At the same time those groups caught in the middle are being squeezed. The pressure is on them to grow either organically or by acquisition.
Through this process the investment management industry is being transformed. While many of the biggest names in fund management are joining boutiques some of the largest companies are becoming increasingly dominant.
To
understand what this trend means for retail investors it is worth focussing on the rise of boutique fund management. But first it is necessary to start by defining just what a boutique – a question that is more difficult than it might appear at first sight.
Difficult definition
As a rough working definition it is clear that boutique fund management groups are those with only a few fund managers. Usually they are not well known to the investing public but they include fund managers who are well known within the industry. Among groups in the UK which can be classified as boutiques are: Aberforth, Artemis, BDT, Findlay Park, Jade, Lindsell Train, Lloyd George, Montanaro, Odey, Polar Capital, Sloan Robinson, Thames River and Unicorn.
Often they specialise in one or two areas. For instance, Aberforth is known for UK smaller companies while Lloyd George is a Far Eastern specialist.
But even in this respect the definition is not watertight. Thames River Capital, for example, includes specialists in Eastern Europe, emerging market debt and Western Europe.
Many of these firms only offer hedge funds – which can use a far wider range of investment techniques than conventional vehicles – rather than unit trusts or Open Ended Investment Companies (OEICs). These often have minimum investments which are way beyond the means of the average investor. Some boutiques also offer investment trusts.
Exceptions to rule
However, here too there are exceptions. The CF Odey European Trust has an initial investment of only £1,000 and can be held within an Individual Savings Account (ISA).
Some boutiques also manage funds on behalf of other fund management groups. So many of the investors in the Premier UK Smaller Companies fund are probably not aware that the management of the fund is outsourced to Unicorn.
In some cases the definition of a boutique is drawn exceptionally wide. Perhaps the most striking is the decision by the multi-manager team at Credit Suisse to define ABN Amro, one of the world’s largest financial institutions, as a boutique fund manager in the UK. ABN Amro Fund Managers, a UK subsidiary of the Dutch group, is included in Credit Suisse’s Constellation Portfolio which invests in funds run by boutiques.
Robert Burdett, a joint head of multi-manager services at Credit Suisse, justifies this definition by arguing that ABN Amro treats its star fund managers as if they worked for a boutique. George Luckcraft and Nigel Thomas have large stakes in their funds and enjoy considerable autonomy. So, as with more conventional boutiques, there is a close alignment of interests between the investor and the fund manager.
New Star is a more borderline case. Although it only has two retail funds at present, with one more to be launched this month, at the rate at which it is attracting investors it looks set to grow rapidly to a substantial size.
Performance promise
Boutique fund managers claim several advantages over conventional fund management groups. Most of these relate in some way to performance.
Several reasons are given to explain why the performance of boutiques should be better than of mainstream groups:
- Fund managers can focus on performance. This is in contrast to working at large fund management groups where the managers have to spend much of their time on marketing, personnel issues and other matters.
- Boutiques tend to run smaller amounts of money than larger groups. This essentially means that funds can be nimbler and more liquid than the lumbering funds often run by larger groups. “We’re not playing the same fund management game,” says Jonathan Hughes-Morgan, the managing director of Thames River Capital.
- There tends to be a closer alignment of interests between fund managers and investors. While mainstream fund managers simply have bonuses a boutique’s fund manager’s wealth and reputation are closely tied to his fund’s performance.
Counter arguments
To an extent boutique fund managers are likely to start off as top performers by definition. It is unlikely they would have set up their own group if they performed poorly. The more difficult question is whether they can maintain their previous record.
Not everyone is convinced that boutique fund managers necessarily deliver the superior performance that they promise. Jonathan Fry, the joint managing director of Premier Portfolio Managers, argues that there is no empirical evidence to prove the case.
However, the relatively few conventional funds run by boutiques do seem to have outperformed their peers over three years. For example, the average UK Equity Small Cap fund has grown by 32.4% over three years according to Morningstar data. In contrast the Aberforth UK Small Companies fund increased by 62.3% over the same period while the Premier UK Small Companies fund (managed by Unicorn) rose by 66.5%.
A similar pattern is apparent in the Europe Large Cap sector. CF Odey European has grown by 23% over three years while the sector average increased by 12%.
But this sample is too small to prove the argument one way or another. And since boutique fund managers tend to spend most of their time running hedge funds – which are free to use a wider variety of investment techniques than conventional funds – it is difficult to compare like with like.
Business focus
Another argument against boutiques is that good fund managers are not necessarily the best businessmen. Where fund managers are running the boutiques themselves they may not end up concentrating on what they do best.
Some top fund managers also prefer the relative security of a large group. They do not crave the pressure or uncertainty of running their own businesses.
Ultimately both large and small fund management groups have a role. As Jonathan Fry of Premier argues “there is a case for both”.
But if the flow of star fund managers to boutiques continues at its current rate it does raise at least the possibility of a serious problem for the average retail investor. Many of the best fund managers could end up running funds to which such investors have little or no access.
