Boutique fund managers find the best of both worlds
The emergence of new boutique replicas within the safety of institutional structures mean fund managers can enjoy the benefits of boutiques without the headaches. Lucinda Beaman reports.
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He has spent the best part of two decades with Perpetual pre-empting the events that will see a company’s share price soar or plunge. The fact that Perpetual’s star stock picker, John Sevior, became a market mover himself late last month has once again highlighted the need for institutions to continue to create boutique structures within a bigger brand.
The uncertainty over whether Sevior will stay or go when his six-month sabbatical ends in December this year was at least partly, if not largely, responsible for a sudden fall in Perpetual’s share price late last month – a drop that was significant enough to prompt the Australian Securities Exchange to ask the company to ‘please explain’.
The man responsible for Perpetual’s $6.1 billion Concentrated Equity Fund could be forgiven for getting itchy feet, having spent almost 18 years with the group – and the last 11 at the helm of its Australian equities capabilities. Perpetual has had its fair share of painful farewells – including with Peter Morgan as he left to set up 452 Capital in 2002, taking with him more than $2 billion in funds under management (FUM), and with Anton Tagliaferro, who went on to establish the highly successful Investors Mutual.
Of course, Perpetual isn’t the only one. The former managing director and head of equities for UBS Global Asset Management, and highly respected investor, Paul Fiani, had the last laugh after leaving UBS in 2007 after his rejection of a private equity bid for Qantas. He bounced back with boutique Integrity Investment Management, a company owned entirely by Integrity staff and boasting several billions in FUM.
It’s taken a while, but most of the institutions have now learnt the lesson.
National Australia Bank and Westpac (via Ascalon and the listed BT Investment Group) have ramped up their boutique incubator business and partnerships in recent years. Challenger’s boutique stable has been gaining significant traction. The group’s FUM is expected to hit $15 billion in this year’s end of financial year results on the back of recent additions, including Alphinity Investment Management, Bentham Asset Management and Merlon Capital Partners.
Standard & Poor’s head of fund research, Leanne Milton, said at least some of the mainstream managers had made “significant progress in replicating some of the characteristics of boutiques in terms of incentives to retain their key stock pickers”.
“Having said that, there’s still a high prevalence of boutiques among our four and five-star rated small cap managers in particular,” Milton said.
Admittedly, staff retention has been less of a headache for mainstream managers in recent years, with a stagnant investment environment stifling the oxygen of start-up capital and inflows for new investment businesses – particularly those wanting to stand without an institutional backer.
Despite the difficult environment, most boutiques have stood their ground.
The most significant boutique fund closure in 2010 was that of Peter Morgan’s 452 Capital. The $3 billion manager was hit by personal, rather than financial, challenges and was later taken over by Integrity Investment Management and Colonial First State’s Australian equities team.
Another group that disbanded was QIC’s Australian equities large-cap team, which Milton described as an in-house boutique.
Small cap manager Atom Funds Management was rolled into Eight Investment Partners in March this year, while in 2010 Souls Funds Management was sold to Treasury Group, and later rebranded as Celeste, with the investment team having majority ownership.
Lonsec head of ratings, equity and property managed funds, Paul Pavlidis, said some of the financially weaker boutiques had been shut down, acquired or merged. He pointed to examples including Patriot Asset Management, which was acquired by Ironbark Asset Management in 2010, and its sister company Patriot Managed Accounts, acquired by OC Funds Management. Australian-based international equities manager TechInvest also closed its doors last year, while Cannae Partners, led by Hugh Giddy, merged into Investors Mutual.
Ones to watch
The most high-profile new boutique is Avoca Investment Management, the Australian-equities small-cap manager established by former UBS portfolio managers John Campbell and Jeremy Bendeich. The pair left their roles as portfolio managers for UBS’s Australian Small Companies Fund in April this year and, after a month’s break, emerged with Avoca, of which they are the majority owners. They took with them another UBS team member, Michael Vidler, and gained additional backing via their partnership with boutique incubator, Bennelong Funds Management.
In August last year, ING’s former lead portfolio manager, Sinclair Currie, moved to Challenger. In January this year, he launched a new boutique for the group, NovaPort Capital, alongside co-principal and portfolio manager Alex Milton and analyst Lachlan Hughes.
Another relative newcomer is Alphinity Investment Management. Alphinity was born out of a close-knit team of former AllianceBernstein analysts who left their former employer and established the boutique, also within Challenger’s stable, in July last year. Alphinity’s principal and portfolio manager, Johan Carlberg, took his entire team with him, ensuring the boutique had a smooth transition where ratings were concerned.
The high number of managers jumping ship to start boutiques has certainly slowed. But a continuing trend of consolidation among the industry’s bigger players may be the precursor to more boutique managers appearing over the next year, Milton said.
She pointed to the three boutiques to emerge following the Credit Suisse and Aberdeen merger in 2009, as well as the launch of Vinva Investment Management following the BlackRock and BGI merger.
Both Milton and Morningstar’s Tim Murphy agreed that the ones to watch over the coming six months will be the managers affected by UBS’s acquisition of the ING Investment Management, one of the biggest independent investment managers in Australia, with the deal expected to close in the fourth quarter.
With Sevior’s recent comments and the creation of the new UBS/ING investment giant in mind, researchers agree 2011 could again see some big name boutiques opening their doors. Whether or not institutions will retain a slice of the pie remains to be seen.
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