Boutique fund management firms can offer lucrative rewards for investors, but first some key questions need to be asked, writes Cathy Hales.
With the ASX200 returning more than 15 per cent in 2013 and many active fund managers significantly outperforming, boutique funds management firms are presenting enticing opportunities for savvy investors.
What are the key questions you need answered before recommending your clients invest in a boutique manager’s funds?
1. Is performance demonstrated and repeatable?
The first criteria on every investor’s list should be how the manager has delivered in terms of investment performance for the risk taken, and is this performance repeatable?
A transparent track record with clear process steps to achieve those results is essential – put simply, if you can’t understand it and feel confident it will perform, your clients shouldn’t be investing in it.
Once invested, regular and transparent communications on how your client’s investment is performing, relative to the objective of the strategy is key.
If your manager is not communicating clearly how their returns have been delivered and what conditions are likely to support or detract from the returns your clients might receive, it may not be the right strategy for their goals.
2. Is the manager free to focus?
Investment talent is key to a boutique fund manager’s success. What they have done to achieve their track record and reputation as a money manager is, however, only part of what is required of a manager to lead a funds management business.
Quiz the portfolio manager on what support they have to manage all the business issues that can distract from managing your client’s money – legal and compliance issues, operational issues, financial management of the company etc can all take their toll and hamper the ability to deliver investment performance in a boutique environment.
A start-up business experiences many pressures – will it have the finances to withstand a number of years of slow growth? What if something in the back office goes wrong?
How will the portfolio manager react if a senior team member decides to leave?
Operational processes, team continuity, compliance issues, reporting and client service are all important to meeting your client’s needs.
Mistakes and poor processes can cost money for investors and the business and often require experienced team members to find the right solution.
How will a small group of investment staff who have spent their careers managing money – not businesses – deal with these challenges?
An experienced business partner can help, handling activities that are outside the investment manager’s control and giving them the support that’s needed to be top of their game.
3. Are they over-extending?
A key part of the appeal of a boutique investment manager is focus. Focus on what they are skilled at and focus on a narrower range of investment strategies than you may see from a large, diversified financial institution.
The road to achieving profitability in a boutique investment firm is very difficult. It can be tempting for managers to try too hard to attract new business by offering a wider range of products and strategies to investors.
Too many options created early in a business can introduce higher costs, complexity in business management and ultimately, distract the key investment staff from focusing on what they are most skilled at.
The price for your clients can be an unsustainable business that doesn’t achieve a profitable size in any one area, ultimately struggling to compete and survive in today’s highly competitive world.
While boutique investment managers are often at a leading edge of investment strategy, nimble and unburdened by bureaucracy, there are many elements to get right in designing and managing a successful boutique investment firm.
Identifying portfolio managers who understand and are committed to delivering what your clients want from an investment strategy is key – and drilling into whether the manager has all the skills to ‘go it alone’ or when they need an experienced partner to carry the load in running a business is the other.
These two factors can make the difference between success and failure on the path to good investment decisions and a sustainable boutique fund manager for the long term.
Cathy Hales is general manager of Fidante Partners.
