When word got around that Perpetual's gun fund manager John Sevior was taking a six-month leave of absence, industry scuttlebutt had "Sevvie" headed alternately to a remote tropical island or to that other paradise favoured by fund managers who have built reputations as outperformers - a boutique of their own.
If the latter, Sevior could be seen as bowing to tradition. When he became head of equities at Perpetual in 2002, he replaced ace fund manager Peter Morgan, who had left to set up his own shop, 452 Capital.
It turns out Sevior really is taking a well-earned six months off, not leaving to set up his own shop.
However, had he done so, it's a well-travelled route among fund managers who, having conquered the markets, get a yearning to captain their own ship.
John Campbell and Jeremy Bendeich are two of the most recent to have embarked on that journey. They left UBS Global Asset Management (UBSGAM), where they ran the $62 million UBS Australian Small Companies Fund, and set up Avoca Investment Management.
Campbell and Bendeich, who have worked together since 2007, expressed their intention to leave UBSGAM in April. That announcement led research house Standard & Poor's (S&P) to put the UBS Australian Small Companies Fund on hold, while Lonsec put the product on fund watch, such is the reputational power of some fund managers.
When word circulated of Sevior's planned long-service leave from Perpetual, S&P Fund Services put the Perpetual Australian Equities Large Cap Concentrated Fund on hold.
What leads fund managers to leave the security of big investment houses with tens of billions of dollars under management and start over? In most cases it boils down to a deep desire to be masters of their own destiny, to work with people of their own choosing and to create their own culture.
Asked why he left the relative safety of UBS to set up his own shop, Campbell says: "It certainly was not borne out of unhappiness at UBS. The motivation was our own desire to build our own business and build up something good that will hopefully endure over time."
The company is about a month old and Campbell says so far, so good, mainly because it's easier to stay focused on a single purpose.
"The whole idea is working together in a small organisation without any of the distractions or the blind alleys that you sometimes go up in a big organisation," he says.
"We're very focused on the small and mid-cap capabilities that we're launching, and we don't have any other focus. We're single-minded and that's very exciting."
Boutique fund managers normally own most, if not all, of the companies they set up. All say having skin in the game changes everything because it aligns their interests so completely with those of their clients.
"We're investors ourselves so we have something in common with our clients," Prime Value Asset Management senior investment analyst Fiona Clark says.
Other fund managers interviewed by IFA also cite the alignment factor as high on the list of advantages of boutique funds management.
"That alignment is our edge," Alphinity lead manager Johan Carlberg says.
"We live and die by that performance."
All in the family
Besides passion, boutique fund managers have something else in common - like-minded colleagues who have a history together.
Prior to joining Prime Value, Clark had a senior treasury role at WMC before BHP Billiton scooped up the miner with a bid of more than $9 billion. While at WMC, Clark worked for treasurer Y Yong Quek, who is now an executive director of Prime Value.
"I'd previously worked with Quek so I knew I was joining an organisation that would offer a very strong cultural fit," Clark says.
Carlberg says his decision to set up a boutique with fellow fund managers from his previous employer, AllianceBernstein, was easy.
"In a way, it was a no-brainer. By the time we'd got the performance, we had become a team that we knew could work together in the long term," he says.
At United States-based AllianceBernstein's operations in Australia, Carlberg worked with Bruce Smith, Stephane Andre, Andrew Martin and Shane Kelly, who have all joined him at Alphinity.
The team has worked together for about seven years, Carlberg says. That stability was a big factor in ratings group Lonsec's decision to name Alphinity the Rising Star Fund Manager of 2011, even though the funds management company is barely a year old.
"I think the key for us has been that we all work together as a team, so we walked out one door and into another and set up shop as Alphinity," Carlberg says.
"We had a team that worked and really just wanted to replicate that, so when the [Lonsec] consultants came through and reviewed that, they were comfortable with what we were doing."
Another key member of the family is the minority partner - usually a big bank, dealer group or other financial institution.
