The battle to beat the benchmark
Since the introduction of managed funds in the early 1980s, fund managers have had to face the challenges of share market (1987), property market (1990) and bond market (1994) collapses. Not all managers survived such calamities, yet the industry continued to grow.
Some would argue that during the last 15 years, Australian fund managers have been blessed with a fortuitous set of circumstances, including share market appreciation of 85 per cent, compulsory superannuation since 1983 and an extended fall in bond yields.
Certainly, the second half of the 1990s saw strong share market returns and fund managers, especially those with a growth-oriented investment style, produced double-digit returns.
During this time, financial advisers and their clients gave their support to big brand managers who experienced massive growth in market share and pool sizes. Colonial First State, for example, now has over $7 billion in their Wholesale Imputation Fund alone.
So what has changed? The collapse of technology stocks (namely the tech wreck during the March quarter 2000), a correction in the US and anticipated rises in interest rates are just some of the factors weighing down share market returns.
Additionally, it is now certain that some of the big brand managers who benefited most from investor support during the 1990s are constrained, by weight of money and other reasons, from outperforming the market.
There is now a proliferation of boutique Australian equity managers as the industry starts to recognise that the manufacturing (the actual managing of the money), administration and distribution of investment services can be separated. Several master trusts have now included boutique options on their product list and Challenger has introduced a fund-of-fund option giving retail investors exposure to specialist managers.
Finding a single definition for a boutique manager is difficult but most agree on a few key points:
equity for key staff members;
funds under management (single asset class) of less than one to two billion dollars;
specialists — investment management is the sole focus of the business; and
smaller yet more highly focussed investment teams compared to the larger brand managers.
John Murray, managing director of Perennial Value Management (Perennial Value is part of Perennial Investment Partners, IOOF’s wholesale investment manager), believes that apart from their size, boutiques are different from brand managers such as Colonial First State, BT and AMP in their corporate structure and greater commitment to providing returns to investors.
“The big brand names have a number of operations and funds management might not always be a priority,” Murray says.
“At Perennial, staff hold equity in the business. That aligns the interests of staff with the interests of investors. There is no such thing as an annual bonus at Perennial, whereas they’re par for the course at the big companies.”
Assirt’sBoutique ManagersReport(January 2002) compared the performance of several popular brand name managers with boutique managers.
The study revealed that, on average, boutique managers have outperformed the brand managers (over 12 months to January 2002) by more than five per cent in the Australian share sector. Results in the small companies sector were even more compelling. Over the 12-month period, the boutique mean return was 21.7 per cent compared to 8.8 per cent returned by brand managers in the same sector.
John Parrish, former head of research at Assirt, said that strong performance has to be a priority for boutique managers.
“A larger manager’s value proposition is its brand name and reputation. They operate under large financial umbrellas and are able to compete aggressively within the market to attract a significant portion of the industry’s funds flow,” Parrish said.
“At the other end of the spectrum, the value proposition of the smaller boutique managers is higher investment returns. They don’t operate under large financial umbrellas, therefore their ability to attract funds inflow, at least initially, usually relies on impressive investment performance.”
Van Eyk Research also recently carried out a survey analysing the qualities of boutique and brand managers. All nine boutique managers met their two-year excess return targets, while only 52 per cent of brand fund managers met their three-year excess return targets.
Van Eyk found that boutique managers hold less stocks and therefore demonstrate higher research conviction.
“Boutique managers are having more of a go. They’re implementing their research and staying at the top end of the tracking error,” said Stephen van Eyk, managing director of van Eyk Research.
Having made a decision to introduce some boutique managers to portfolios, the challenge for financial advisers will be to provide their investors with access. At this point, many boutiques do not have either retail or wholesale prospectuses. Many may choose to participate in the retail market only by achieving a presence in fund-of-fund type structures.
Mark Knight is the head ofretail investments IOOF/Perennial.
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