Out­break of bou­tiques wor­ry­ing

It’s all hap­pened be­fore

Finweek English Edition - - Creating wealth - BY SHAUN HAR­RIS shaunh@fin­week.co.za

IN COM­ING MONTHS in­vestors are likely to be flooded with ar­gu­ments, and much is likely to come from the as­set man­agers’ mar­ket­ing ma­chines, de­bat­ing the mer­its of big ver­sus small in­vest­ment man­agers. It’s an old de­bate that’s go­ing to be re­fu­elled partly in re­sponse to Old Mu­tual’s de­ci­sion to break its as­set man­age­ment busi­ness into 12 “ bou­tiques”, but more widely it’s a clas­sic sign of a bull mar­ket that’s prob­a­bly near the top.

From a sell­ing per­spec­tive, there are valid ar­gu­ments for both large and bou­tique man­agers, but the pen­du­lum has swung to­wards small man­agers. For good rea­son too, the bou­tique man­agers that have sur­vived have gen­er­ally per­formed very well.

Those that sur­vived. There’s a les­son for lo­cal in­vestors here. About eight years ago a num­ber of new bou­tique man­agers were be­ing launched, for rea­sons sim­i­lar to why there’s a grow­ing num­ber of bou­tiques spring­ing up now. Tal­ented fund man­agers work­ing for big in­vest­ment houses re­alised they could prob­a­bly make far more money on their own. More im­por­tantly, the chance to in­vest as they saw best rather than fol­low a re­stric­tive man­date or house view ( most large as­set man­agers had a house view then, since ditched) was ap­peal­ing.

But the move to bou­tiques then was also a symp­tom of the mar­ket, run­ning hard to­wards the end of the last decade and filled with theme i nve s t - ing and much hys­te­ria about TMT stocks, the In­ter­net and the “New Econ­omy”. It was dif­fer­ent this time, and it was easy to make money. In­vestors piled in, and fi­nan­cial ad­vis­ers, un­re­stricted by the FAIS leg­is­la­tion they face now, were do­ing out­ra­geous things – putting el­derly wi­d­ows’ money into tech­nol­ogy funds.

We all know what hap­pened in 2000. Many of those bou­tique man­agers ( and some large ones as well) are not around any more. I’m not sug­gest­ing we’re head­ing for a sim­i­lar melt­down – though I also feel our mar­ket is at testy lev­els – but the sud­den rush to be small is wor­ry­ing.

How­ever, as with the large man­agers, it’s re­ally a case of the qual­ity and con­vic­tion of the in­di­vid­ual fund man­ager. There are very good fund man­agers at both the large and small as­set man­agers – the dif­fer­ence is that the good small man­agers of­ten have more space and free­dom to ex­er­cise their tal­ents.

For the in­vestor this car­ries a bit more risk. Apart from the ob­vi­ous that a small com­pany might find it harder to sur­vive a sharp eco­nomic down­turn, it also leaves the in­vestor re­liant on just one in­di­vid­ual, or a small team.

Ev­ery fund man­ager will get it wrong at some stage. A man­ager at a large house has the or­gan­i­sa­tion, bal­ance sheet and other in­vest­ment pro­fes­sion­als to bail him or her out. The small bou­tique man­ager may lack much of

this.

But the higher risk – and I don’t be­lieve it’s that much higher so as to be a con­cern – car­ries the ex­tra re­ward. A good bou­tique man­ager can in­vest un­re­strict­edly. And they own the busi­ness and of­ten have much of their per­sonal money in the fund they run.

This also means, as so many small man­agers tend to be con­trar­ian and are al­lowed to be so at a bou­tique, that there will be times, of­ten long pe­ri­ods, of un­der­per­for­mance. That hurts, but a bou­tique owner- man­ager will en­dure clients with­draw­ing funds and new in­vest­ment dry­ing up.

The fi­nal out­come is of­ten out­per­for­mance that makes up for ear­lier un­der­per­for­mance. In­vestors in bou­tiques must re­alise this. There’s no easy way to choose a fund man­ager, but best is to un­der­stand the man­ager, un­der­stand what he or she’s try­ing to do, and if you agree, stick with them through the lean times.

I’m not sure large as­set man­agers will al­low tal­ented fund man­agers this sort of scope. That’s why I ques­tioned last week whether what’s now Old Mu­tual In­vest­ment Group SA’s ( Omigsa) de­ci­sion to break the large house up into bou­tiques re­ally con­sti­tuted bou­tiques.

Omigsa has pointed out to me that the latest move is just part of “ a jour­ney” to­wards spe­cial­i­sa­tion that started back in the late Nineties, list­ing a num­ber of spe­cial­ist funds set up over the years. They say that last year nearly 20% of what was then Old Mu­tual Fund Man­agers’ as­sets un­der man­age­ment were run by spe­cial­ist in­vest­ment teams.

That’s fine, and I’m not try­ing to be overly crit­i­cal of what Omigsa’s do­ing. What I do ques­tion is whether it will al­low in­di­vid­ual fund man­agers com­plete free­dom to in­vest as they be­lieve. That’s what hap­pens at a true bou­tique, and many bou­tique man­agers are not spe­cial­ists in one style or as­set class. And that’s why I be­lieve they pro­vide bet­ter per­for­mance than the big guys over time.

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