In the case of Avoca, the partner is Bennelong Funds Management and Alphinity's partner is Challenger.
Carlberg says the partnership with Challenger was another factor in getting the Lonsec gong so early in Alphinity's young life.
"We haven't had to spend a lot of time doing all the stuff you do if you set up a new business, like finding offices and buying computers and setting up systems. That was there for us," he says.
There are a handful of boutiques that have taken no big partner at all, including Integrity Investment Management, Eley Griffiths Group and David Paradice's Paradice Investment Management, although the last, with $6.6 billion under management, may have outgrown the boutique category.
Integrity Investment Management, founded in 2007 by Paul Fiani and a handful of colleagues from UBS, has won the Lonsec Fund Manager of the Year Award for Australian Equities (Broad Cap) in 2009 and 2010, among other awards.
Some boutiques start out on their own and take on a partner down the track. Manny Pohl, who founded Hyperion Asset Management 14 years ago, says if he had to do it over again, he would have pinned down a distribution partner earlier on.
"I think I would have ensured we had an association earlier on with somebody who could distribute the product, rather than relying on our own ability to get to the market," Pohl says.
"Distribution is the key that I think one has to tie up early on in the piece."
As it was, Hyperion built its own wholesale distribution brick by brick. About two years ago, the fund manager partnered with its associate, Pinnacle, an umbrella organisation of boutique fund managers, to handle its retail distribution.
However, when it comes to taking on a partner, Pohl says the operative word is minority. In the case of Hyperion, its executives have a controlling 51 per cent of the company and Pinnacle has the remainder.
"That's the accepted structure for a boutique - that the executives own as much of it as they can, but at least 51 per cent, which gives you control with the ability to acquire more equity over time," he says.
"That's a key thing about boutiques; the executives have to be in control of the company and their destiny. If they're not, it's a major problem."
In 2010, Hyperion was named Best Australian Equities Small Cap Fund Manager by Lonsec and Best Performing Australian Large Cap Fund Manager by the Australian Financial Markets Association.
Eley Griffiths, founded in 2003, is wholly owned by Brian Eley and Ben Griffiths.
About 10 years ago, the two portfolio managers were looking after about $1.5 billion at ING when BT came knocking. However, their stint at their new employer was a relatively brief 12 months. Westpac's acquisition of BT in August 2002 led to the retrenchment of most of the equities team, including Eley and Griffiths.
Asked why they never sold equity in the business to a well-funded partner, Eley told IFA: "Everybody's got their own approach to these things. We elected to use our own risk capital to set the business up rather than give away part of the business to reduce our risk."
He says the pair had developed a 100-page business plan and good reputation in the market.
"Luckily, we had a redundancy cheque so we did have some flexibility. But let's just say that you needed the savings as well. We kind of knew what we were up against as well because we'd done all the numbers in our business plan," he says.
He says their reputation helped them overcome the distribution hurdle when they first opened their doors.
"When we were starting out, fortunately for us, we had acquired a bit of market presence. People who had followed the small-cap world were across what we were doing. At the time - and this is one thing our business plan highlighted - there was a scarcity of offerings in that segment," he says.
"You had some very well-established players who were closed to new funds, and you didn't have a lot of new players at that point. To be totally honest, we wouldn't have been either if we hadn't been retrenched from BT. We were quite happy there.
"In that sense, it was fortuitous timing. Possibly the most important attribute you can have as a fund manager is timing - and the second is luck."
Eley Griffiths won S&P's Australian Equities Small Cap award for 2009 and 2010.
Advisers, consultants the Holy Grail
Asked about the hardest part of the job, Pohl says it depends on the stage of the boutique's life cycle.
"The most difficult thing, initially, was getting the approval of asset consultants," he says.
"That was the biggest hurdle right up front. You cannot proceed in the wider world unless you've got those ticks."
