Alpha decay - teething problems for boutiques

Fund managers will find it increasingly difficult to generate returns for their investors, and larger, more established managers are likely to be the ones struggling to perform, a leading investment consultant has claimed.

Speaking at the Investment and Financial Services Association (IFSA) annual conference yesterday, Intech chief executive Michael Monaghan said the increasing volume of funds in the Australian equities market, currently around $200 billion, means fewer managers will outperform their benchmarks, particularly after fees are deducted.

Monaghan said that boutique fund managers are more likely to achieve alpha returns because they can “avoid the conflicts around business growth versus sustainable performance”.

However, he added that boutiques tend to achieve alpha returns early after their inception.

Monaghan referred to a recent survey of 75 fund managers by KPMG which showed that alpha decay usually sets in after a four-year period.

The research showed outperformance of 9.4 per cent for boutiques compared to 4.9 per cent of all managers surveyed in their first year of operation.

This fell to 1.7 per cent for boutiques and 1.3 per cent for all managers after four to seven years.

Monaghan said investors should consider moving funds while the manager is still performing well.

He said alpha decay is generally the result of increasing funds under management, waning passion of the individuals involved, poor strategy and “lack of definition of the end game”.