Known to industry insiders as the 'boutiques boom', the late nineties through to the late noughties saw the emergence of a number of independent, boutique specialist investment management firms that promised to have a competitive edge over the bigger institutions.
Often established by star fund managers who left institutions to go solo, the benefits of boutiques were thought to be obvious - expert fund managers set free from the bureaucracy and demands of institutions, allowed to focus on exactly what they did best - investing. Because the majority (or all) of a boutique is privately owned, often by the staff or principals, there was no institution to hide behind; the success of the boutique was linked irrevocably with the end investor - creating an alignment that meant the best outcome for everyone.
"Asset managers are typically significant investors in their own fund, which means they share their investors' objectives," Jarrod Brown, CEO of Bennelong Funds Management, a 100 per cent privately-owned investment funds management group with more than $3 billion in consolidated funds under management (FUM), says.
"Boutique asset management teams work in an environment totally focused on delivering quality investment outcomes, filtering out the distractions that can occur in the big institutions."
But the key benefit to boutiques, according to Brown, is that staff retention is higher. This is often because key employees have an investment in the firm's success, which gives the fund manager added incentive to achieve.
Morningstar Australasia co-head of fund research Tim Murphy agrees.
"As an individual fund manager in an institution there's a safety net in terms of salary. When it's a boutique, it's all you - you can make lots or none at all, depending on your performance and ability to raise assets," Murphy says.
The multi-boutique model
Gaining traction in recent times is the multi-boutique or incubator model, where boutiques have the minority backing of a partner such as a bank, institution or dealer group. The arrangement has been described as a win-win for both because the partner can help manage the administration and distribution, allowing the fund manager even more time to focus on investing.
And because the minority partner usually has a stake in the business, interests are again aligned - both rise and fall with the boutique's performance, just as the client and the fund manager's performance is aligned. The boutique model's inherent incentive to achieve is often a key motivator for institutions to get in on the boutique action - and partnering with or backing boutiques that are part owned by staff is a good way to retain talented staff who might otherwise have gone on to establish a 100 per cent privately-owned boutique of their own.
On the flip side, it's all very well for talented fund managers to wish to become masters of their own destiny with a boutique of their own, but securing seed funding is not necessarily easy. A minority partner can help overcome some of the barriers to entry that boutiques face when trying to enter the market - including investor expectations for robust infrastructure (which can be expensive), a minimum starting amount of FUM in order to attract investors (which can be hard to get), and compliance and regulatory costs (which can be a complex, time-consuming process). And access to the financial backing of an institutional partner can provide the boutique with more credibility and less perceived business risk when it comes to obtaining all-important ratings and approvals from research houses.
Ian Macoun, the managing director of long-term multi-boutique firm Pinnacle Investment Management, says that for all of these reasons there is no question that multi-boutique or incubator models are on the rise. In addition, Macoun says the global financial crisis (GFC) only made the incubator model even more highly regarded.
"As valuations dropped post-GFC, economic pressure increased and institutions reacted by asking fund managers to find ways to reduce costs - that's the last thing you want your fund manager to be worrying about," he says.
"Also, some stand-alone boutiques really struggled during the GFC. That's when people really began to understand the benefits of the multi-boutique model."
Investment management firm Challenger is a proponent of the incubator model, revealing in April that it plans to eventually add more boutiques to its existing stable of 10, which it recently combined under one umbrella and rebranded as Fidante Partners.
"Our boutiques businesses have performed well due to two reasons: the high calibre of our portfolio managers and the focus on management around alignment with investors," Challenger CEO Brian Benari says.
"Interests are aligned when fund principals and staff have meaningful capital at risk in the same way that external investors do. And because Challenger is an equity investor in our boutiques, as well as a distribution partner, we have a greater economic incentive to excel in important front-line areas like marketing and distribution and the maintenance of appropriate compliance and control frameworks."
Relationships with boutiques have not been a universally positive experience for institutions (which, it must be said, have each approached the boutique relationship differently). In April, National Australia Bank (NAB)-backed boutique Lodestar announced it was closing its doors, though NabInvest says it maintains its commitment to boutiques and is still open to other opportunities (the company is currently linked with 11 other boutiques). In the past few years a number of boutiques have shut up shop, including BNY Mellon Asset Management's Australian equities boutique, Ankura Capital, last year, and Commonwealth Bank of Australia-backed 452 Capital in 2010 (see breakout box).
"There's very little money flowing into any asset class at the moment. If you look at boutiques right now, it's very tough to raise assets. The challenge for everyone is to raise assets. That's why we haven't seen many boutiques starting up in the past few years - and why the solo boutique has almost dried up altogether," Murphy says.
Then there's also the fact, he says, that there's actually no empirical evidence to say boutiques perform any better overall than institutions.
