For planners and investors, small can indeed be a beautiful thing. Boutique funds may once have been regarded as interesting, but a little risky. Yet over time they have become an important part of the funds management landscape.
Planners and investors are finding appeal in their special characteristics: they are often home to talented, proven managers; the staff usually have a significant commitment of their own money; and they need to deliver on returns to attract business.
Boutiques appeal to a wide range of investors, not just high net worth clients, according to Count Financial research and product senior executive Rachel Griffith. "Generally, investors are more sophisticated than they were a few years ago and are more than happy to go beyond larger fund managers," Griffith says. "Boutiques took off a number of years ago when people got disenfranchised with larger fund managers. I think they are still as popular as ever."
Many of the movers and shakers in the funds management industry have also decided that good things come in small packages, with many leaving bigger brand names to set up their own, select boutique label.
For example, Anton Tagliaferro left BNP and Perpetual for Investors Mutual; Paul Moore went from BT to PM Capital; Peter Morgan departed Perpetual Investments to set up 452 Capital; Lazard lost Michael Triguboff, who set up MIR Investment Management; former Rothschild/BT staffer Carlos Cocaro founded Renaissance, which is embedded in the Zurich offering; Chris Selth, ex-BT, established Five Oceans Asset Management; and Kerr Neilsen exited BT to set up Platinum.
With so many funds under management, are the likes of Platinum, which manages in excess of $21 billion, still classified as boutique? The general consensus is yes if you define a boutique as being privately owned, relatively small in terms of investment personnel, with staff holding equity in the business and the focus purely on investment management and performance. The Private Collection chief executive Krystyna Weston believes the move to boutiques will continue thanks to a run of alpha returns to investors.
"In the main, the boutiques have done quite well. They have benefited from starting off with small funds under management that grow quickly," Weston says.
"According to Intech research, the best time to pick up a fund manager is in the first three years.
"Once a manager gets to a certain size, they often suffer from capacity constraints and the ability to be agile in the market. What we have seen in Australia is a lot of big names have got quite big, a lot of talent has left and set up boutiques and recreated what they have created in the big shops."
David Wright, director and joint founder of boutique research business Zenith Investment Partners, says boutiques will continue to increase though the natural succession for many is to go full circle, selling the business to a larger manager. "There is no doubt in our mind that there is greater potential to generate excess returns when you manage a smaller amount of funds under management. Initially, you have had high-quality managers coming out of the large funds management institutions doing very well from a returns perspective," Wright says.
"It's getting a much more populated space so when that occurs returns will follow more of a normal distribution. We will continue to have some who are exceptional in their returns, some who are fairly ordinary who don't succeed and a lot somewhere in the middle. It doesn't necessarily hold because you are a boutique you are going to have outstanding returns."
Select Asset Management chief executive Dominic McCormick says more forwardlooking planners and investors are attracted to the tendency of boutiques to have more of an absolute return non-benchmark mindset. This fits closely with what most retail investors and, increasingly, institutional investors are after. "For less sophisticated investors, getting comfortable with boutiques they may not have heard of doesn't come easily," McCormick says.
Planners and dealer groups, in their hunt for something new and sexy, have become bored with Australian equities in the past 12 months and a boutique needs to be a real standout in that asset class to be noticed, Weston says. Yield space is the big driver, with so many investors nearing retirement. There has also been strong interest in international managers, in those performing well and in those doing things differently. Innovations in fixed interest are also gaining attention.
"The market is getting bored with old-style mortgage funds. They fell out of favour last year. People are looking for sexier income and higher yields. A lot of mortgage funds are returning about the same or similar to a cash management trust. So that's why diversified income funds caught the imagination of investors. Some really interesting stuff is being done in fixed interest, not just boring straight fixed interest, but a lot of derivative work. It has really been taken up a notch," Weston says.
"We have seen strong interest in Asian managers in the Asian sector, which took off last year, as well as emerging markets. A lot of dealer groups and planners were a bit cautious, but we are seeing more researchers saying it is important strategically to be in those regions if you want a piece of future global growth.
"The acronym BRIC - Brazil, Russia, India and China - is the subset of emerging markets and I think this trend will continue."
Wright adds that there is an emerging trend for boutiques in hedge funds and alternative asset classes, including Asian equities and domestic hybrids. He has also witnessed an increase in investor appetite for alternative investment strategies. "That will be the case when the Australian equity market ends its extended bull run. Some of the alternative strategies will really come into their own in those types of conditions," he says. McCormick says that apart from the increase in boutiques, there is a trend for large financial services groups to take stakes or partner them - such as 452 Capital. Challenger has also been active in hooking up with a number of managers.
A more worrying trend is that relatively inexperienced people are opening shop because of the move by major groups to back them. Not all will be successful.
"A lot of people have got good performance, some of it by judgment, some by good luck, and they are using that as a basis to set up a boutique," McCormick says. According to Weston, newer offerings include Treasury Asia, Green Cape, Kinetic and Infiniti. Some of the stars based on performance are Lazard and Hyperion, both in Australian equities, and Rare, a subsidiary of Treasury.
Wright rates Infiniti Capital and Denning Price because they offer a good point of difference, while McCormick says Platypus has attracted a lot of publicity recently. Another standout is Souls Funds Management.
Souls managing director Vincent Parrott says the secret to success for boutiques is simple, but difficult in execution.
"You need to build or develop the capability which delivers superior, explainable investment performance," Parrott says.
"It's very important that it's explainable. People need to understand where and how you achieve your investment results. You really are bringing together quite often sophisticated investment concepts with a small group of people who have investment intellect."
Then it is a matter of convincing people about the "repeatability of what you have done", he says. At the end of day, a boutique sells only one thing: investment performance.
"In essence, whatever asset sector it is in, those fundamental principles are the same. It is not that complicated, but the execution and delivering that agenda over the medium to long term is where the real difficulty lies," Parrott says.
It is also critical to have a clear focus on the competitive advantage and the financial resources for the business to survive while you are building a track record. Throw in persistence, real commitment from people in the business, patience and the drive to be best of breed for the Souls' formula to fire.
"We have assembled a top-quality investment team, we have six investment staff, a total of nine in the firm," Parrott says.
"The staff has about 30 per cent of equity. But we have the benefit of a parent who is able to provide and give us access to financial resources, which funds the business in its early growth years. That parent has an understanding of the need to be patient and persistent as the track record builds."
Souls had $720 million under management as of the end of December 2006. It plans to cap its small cap product at between $500 million and $750 million and its more broadly-based Australian equity product at between $3 billion and $5 billion.
"Because investment performance is critical, it is important that business closes capacity at that point where investment results will be sustainable," Parrott says.
"As size grows, the ability to produce superior results does go down. Bigger does not equal better. We will close our capacity given our primary focus is to deliver above average returns." One of the challenges for boutiques has been access to platforms. Most platforms won't put a product on unless they can be sure the demand will be there, McCormick says.
"Some boutiques find this frustrating. They need to be on a platform to go out and generate demand, so it does create a catch-22 for boutiques. Some of the platforms are looking to differentiate themselves to be seen to be proactive in bringing them to the market. But generally it is quite hard for boutiques unless they have got a following from day one," he says.
Weston goes further, saying the pay-to-play game is becoming costly.
"Almost all of the platforms want you to come with a piece of research. For one, they require you to have a guaranteed amount of $10 million from financial planners that use that platform," she says.
"From the platform perspective, they want to make sure any new product coming onto the platform isn't just a sleeper, that it will get support. That makes it quite difficult. A lot of boutiques don't have the ability to do that."
