Over the last decade the number of unit trust funds available in South Africa has increased rapidly. Because of this, picking the correct combination of funds can quite literally make the difference between a financially independent retirement or being dependent on your family in your retirement.
A recent buzzword in the asset management industry is the concept of Boutique Asset Managers and how they attempt to outperform the large manager investment houses. Our responsibility is to identify the good and the bad in both large and boutique money managers.
To start off we need to realise that you don’t overnight become a large money manager. Most successful large managers started out as boutique mangers and have grown into these larger managers. This is down to very simple ideals. Picking investment strategies that work, streamlined investment process, employing the right people and incentivizing them correctly to ensure a sustainable business model which will continuously gather assets because of outperformance of their relative benchmarks over the long term.
- They are the tried and tested with long track records and significant assets under management, they set the benchmark for aspiring money managers.
- Long track records allow for more robust analysis of investment management ability.
- They have the ability to attract the best talent which allows for significant research teams, ensure they have the best technology and arguably the best money managers do want to work in those environments
- Succession planning is something that large managers are able to plan for as they continue to look to develop and groom analysts into portfolio managers down the line.
- Large managers do lose quality employees as they feel they can do it on their own. However, as with any business there is natural attrition over time which can’t be stopped.
- Large managers can succumb to organizational inefficiencies (bureaucracy) possibly stifling innovation and certainly distracting attention.
- Flexibility can be a perceived issue by investors as the funds reach a size they feel will hamper the manager in producing returns greater than their peers and benchmarks. However, while some managers have closed to institutional business they remain focused and open to retail business.
- Advisers and consultants are looking to offer their clients something different and boutique managers.
- Their flexibility and size allows them to invest in sectors where generally the larger managers would struggle to find make meaningful enough allocations.
- More often than not boutique managers have significant equity stakes in the business and are therefore incentivized to generate performance and manage risk.
- The risk of a having a small investment team may hamper the manager in consistently making the right calls.
- Further attrition in the business can leave the fund struggling should the portfolio manager wish to leave.
- Liquidity risks could also hamper boutique managers as an unexpected withdrawal could force managers to liquidate a position which could affect fund performance.
In summary as our investment universe continues to grow. The opportunity to invest in boutique managers becomes more and more attractive to both advisors and clients. It is necessary, therefore, to ensure that your due diligence process is robust enough to ensure you continuously choose the appropriate managers to manage your investments in accordance with your risk profile and investment objectives.