As the financial services industry heads into a new year, a backward glance at 2003 shows that while it may have been the Year of the Ram, it was also the Year of the Boutique Manager.
Since this time last year the market has continued to be filled with small, niche, focused funds management groups often working below or even off the radar of many advisers and most investors.
But as their larger, more institutional competitors find it harder to generate outperformance and move quickly in the market, boutiques are becoming better known and used by financial advisers and their clients.
While the market offers a wide range of managers it is still a fluid environment with even the term ‘boutique’ subject to a wide range of definitions and uses.
Assirtresearch analyst Jody Fitzgerald says a boutique manager is typically defined by a number of criteria:
• a limited size of funds under management that is usually capped;
• a focus on a single or limited set of asset classes;
• personnel have ownership stakes in the business;
• executive staff have prior existing relationships with other staff and partners and a background in larger funds management groups; and
• the manager outsources all non-investment management functions.
However, if this criteria is strictly applied, a number of fund managers could be considered to fall outside the boutique category, such asMaple-Brown Abbottdue to its growing funds under management, according to Fitzgerald andvan Eyk Researchmanaging director Stephen van Eyk.
However, van Eyk says the criteria can’t always be strictly applied because in all other respects Maple-Brown Abbott fits the boutique mould.
“It is hard to pick every boutique manager in the market because there are some managers who run their operations like a boutique but have high funds under management or an ownership stake held by an institution,” van Eyk says.
“They do tend to be small and without the bureaucracy of larger competitors, they charge on a similar basis to those competitors but are there for those planners and investors who want a manager with a different risk position.”
And it is this tendency to generate outperformance through willingness to make plays other managers won’t that has driven the success and increasing profile of boutique and specialist managers.
“We have had boutiques with us for a long time but then nothing really took off for five years. However, in the last three years there has been rapid growth,” van Eyk says.
The reason for the growth, according to van Eyk, is a departure by advisers from models of investing that had a core of large-scale managers. Rather, advisers have taken on portfolios made up of a range of managers, particularly those that could add outperformance, and are reviewed, and often replaced, on an annual basis.
“The advent of fund-of-funds and access to products through platforms has also made it easier for smaller managers to get their name to the market without infrastructure and marketing costs,” he says.
“If they have a good reputation from previous roles and a good process and can get on a master trust or wrap, then they are out there attracting inflows, and with advisers using a range of platforms they have even more exposure.”
With these low barriers to entry, Fitzgerald says boutiques have also received a boost due to consolidation at the large end of the funds management market and the changing investment environment.
“Boutique managers are more passionate and feel they perform better because they are not tied to a strict mandate or structure that does not allow them to deviate from their competitors. Yet their rise has also coincided with a downturn in performance by larger managers with boutiques tending to shy away from investment styles but concentrating on bottom-up stock picking,” Fitzgerald says.
And stock picking seems to be where it is at for boutiques, with the majority focusing on equities investment either with or without an absolute return strategy, and for good reasons — the returns and hence the fees are higher than any other sector.
“Boutiques have nothing more to offer but outperformance, so they seek where they can add the most value and for many it is Australian equities,” Fitzgerald says.
Is there a long-term future for boutiques past the trend favouring them at present?
Those who have had links with larger managers in the past may find it easier than those starting operations from scratch.
But, van Eyk says many managers have set themselves up as value managers in a value cycle, and even the recent swing against value has not been too strong.
“Their success has been driven by the performance of the value market, whether they can continue to do the same in the future has yet to be seen.”
