Outbreak of boutiques worrying
It’s all happened before
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
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.