Up until the last two decades, few investors would risk entrusting their assets to a small management firm, preferring to leave the task of preserving and growing their wealth up to larger, more established asset managers.
However, smaller, independent firms have risen up since the 1990s, making inroads into the market share dominated by life- and bank-owned asset managers in the preceding decades. They have become increasingly popular among investors looking for a different slant on investment. These smaller firms – commonly referred to as boutiques – are proving themselves a good fit for clients who are looking for a more nimble approach to investment, backed by high-quality research and investment processes and superior levels of client service. At the end of 2016, there were roughly 126 small, independent asset management firms in South Africa, with approximately R2.4 trillion of assets under management – 47% of the country’s total of R5.2 trillion total assets under management. And the majority of assets under management by boutiques were in the hands of the top 10 boutique firms in the country. So it is unsurprising that the amount of new business flowing to boutiques continues to rise, as they consistently outperform benchmarks in terms of long-term value.
While their smaller size may initially have seemed to pose a challenge, boutique firms have turned it into a distinct advantage. The fact that they deal with smaller investment values enables boutiques to react more nimbly than larger firms to changing market dynamics. Where market conditions rapidly change, they are able to act faster, thereby taking advantage of opportunities or reducing risk for their clients. In the cases of EOH, FBR, ASC and DAW, for example, boutiques were able to sell out of these positions efficiently before the stock values fell to significantly lower levels. Another example is the Steinhoff debacle. Smaller firms who were holders of the share when the story broke were able to make the decision to sell quickly, and to execute those trades within a matter of hours, protecting their clients from enormous losses.
Large firms are unable to act with the same speed, due to the huge pools of assets that they manage, while smaller firms are able to sell out of and buy into positions much more quickly. And whereas small and mid-cap stocks would usually add no significant value to larger managers’ funds, they can have a very meaningful impact for boutique asset managers.
As for the question of talent, it’s no secret that many of the country’s most respected investment professionals have moved away from larger firms to establish themselves independently, thus thoroughly debunking the postulate that small asset managers lack the experience and expertise of the larger companies. Boutique managers spend a lot of time researching and understanding stocks, asset classes and market forces. There is no room for a ‘fly by the seat of your pants’ philosophy.
In fact, boutique owners often invest significant portions of their own wealth into their funds, which means that they share their clients’ risks – a clear demonstration of their confidence in the skills and knowledge of their teams. These managers have a personal stake in the success of their funds.
Additionally, and by virtue of the fact that they service fewer clients, boutique managers offer a far superior level of service because they can afford to provide a much more personal level of interaction, building solid long-term relationships on mutual understanding and trust.
For investors seeking a fresh approach and personalised investment solutions, a boutique manager definitely offers an attractive option.
Peter Armitage, CEO at Anchor.