PACKING A PUNCH

Niche firms may out­per­form oth­ers due to their in­vest­ment style or port­fo­lio con­struc­tion

Financial Mail - Investors Monthly - - Contents -

It’s never easy be­ing an out­lier, es­pe­cially if you’re a bou­tique, or small, as­set man­ager. The lack of scale, as mea­sured by as­sets un­der man­age­ment, places tremen­dous pres­sure on the abil­ity of such man­agers to be price com­pet­i­tive and ex­tend their reach into the mar­ket.

But once es­tab­lished, they have shown a knack for de­liv­er­ing what their cus­tomers most want: strong per­for­mance. This abil­ity to out­per­form could be mea­sured in the strong per­for­mance of bou­tique man­agers in Morn­ingstar’s an­nual unit trust awards.

Of the seven fund cat­e­gories, four were won by bou­tique man­agers in the event that was held ear­lier this year.

Win­ners in­cluded NFB As­set Man­age­ment, which won the top mod­er­ate al­lo­ca­tion and the best cau­tious al­lo­ca­tion fund cat­e­gories. Cen­taur’s BCI Flex­i­ble Fund took top hon­ours in the best flex­i­ble al­lo­ca­tion fund cat­e­gory, while Mazi Cap­i­tal walked away with the best SA eq­uity fund award.

The big chal­lenge for many in the bou­tique space is build­ing an un­der­stand­ing among clients of the rationale for a par­tic­u­lar in­vest­ment style or port­fo­lio con­struc­tion.

James Twidale, a port­fo­lio man­ager at 1st Fu­sion As­set Man­age­ment, says his firm’s longer-term fo­cus and wider di­ver­si­fi­ca­tion across as­set classes and ju­ris­dic­tions of­fers dif­fer­en­ti­a­tion in the Reg­u­la­tion 28-com­pli­ant fund cat­e­gories but can cause un­ease with in­vestors who may be swayed by short-term mar­ket or po­lit­i­cal volatil­ity.

The com­mu­ni­ca­tion of a dif­fer­ent in­vest­ment strat­egy and phi­los­o­phy is es­pe­cially dif­fi­cult when deal­ing with re­tail in­vestors who might not have a di­rect re­la­tion­ship with as­set man­agers be­cause they deal through a wealth man­ager or fi­nan­cial ad­viser.

“To com­mu­ni­cate our mes­sage about our phi­los­o­phy can be dif­fi­cult, be­cause peo­ple al­ways bench­mark bou­tiques against the big­ger guys,” Twidale says. “They love you when you beat the big­ger guys, but tend to pun­ish you in terms of new busi­ness flows when you do not.”

Twidale says the mar­ket is too fo­cused on rel­a­tive short­term per­for­mance mea­sures, which are a con­straint cre­ated by in­vestors and ad­vis­ers. 1st Fu­sion there­fore doesn’t bench­mark it­self against peers or mar­ket in­dices, but rather mea­sures it­self against its own bench­mark of CPI plus 2%, 3% or 4% in its lo­cal fund range.

“Those might be seem like rel­a­tively low bench­marks his­tor­i­cally, though we be­lieve global mar­kets are go­ing to re­turn sig­nif­i­cantly less in the next two decades than they’ve done in the pre­vi­ous two. We’re in a much lower re­al­re­turn en­vi­ron­ment struc­turally, so we’re set­ting clients’ ex­pec­ta­tions cor­rectly,” he says.

It is only nat­u­ral for in­vestors and ad­vis­ers to look at where they can ex­pect to get the best real re­turns. And de­spite the oft-re­peated global syn­chro­nised-growth story, lo­cal and in­ter­na­tional events con­tinue to un­der­mine any huge sense of com­pla­cency.

Al­ida de Swardt, CEO of RMI In­vest­ment Man­agers, says this cre­ates an op­por­tu­nity for bou­tique man­agers to of­fer their unique skills to the mar­ket. “Mul­ti­man­agers use bou­tiques for their spe­cial­ist ca­pa­bil­i­ties and par­tic­u­lar in­vest­ment styles,” she says.

“We’ve re­cently seen a shift away from multi-as­set al­lo­ca­tions to more spe­cial­ist man­dates. This shift has been good for bou­tiques.

“In our ex­pe­ri­ence, bou­tiques are very dis­ci­plined in their in­vest­ment pro­cesses and are far less likely to suc­cumb to ex­ter­nal busi­ness pres­sures.”

RMI In­vest­ment Man­agers has been build­ing up its af­fil­i­ate port­fo­lio of bou­tique as­set man­agers over the past twoand-a-half years, re­cently adding pri­vate eq­uity firm Ethos to its sta­ble. This ac­qui­si­tion has been done in part­ner­ship with Royal In­vest­ment Man­agers, which in it­self is a joint ven­ture with Royal Bafo­keng In­vest­ments.

“Our main fo­cus at the mo­ment is as­sist­ing our af­fil­i­ates with their growth strate­gies, as our model will prove its worth only if we can as­sist th­ese man­agers to reach the next level. It’s one thing to have the the­sis of why we are do­ing this and what we be­lieve in, and an­other thing to have the ev­i­dence to sup­port it.”

De Swardt sees scope to grow in­flu­ence across the value chain, with a par­tic­u­lar em­pha­sis on boost­ing di­ver­sity in the in­dus­try.

The ques­tion of trans­form­ing the in­dus­try is dealt with in greater de­tail in this edi­tion of

IM. While the fo­cus there is on cre­at­ing a more rep­re­sen­ta­tive in­dus­try, it is equally im­por­tant to en­sure sus­tain­abil­ity by of­fer­ing re­tail and in­sti­tu­tional in­vestors real choice.

The per­for­mance of th­ese niche play­ers shows that this is hap­pen­ing, and the sup­port from the likes of RMI In­vest­ment Man­agers and 27Four In­vest­ment Man­agers will stand bou­tiques in good stead.

We’ve re­cently seen a shift away from multi-as­set al­lo­ca­tions to more spe­cial­ist man­dates. This shift has been good for bou­tiques

Al­ida de Swardt … boost­ing di­ver­sity

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