Matthew Smith, Independent Financial Advisor, 22 January 2001
Boutiques have already earned their stripes in the wholesale market. For instance, five years ago Mercer Investment Consulting recommended four boutique managers on its Australian shares specialist fund list. And in 2000 the same list recommended 13 boutique managers. Although only a few of the retail research houses have recommended boutiques to their clients as yet, institutions have recognised the demand in the retail market for access to boutique managers.
Challenger has flagged a new project involving boutiques that is expected to launch in the first quarter this year - the details of which are yet to be disclosed. Also St George is set to launch a new entity this March called Ascalon Capital Management (originally titled Advantage Capital Managers), designed to fund start up boutique managers. Ray De Lucia, Ascalon chief executive says the entity, that intends to invest in, and substantially support emerging fund management organisations, was based on the idea that a growing funds management industry in Australia requires a diversity of fund manager organisations. He believes the industry's concentration is reducing the opportunity for both wholesale and retail customers to have choice. "Therefore the successful emerging fund managers will rapidly grow funds under management this year because they are able to offer a viable and vibrant alternative to the existing traditional players," he says. "There has been a fair bit of turmoil amongst institutional fund managers in recent months with poor performance and key investment staff moving on.
"Boutique managers have become top performers over the year (2000) because it is proven that innovation generally comes from small or emerging businesses and the larger institutions are generally followers rather than leaders."
Although De Lucia says it is too early to disclose any detail of the entity before its launch, he says there are already a number of key institutions both as investors and fund managers lining up to be involved in Ascalon. "Obviously I see 2001 as a very big year for boutiques," he says. "2000 was a period of massive consolidation, and given the lack of diversity of players, the concentration of business, and the size of the superannuation pool in Australia; all these things are spurring a move to the emerging fund managers."
Last Year, AM Corporation launched a fund that invests purely in boutique fund managers. Deon Joubert, AM investment committee manager says AM, at the time, was seeking to differentiate its product in the marketplace. He says boutique managers are primarily focused on returns. "They don't care about funds under management, its not that important to them, their business risk is in their performance numbers and not in losing FUM," he says. "Secondly, most boutique managers have been through the mill of various institutions... being able to start with a clean sheet of paper is a very powerful concept. They are able to say; lets forget what the larger managers and consultants believe to be the traditional boxes, forget about value and growth, and lets go after performance."
Joubert is convinced that 2001 will be the year of boutique. In fact, Joubert is planning to launch his own boutique fund management business in February this year called Absolute Capital in partnership with AM investment committee chairman, Mike Devlen, that will specialise in absolute return and hedge fund type strategies.
The major risk associated with selecting a boutique manager is the resource risk, or its capability to go the distance. Russell Clarke, William M Mercer head of investment research delivered a paper on the subject at a seminar last year. He says boutique managers, in general, have more experienced staff, are more streamlined and efficient in their decision-making processes, making them better at reacting quickly to changing market conditions than larger managers. But at the same time, he says, the disadvantages include an implied extra risk - they generally lack the investment resources and support staff of larger funds, are unable to obtain the lower brokerage rates of larger funds and tend to lack systems back-up facilities.
Clarke says the risks also include "greater key person risk"; while managers have teams of analysts and talented portfolio managers, boutiques generally have one or two "star" personnel. He says the damage done to the fund with one of these few staff departing is much more concentrated than in the case of a large manager.
Clarke says boutiques have become popular over the past 2 or 3 years in the wholesale market. "The reason is most boutiques are looking for a small number of large accounts; boutiques have no pooled funds making them hard to sell in the retail market, and in the retail market, brand is important, making wholesale easier for boutiques."
It is no secret that the retail rating houses are less than enthusiastic about the trend towards boutique managers. At an FPA lunch in Sydney last year, Brett Sanders, ASSIRT managing director questioned the financial backing of boutiques. He said under financial pressure, it is nice to know that a manager has the financial resources to make decisions that are in the best interests of the client.
Stephen Van Eyk, Van Eyk Research director says he has never recommended a boutique manager to his clients. The reason he says is the resource and portfolio size risk criteria he (and other research houses) use to screen managers knock boutique managers out of the selection process. "The last few years, the risk of boutiques haven't been justified because the higher returns haven't been there, and clients haven't suffered by not being in boutiques to date.
"There seems to be an air in the last few years that boutiques have a place in a portfolio because of the mix or blend they have with other larger managers, and I am surprised that some of my competitors have recommended boutiques," he says. Although Van Eyk admits that Ausbil (Dexia) will be worth a look sometime this year because he says it has reached a significant enough level of resources and FUM to be considered.
Ian Macoun, Perennial Value Management managing director, started up his own boutique operation with (then) BT's Mike Crovelly 18 months ago. He says being labelled a boutique is all about the working environment and not necessarily size. He says, for instance, a boutique will have significant ownership by the people that work there, strong focus on investment management and no distractions by broader institutional issues.
Macoun says, in a boutique environment, people's rewards can be structured more long term and directly related to the outcome they deliver for their customers. "Typically funds managers working for institutions get annual bonuses. We think annual bonuses are dumb in this business."
Macoun is positive about the year ahead for boutique managers. He says 2001 will be a year when some of the boutiques that have already established become more widely known and accepted. He says the retail market wants investment returns every bit as much as the wholesale market, and if boutiques are going to be successful for the wholesale market one would assume they should also be successful for the retail market. "...as more and more pressure comes in the retail area for investment performance, increasingly the big institutions will put their money out to boutique managers."
But why hasn't this relationship progressed further? The answer is in the response of the gatekeepers. Asset consultants have been faster at adopting boutiques, whereas in the retail market, the big research houses have tended to be more conservative.
Research by funds management marketer, Shed Enterprises confirms there is growing institutional support for boutiques. However, Lachlan Douglas, Shed associate says while smaller managers may offer a diversification benefit investors still need to be sure the additional risks are adequately rewarded. "Boutiques have a reputation for being nimble, flexible and better performers, but the allocation of assets to smaller managers has been somewhat sporadic to date," he says. "Boutiques that are able to garner institutional support are still only those able to demonstrate a transparent, consistent, risk-aware process, and a business structure that can stand up to scrutiny."