Campbell says Avoca's $15 million in funds under management (FUM) is likely to stay small until consultants get a look at what the company has to offer.
"In the first six months or so, we're not expecting huge amounts of funds because most people want to see what the researchers and the consultants have to say about us," he says.
"In terms of the researchers and consultants, it's a matter of getting into their cycle. You've just got to wait for their timing. I think it will take at least six months for us to get some people to review us."
A seal of approval from Lonsec, Mercer, Morningstar and S&P is a Holy Grail that sits alongside another must-have: distribution.
Clark says building up a distribution network and the branding that goes with it is the biggest obstacle.
"Because we're not a well-known brand, that presents challenges for us when we're trying to build trust and strong relationships with advisers," she says.
"The flipside is that when we do develop relationships with advisers, they're usually with like-minded, boutique-style advisers or independent advisers who share similar values or a similar philosophy when it comes to investing."
Agility is everything
Boutique fund managers are small by definition and by design, and they say the global financial crisis (GFC) highlighted the advantages of being a small fish in a big pond.
"We were able to outperform during the GFC because of our mix of wealth protection as well as wealth creation, so by not hugging the index and being able to select stocks that did well on a relative basis, we did quite well," Clark says.
"It goes to that big advantage of being flexible - not hugging the index, not having to diversify your performance away by holding 300 stocks instead of 30 or 40. Factors like these come to the fore in times of crisis."
While some boutiques are still in the growth phase, others are right where they want to be because even boutiques can get too big to be agile.
Hyperion has $3.5 billion in assets under management. Asked whether that sum is a sign the company is getting too big, Pohl says: "We're at the size where we don't believe we can take on substantial amounts of funds under management going forward."
Avoca, just one month old, is at the other end of the spectrum. It has about $15 million in seed money from partner Bennelong and one other investor. However, Campbell can already answer a key question: how big is too big? When size hinders performance, you've gone beyond the limits of your capacity.
"We all start in this business with small amounts of funds and we all obviously want to grow our business, but there comes a point where, if you've been that successful, the size of your funds is such that it's difficult for you to add significant alpha because you've got so much by way of funds under management," he says.
"If you're a large-cap manager, my personal feeling is that anything above $4 billion becomes challenging. If you're a small-cap manager, anything above $1 billion is a large amount of money, and it becomes challenging."
Alphinity manages $750 million, including some of Challenger's in-house funds, and Carlberg also has an eye on the outer limits.
"We have ambitions to grow the business over the next three or four years," he says.
"The question is, what is our capacity? We think that, with our investment style and performance targets, we should be able to move towards $5 billion in management," Carlberg says, adding the target is a long-term one.
"Above that, most boutiques would have to question whether they have the flexibility to be an active manager."
Prime Value looks after about $350 million in FUM.
"We're comfortable with our size. There's profitability in that but we've got plenty of room to grow, and it would be our intention to do so," Clark says.
She says the company, which was S&P's Boutique Fund Manager of the Year in 2005 and 2006, aims to increase FUM by maintaining its track record and its focus on performance.
How big is too big?
Eley Griffiths manages just over $1 billion. Eley says the group is not taking on any new wholesale mandates and is not actively soliciting retail money.
Asked why, he says: "There is a finite pool in which we can operate in terms of capitalisation. Our world is defined as anything outside the S&P/ASX 100. That world is about $110 billion or $115 billion of market cap.
"There is a view, and I think we have some sympathy for that view, that if you get too big you become less nimble, you can get stuck in positions. We offset that by having what we call a liquidity filter. We have a liquidity test on the investments before we get into them or, even when we're in them, we monitor their liquidity to make sure it's still good or if it's drying up because liquidity is a risk for investors and we have to manage that."
He says boutiques have a tougher path to tread than they did 10 years ago because the marketplace is far more crowded than it once was.
"We were very lucky in setting up a retail part of our business at a point in time when the market was receptive to that and there was much less noise to cut through. I wouldn't like to start again now." «