"Both boutiques and institutions have their pros and cons, but one is not necessarily better than the other. In terms of outcomes, there's not a lot of evidence that boutiques are more successful. Our current large-cap sector wrap shows that, looking across Australia at 60-70 large-cap fund managers, there has been no significant difference in performance between the two," he says.
He says the research found that over the past year, institutions averaged -5.04 per cent, while boutiques averaged -5.01 per cent a year; over the past three years, institutions averaged 11.97 per cent a year and boutiques 11.89 per cent a year; and over the past five years, institutions averaged -1.02 per cent a year and boutiques -1.06 per cent a year.
Zenith Investment Partners director David Smythe is cautious about comparing performance between institutions and boutiques. "It is the capability and skill of the underlying fund manager which is the key driver of performance, not the thickness or the extent of the 'wrapper' around them," Smythe says.
Sizing up boutiques
Because they are generally smaller in size, boutiques are said to have an advantage over institutions in terms of agility, free as they are from unwieldy amounts of FUM. Ibbotson Associates investment consultant James Foot says that while not all asset classes lend themselves to active management, smaller boutiques have an advantage within equity markets because they can venture up and down the capitalisation spectrum and invest with more freedom than the larger players.
"Size is less important when it comes to investing across asset classes," Foot says.
Han K Lee, CIO and co-founder of 100 per cent privately-owned boutique Prime Value Asset Management, says it's not just about being small in terms of FUM.
"Managing less money is an advantage, but boutiques also have the advantage of smaller investment teams and less bureaucracy, which allows them to make and act on decisions faster. The perfect size depends somewhat on the investment universe and investment mandate," Lee says.
Rather than just being about size, Macoun says boutiques are about having specialist investment characteristics. "Do they own the majority of the company, are they very clear and focused, for example, on just one asset class? Are they all about investment performance?" he says.
He says commercial pressure may exist in larger institutions to keep growing the amount of FUM, but boutiques are not under the same pressure and they put performance first. He says that though it can vary according to asset class and style, capacity is an important consideration - though some, such as a boutique focusing on global real estate investment trusts, can have large capacity yet still be regarded as a boutique.
"Remember that Aussie equity boutiques cap out - they can only get so big and then they just become more mature and stable. Boutiques are talking constantly about what their capacity is - it's really about how many of their ideas or investments can become successful," he says.
"Research houses ask what is your capacity because it's a breach of faith if you're too far over capacity. Yes, it's always tempting to grow a bit more, but if there is then a struggle to find appropriate investments, that can in turn risk overall performance. It's a cardinal sin."
Boutiques in the future
Macoun says he thinks the number of boutiques in Australia will continue to grow - particularly those linked with multi-boutique models. He also predicts the emergence of boutiques venturing into new asset classes - even into areas that used to be the preserve of institutions, like unlisted property, real estate, infrastructure and currency.
Russel Pillemer, the CEO at 49 per cent NAB-backed Pengana Capital, says that, as a house of retail boutique funds, the company is seeing an increasing number of advisers being drawn to boutiques that have the structures and skills to generate more stable returns in order to insulate their clients from equity market volatility.
"Boutiques are much better placed to develop funds beyond the usual long-only offerings of big houses - such as market-neutral funds, or events funds, or other niches that have limited correlation to equity markets," Pillemer says.
"We think that low or negative correlation funds will become a significant component of the equity allocation in portfolios. Sophisticated investors used to have these funds as their sole preserve, but boutiques are bringing niche funds that usually require large licks of money to retail investors."
Smythe says that though limited inflows across the managed funds industry broadly mean it would currently be a more challenging environment to launch a boutique, he believes the boutique fund manager is here to stay.
"Australia does, we believe, have a good track record of producing high-quality boutique fund managers. Often boutiques run investment styles which are less benchmark aware and more absolute return in orientation - while this is a broad comment it may explain some of the boutique appeal for advisers," he says. «
The Name Game
Many a boutique has been established when big name fund managers or star stock pickers depart from bigger institutions.
The biggest boutique fund manager news of 2012 is that former Perpetual head of equities John Sevior will start his own boutique with former Treasury Group managing director David Cooper later this year.
John Campbell and Jeremy Bendeich left UBS Global Asset Management to establish Avoca Investment Management in 2011. Their predecessor Paul Fiani, former managing director and head of equities at UBS Global Asset Management, established his own privately-owned boutique, Integrity Investment Management, in 2007.
Paul Cuddy and Mark East left their role as co-heads of Australian equities at ING to found boutique Bennelong Australian Equity Partners in 2008 (in partnership with Bennelong Funds Management).
But there are dangers to pinning the success of a boutique solely on the back of a big name - this was sadly demonstrated by the collapse of 452 Capital. Established in 2002 by former Perpetual head of equities Peter Morgan, the boutique did well until Morgan's misdiagnosis with terminal brain cancer. The company collapsed in 2010.
