even Platinum, which already has several funds including an international fund, is launching two new funds — a health care fund and an Asian fund.

“Clearly the organisations or the people within these organisations have a business that they want to grow and where they have little possibility of growing in established product lines, some of them will look at new products,” Serhan says.

“It just goes to show that some of the boutiques are not too much different from the institutions.”