The lure of boutique funds management remains strong for Australian fund managers: the desire to be one's own boss, to be unconstrained by weighting and portfolio and capitalisation limitations imposed from above or marketing department initiatives, and to simply pick stocks - and live and die on the success or otherwise of those picks.
The Platinum listing and media publicity of business dividends generated by manager principals have made obvious the financial rewards of building a successful boutique.
And there has never been more in the way of support structures in place to smooth the move for a portfolio manager - or an asset-class team - to independence.
Boutique fund incubators - which provide all the back-office and compliance assistance - offer institutional-level governance in return for pure stock-picking prowess; venture capitalists will stump up seed capital; even industry superannuation funds will bankroll the aspirations of portfolio managers to go it alone.
There is only one fly in the ointment: it is a tougher stock market now than when the first-mover boutiques hung out their shingles.
"The whole environment is not as sympathetic to boutiques as it once was," Lonsec head of research Grant Kennaway says.
"Boutiques are no longer getting the benefit of 20 per cent-plus compounding returns as soon as they open their doors.
"That not only builds funds under management (FUM), it brings a lot of people looking to invest. Newer boutiques now are trying to build businesses in a market where a lot of people are sitting in cash, so it's harder work to get dollars through the door."
But people still want to take the plunge.
Early last year, former UBS head of Australian equities Paul Fiani took a team with him when he left to found Integrity Investment Management: the most recent ex-UBS colleague to join Fiani left only last month.
In mid-2007, Invesco lost most of its Australian equities team to Karara Capital, the boutique formed by David Slack (ex-Portfolio Partners). In October, former Perennial portfolio manager Hugh Giddy set up his own shop, Cannae Capital Management; in November, Suncorp's entire nine-person Australian equities team defected to form a new boutique, Solaris Investment Management, under the umbrella of Wilson HTM-owned incubator Pinnacle Investment Management.
In the same month, National Australia Bank's NABinvest arm bought the remnants of Insurance Australia Group's Australian equities division and turned it into a boutique, called Northward Capital.
And in April this year, value boutique Concise Asset Management, founded in October 2007 by portfolio co-managers Andrew King (ex-Investors Mutual), David Grace (ex-Centro) and marketing and distribution head David Parr (ex-UBS Global Asset Management), began investing the seed capital put up by listed private equity firm CVC.
The lure of independence in a boutique is a big worry for institutional fund managers, which face a struggle to keep their stock-picking talent.
An even bigger worry for them is that boutique incubators have stepped up their activity, making it easier than ever before for managers to jump.
Firms such as Pinnacle Investment Management, the St George-owned Ascalon, the MLC-owned NABinvest, Challenger and the Australian Securities Exchange (ASX)-listed Treasury Group offer full back-office and compliance support for investors who want to focus wholly on investing.
Where this combines with an entire team moving - as was the case with the Suncorp team's relocation to Pinnacle and rebirthing as Solaris - the institutional managers know they could face a monumental problem.
"Fund managers don't like turnover at any time, but when an entire team leaves, it's very disruptive for the business," Kennaway says.
"All financial services businesses find it hard enough to find good people in the first place, so when you have to replace a whole team, it is difficult - particularly in a difficult market, having to rebuild your whole team is not a very good prospect. And usually it results in a research downgrade as well, which is a double whammy."
When a team leaves, he says, it can be a matter of years before it is replaced and is functioning to the same level as that it replaced.
"Invesco lost most of its Australian equities capability to Karara Capital, which is the boutique formed by David Slack, ex-Portfolio Partners. The Invesco team left mid-2007 and they haven't yet been wholly replaced. Suncorp still hasn't got a new team up and running.
UBS moved quite quickly after Fiani and his team left, and is heading down the right track with its new Australian equities team, but it's certainly not what these managers want to see happen - it's a huge distraction that can put a real hole in their business for quite some time," he says.
Zenith Investment Partners senior analyst Ben Davis says it is increasingly common that teams move together.
"Most of the time at least three people move together, especially in equities: you need good underlying analysts to provide a competitive edge. It's a team approach rather than the 'star portfolio manager' approach," Davis says.
This suits the market, Morningstar head of research Anthony Serhan says, because "people are more likely to back a group of people than an individual".
Davis says it is something of a paradox that while in numbers of boutiques - particularly in Australian equities, which is boutique central - the market gives every appearance of being "saturated", there will "always be opportunities for good stock-pickers".
"In a sense, it's probably going to get harder to attract inflows given what's happening in markets. But in small-cap Australian equities, the fact remains that a lot of the good managers have hit capacity really early, so it provides opportunities for new groups to start up in those areas," he says.
