Many boutique asset managers have considerably outperformed their larger institutional rivals and are now competing price wise on the same level, believes Windall Bekker, partner at Rezco Investment Consultants.
Bekker says that although the term ‘boutique asset management’ historically invited expectations of exclusivity accompanied by higher fees, this is no longer the case. “Over the past decade, we’ve seen a number of boutique asset managers entering the fray and outperforming their larger institutional rivals at lower risk levels, while charging similar fees to institutions. The investment community is starting to take notice of boutique asset managers’ funds and their ability to generate outperformance, or alpha, for their clients, while at the same time being able to better protect clients assets in market downturns,” he claims.
Nimble boutiques
As the assets under management for the boutique managers are generally smaller when compared to the big institutional managers, they have a competitive advantage in being able to actively manage their portfolios by taking high conviction positions or offering downside protection argues Bekker. “Boutique asset managers are able to achieve these superior returns for a number of reasons. The size of boutiques gives them a considerable performance advantage over larger, more bureaucratic institutions, which take longer to buy into and sell out of a position. Investment decisions at boutique asset managers are grounded in high quality, independent, fundamental research.”
Bekker adds, “Boutique fund managers are also solely focused on risk-reward decisions, resulting in alpha-generating returns. This is in contrast to larger institutional fund managers who also have to focus on non-investment factors – for example, making a wrong decision that could result in substantial career risk for the manager. This sometimes leads to larger institutional fund managers charging clients active manager fees, when in fact they are actually tracking their benchmark’s index.”
Looking for retirement returns
Bekker says the past few years have seen most retirement funds not reaching their investment objectives. “As a result, trustees and consultants have started allocating assets to boutique managers in order to generate the outperformance that will enable them to reach the fund’s investment objective that will provide members with the desired replacement ratio on retirement.”
Bekker adds, “Investors in boutique managers are also becoming increasingly aware that there is less business risk when placing assets with boutique managers, as most boutique managers have invested their own personal assets into their funds. The risk of a manager leaving is lower than at an institutional manager, as boutique managers generally also own big equity stakes in their companies.”
Bekker says a good case in point would be the constituent funds that make up the top 10 performing Domestic Asset Allocation Flexible category over the last year.
“All ten of these funds are boutique asset manager funds who collectively have produced an average return of 28.8%. Similarly, of the top ten performing funds in the Domestic Asset Allocation Prudential Variable Equity category over the last year, eight are boutique asset managers. In this unprecedented time of flux in the asset management industry, investors are increasingly looking to boutique asset managers that are more flexible and able to implement investment decisions faster because of their smaller asset pools and quick decision making,” concludes Bekker.