Is size the enemy of performance?

15 May 2020

Boutiques offer a smaller, single-focused investment firm when compared to institutional firms, which often allows for a tighter relationship with clients.

They tend to often operate from a single office with a smaller staff, operating products with fewer funds under administration than what would be accepted at a larger or institutional firm. 

However, despite their small size relative to institutional fund managers, they are just as well equipped to deal with market turbulence from the COVID-19 pandemic – if not in a better position.

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According to data from FE Analytics, within the Australian Core Strategies universe, the best-performing boutique fund in the Australian equities sector was Hyperion’s Australian Growth Companies which returned 9.31% over the year to 30 April, 2020.

This was followed by PM Capital Australian Companies (3.09%), CI Brunswick (2.95%), Bennelong Concentrated Australian Equities (2.44%) and Platypus Australian Equities (1.43%).

These figures compared to losses of 8.6% for sector.

Mark Arnold, chief investment officer (CIO) and managing director at Hyperion Asset Management, said being a boutique manager allowed them to maintain a long-term view during market turbulence.

“Adopting a long-term investment mindset is an important factor in achieving attractive compounding returns, requiring us to think more like business owners rather than being influenced by short-term market noise,” Arnold said.

“As a boutique, we are fully aligned with clients’ goals because we [Jason Orthman, deputy CIO and executive committee deputy chair] are both owners of Hyperion, and we only invest our personal savings into Hyperion products – we only ‘win’ when our clients win.”

Sophia Rahmani, managing director of Maple-Abbott Brown, said being part of a privately-owned boutique meant she had direct control over what actions the company took during COVID-19.

“We were very responsive getting everyone working from home and the team has adapted incredibly quickly,” Rahmani said.

“We can be very clear on where we are going and actually make longer-term decisions, so I am spending time talking to my board about where we should be investing for the future and what other efficiencies we can eke out of our business right now.

“We’re not watching our share price on a daily basis because we’re not listed, so we can actually take the time now to decide to invest more of our retained profit to build our business for the future.”

OPERATING A BOUTIQUE

Despite not having the headcount that institutional firms had, boutiques could still rely on outsourcing operational infrastructure, which allowed them to focus purely on the investment mandate.

Fidante Partners invested in long-term partnerships with boutiques to provide operational infrastructure, experience in asset management and a distribution network to help boutique managers focus solely on investments.

It partnered with managers at all stages, including ones starting out, ones growing new investment capabilities or channels, and ones considering how to maintain long-term value in an established firm.

John Burke, global head of Fidante Partners, said boutique investment managers benefitted from having an intense focus on a particular asset class or strategy.

“This specialisation means they have a high level of expertise and like any business where the management has significant ownership, they are driven by a passion for what they do and a high conviction in their ideas and processes,” Burke said.

“Boutique fund managers put their own money into their business and always invest personally in their funds. 

“This means they have as much at stake as their clients, and as both investors and business owners, they’re highly-committed to the long-term success of their funds.

“Boutiques also have a singular focus – investing – and are unencumbered by the bureaucracy and politics that can come with institutional investment managers.”

Maple-Brown Abbott, founded by Robert Maple-Brown and Chris Abbott 35 years ago, was one of the first boutique asset investment managers in Australia, and Rahmani was only the fourth managing director of the company since its inception.

“It means we only do one thing, which is investment management, we’re not a global asset manager with offices scattered around the world, but we do have clients around the world,” Rahmani said

“We’re a smaller firm that does one thing and that gives us a much closer alignment with our clients.

“We have a simple organisation structure; we don’t have layers of bureaucracy so we’re more nimble when it comes to making decisions.”

This was Rahmani’s first stint at a boutique firm so she was well-versed in the cultural differences between boutiques and the major institutional funds, having previously worked at Janus Henderson and Macquarie in Australia, Singapore and the United States. 

“Because of the nature of boutiques, there’s a closer alignment in culture and values in the team, and we can talk very simply about what our purpose is,” Rahmani said.

Mark East, chief investment officer for Bennelong Australian Equity Partners (BAEP), said a key difference was the fact that the people running the business had ownership of the business – and there’s no motivator like having equity or ownership in a business.

“The added advantage of boutique management is that the [investment managers] have a huge interest in performing well and they won’t be going anywhere,” East said.

“We’re nimble, we don’t have to go to investment committees – we make thorough decisions – but we don’t have to go through tiers of management to do so.”

NOT JUST AUSTRALIAN EQUITIES

Maple-Brown Abbott, Hyperion and Bennelong were all among the big boutique players in the Australian equities sector, but investors had options for boutique managers in other sectors.

Aoris Investment Management, which is based in Sydney, ran a $225 million Aoris International fund investing in global equities. With only one office, the firm demonstrated investing globally did not necessarily require a global network of offices. 

The Aoris International fund had returned 2.03% over the year to 30 April, while the global equities sector averaged 0.71% over the same period.

Stephen Arnold, founder and portfolio manager of Aoris, said a boutique ownership structure by itself did not guarantee a good or bad outcome, but it could have a material impact.

“Boutiques are often created and run by investment professionals, so investing is at their heart and soul,” Arnold said. “Conversely, asset management institutions are most often run by salespeople, so their DNA is product creation and selling.”

Arnold said the key for a boutique was not to become institutional as they grew.

“My observation is that boutiques are built by a serious investor around an area of genuine expertise,” Arnold said. 

“But over time they lose sight of their original mission and passion by creating new products and focusing on asset growth over performance.”

For Fairlight Asset Management, which launched its Global Small and Mid Cap fund in November 2018, it said a boutique was the “only model” that would allow it to run the fund with the focus and alignment it wanted. Over the year to 30 April, 2020, the fund had returned 9% compared to the sector average loss of 4.38% over the same period.

“Fairlight only offers a single fund to clients and all members of the team are also investors in the fund. Our focus is solely dedicated to finding the best investment opportunities in small and mid-sized companies outside of Australia.” Ian Carmichael, Fairlight’s portfolio manager and partner said.

Moving to the fixed income space, Daintree Capital ran two Australian dollar actively-managed fixed income funds, the Core Income Trust fund which returned 1.12%, and the High Income Trust which lost 1.66% over the year to 30 April.

Mark Mitchell, Daintree Capital director and credit portfolio manager, said very few boutiques ran passive management strategies and the firm held a strong conviction that passive management in fixed income made considerably less sense than in certain parts of the listed equity market.

Daintree was a finalist for the Emerging Manager award in the Money Management Fund Manager of the Year awards for 2019.

“Most passive fixed income products are managed against indices that have a long duration benchmark, so they perform well when interest rates get lower,” Mitchell said.

“The challenge with these types of strategies now is that interest rates are near historic lows; there is limited scope for interest rates to move too much lower. Therefore, managers need to be very active to look for other ways to add value beyond simply mimicking a long duration index.”

Being a relatively small boutique fixed income fund manager had the extra benefit of being able to invest into markets that were smaller but still offered good relative value.

“Some large asset managers can be precluded from investing in certain areas,” Mitchell said.

“Because if they purchase the asset in a size that is meaningful for their portfolio they may end up owning all the security on offer, turning it into a highly illiquid security.

“As the old saying in asset management goes ‘size is the enemy of performance’.”

Best-performing Australian equity boutique funds over the year to 30 April 2020




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