"There's a lot of competition in both Australian equities and international shares, and it is getting harder for boutiques to provide a competitive edge. There are so many fund options that they really have to be a high-quality team to get onto recommended lists and onto platforms, and there's a lot of them that won't make it. But there is unsatisfied demand there for those that can deliver outperformance. If a team can do that, and it decides to go out on its own, clients at the previous organisation will probably follow them to the new boutique."
He says many boutiques tend to have a greater ability to outperform because the managers are not managing as much money as they were at the larger organisation. "That's the theory of why they're attractive investment propositions, because they're freed up: they're not going to be as tied to the benchmark because of their FUM.
But it could really go either way - that added flexibility provides them with scope to underperform as well as to outperform, especially if they don't adopt tight restrictions on what stocks and sectors they hold," he says.
Kennaway says the "bigger shops" are trying to replicate the positive features of the boutique structure - to have a closer alignment between the profitability of the business and the rewards that the investment team can get.
"As much as they can, they're trying to make sure that the people producing the performance get bang for their buck. It's also a defensive mechanism, so the shops can maintain existing teams and hopefully prevent turnover, because consistency of personnel is a major factor in how a strategy performs," he says.
The focus is firmly on the retention of the key stock-pickers and decision-makers, he says.
"Some firms have been prepared to accept turnover within their analyst ranks but have gone out of their way to lock in the key two or three investment staff. For example, Ausbil Dexia has had considerable turnover within the analyst ranks, but Paul Xiradis and John Grace, the key decision-makers, have been very stable," he says.
There are several ways the big institutions can seek to lock in their talent. There is 'shadow equity', as in the Colonial First State approach, or real equity, such as that given to key staff by BT Investment Management prior to its ASX float. Then there are bonuses and ramped-up salaries.
Ian Macoun, chief executive of incubator Pinnacle Investment Management - which houses boutique managers Plato Investment Management, Resolution Capital, Palisade Investment Partners, Hyperion Asset Management and Solaris - says simply paying more is a "joke".
"We believe that, generally speaking, the best people don't stay working with institutions; so an institution simply paying more to try to retain its investment managers is really only paying people more than they're worth," Macoun says.
"The wider issue - and this is why we set up this business - is that institutions shouldn't be undertaking the function of investment management, because they're not good at it. They do distribution and they do financial planning, and they're good at that sort of thing, but they're no good at investment management - which after all, is not that big a proportion of the value chain. A lot of institutions have got out of that business, they outsource it and pick the best managers, and put them together and offer them to their customers. That's a model that works very well."
While there may be some sectors where sound investment requires an institution's balance sheet - for example, high-end structured fixed-interest - Macoun argues that in most asset classes, investment management is best done by boutiques - boutiques that are supported by having all non-investment functions taken care of.
"The most crucial thing that investors want is performance - they want alpha. Our proposition is that good investment people are really valuable and the skills that they have are greatly in demand, so it's not a good use of their time to have them distracted by doing anything other than investment," he says.
Kennaway puts the counter-argument thus: "Just because you're a boutique, it's not a panacea for investment performance. I think sometimes people get carried away with the boutique concept, and think that just because an operation is a boutique it will enjoy automatic success.
Just because a firm is a boutique doesn't mean that it will tick all the boxes on process and performance. The reality is that there are still a large number of high-quality fund managers working with institutional models, who are quite capable of delivering strong performance, because the institutional base suits their temperament and their style."
In such a "choppy" sharemarket, he says, good stock-pickers will continue to do well. "In fact, their skills are at a very high premium in a market that can't rely on the rising tide as it has done over the past four or five years. But those good stock-pickers will come from the ranks of the institutional managers as well as boutiques," he says.
"Most of our preferred managers in the small-cap Australian equities space are boutiques - for instance, we rate highly the likes of Souls Funds Management, Pengana Capital and Kinetic Investment Partners. Similarly in large caps, Greencape Capital is rated highly and a house like BT is showing pretty strong performance. The jury's still out, but BT's decision to give its investment staff equity looks like a good one."
Macoun says trying to "boutiquise" doesn't work if you're not a boutique.
"BT might be an institution making investment people wealthy, but it's not a boutique - it's still majority-owned by Westpac. They've given it some of the characteristics of a boutique, but not the critical one, which is control of its own destiny. It's only when the individuals in a boutique have majority ownership and control of their own destiny that you have the most efficient structure to generate alpha," he says.
