More boutique managers are setting up shop as they look to get away from the lack of individuality and constraints of larger institutional fund managers.
The theme of diversification and going against the grain in search of returns is not only rife in asset classes but also in what and how fund management firms are forming.
In a bid to get away from large institutional fund managers, more and more boutique fund managers have emerged, particularly within the smaller end market cap, according to Bennelong Australian Equity Partners.
Bennelong’s investment director, Julian Beaumont, said this increase in set-ups had come off the back of difficulties in the larger firms.
“A lot of the big institutional fund managers are focused on large cap, $6 billion plus, and they’re really struggling to differentiate themselves as there is more and more index hugging,” Beaumont said.
“A lot of it is the institutions are becoming just really mass market and undifferentiated but the boutiques can differentiate without the constraints of a bigger operation, which have public shareholders to answer to and are more focused on growing funds under management than providing a better performance, which is what boutiques can do.”
According to Zenith Investment Partners’ senior investment analyst, Justin Tay, there was a trend for new boutiques to partner with a dedicated incubator or distributor business to assist them.
“Quite often with newly-established boutiques, the big challenge is getting distribution and getting things off the ground. There are not many newly-established boutiques that go out on their own,” Tay said.
“The market is getting more competitive with distribution so having a dedicated business and looking after that side of things is certainly quite attractive for new boutiques looking to set up.”
Tay also said that investment teams within large organisations using a boutique type structure with a profit sharing agreement were also gaining popularity.
“Although it’s not strictly a boutique, it has got elements of a boutique structure within that. For example, Blackrock did that when they set up their active Australian equity strategy,” he said.
“The thinking there is to try and get the best of both worlds.
“The outcomes really depend on the quality of the people. The process and structures are the most important things for excess returns.”
Stepping away
As financial advisers stepped away from large planning groups, boutiques potentially had a bigger role to play, according to Montgomery Investment Management.
The boutique firm’s head of distribution, Scott Phillips, said boutiques were being seen as an important part in a lot of independent financial adviser value propositions.
“There’s a view that big brand names are safe and they don’t do too much away from index,” Phillips said.
“Whereas now the core thinking is that they’re trying to deliver investment excellence and not just, dare I say, more mediocrity in terms of the investment outcomes. So they’re really looking for investment managers with skill and [who] are able to generate a return outcome that is consistent with their philosophy.”
Montgomery’s chief investment officer, Roger Montgomery, said the industry would be seeing people inside bigger funds management firms leaving to set up boutiques, as the existing managers were capacity-constrained.
Fidante general manager, Cathy Hales, said the current volatile environment meant that the boutique structure would be attractive for advisers.
“Advisers look for the best quality investment teams they can find. I think in this current volatile environment, you want to be partnering with investment managers that have broad experience in different investment environments and they can manage through that,” Hales said.
“Boutiques are attractive to financial planners because they bring focus and specialisation that hopefully delivers a better outcome for their client.”
Alignment
Hayes noted boutiques prospered due to stronger alignment in values and outcomes, compared with larger firms.
“I’ve experienced firsthand the energy and passion within a boutique to delivering good investment outcomes to clients,” she said.
However, Pengana’s director of distribution, Damian Crowley said while alignment was important, boutiques needed support so that they could focus on managing money.
“We often have conversations with boutiques that have great performance but struggled to get money in the door and be profitable,” he said.
“You have to manage the business and the investment piece. You need the institutional approach.”
Fees
Montgomery said while it was frustrating for top-performing boutique managers to not be available on the big six dealer groups’ approved product lists (APLs) — (AMP, Westpac, ANZ, National Australia Bank (NAB), Commonwealth Bank, and IOOF) — his firm did not want to compromise on their fees to get on their lists.
“Those big dealer groups have a lot of overhead they need to maintain so they want to retain as much of the margin as they can and that’s commercial reality,” Montgomery said.
“We want to be able to give our clients consistency of performance. That means we need to hire the brightest and best, we need to pay them accordingly, and manufacture great returns consistently, and we don’t want any turnover of our staff.
“We want to maintain our margins and so our fees are unashamedly higher than our peers. All our returns are expressed net below fees and we’re still shooting the lights out.”
Phillips noted that firms could get blocked out in the Australian marketplace if they started out on a higher fee than the average manager.
“On an after fee basis you may well trump those managers that end up in the top quartile of post fee returns but because Australia has got such a heavy focus on trying to pay low fees, then I think some advisers are foregoing boutique managers that have a higher fee and after fee return,” Phillips said.
Montgomery said if businesses were paid the lowest prices, they would not be able to reinvest, and could go out of business.
“…then overseas companies come in and dominate the industry and charge higher prices and then there’s no one left to compete with them,” he said.
“It’s strange that our industry that has attracted some of the smartest people in the country and yet when it comes to fees they behave like amateur online retailers that cut fees over the top of each other.”
Read part two of this feature here: So you think you want to go boutique?
