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Unit trust managers that can ‘look you in the eye’

Five reasons to include a boutique manager in your portfolio.

CAPE TOWN – One of the major themes in the South African unit trust industry over the last decade has been the rise of boutique managers. Dozens of new fund houses have been launched in the country, many of them by experienced managers who have left big corporates to start their own firms.

These boutiques offer investors something distinctly different from the bigger players. They are small, focused, and are generally owned by the same people who are making the investment decisions.

“I consider boutique managers to be companies where the assets under management are under R10 billion, the fund managers have comprehensive experience, and the core fund management decisions are made in-house,” says Hardi Swart, marketing director at Autus. “More than 50% of the company should also be owned by the people who manage the money.”

These characteristics mean that boutique managers approach their mandates differently to their bigger counterparts. And because of this, Swart believes that funds managed by boutique managers should form part of any well-diversified portfolio.

He argues that there are five reasons why any investor should allocate some money to a boutique firm:

Boutique managers can take substantial positions in counters outside of the Top 40

Because of their size, boutique managers are able to take much more meaningful stakes in companies in the mid and small cap space. This allows them to take greater advantage of big growth stories.

“Think of companies like Capitec, Coronation, EOH, PSG and Curro,” Swart says. “They all started out much smaller and have grown into substantial businesses. If you had the ability to invest in those companies, you could have created a lot of alpha for your clients.”

Swart illustrates the boutique advantage with a simple example.

“If you have a listed company with a market cap of R3 billion and a boutique manager running a portfolio of R5 billion, he could buy 5% of the company and it would be a meaningful position of 3% in his fund. But for a larger manager managing R100 billion, he would have to buy the whole company to get that same weighting in his portfolio. And of course he can’t do that.”

Boutique managers have skin in the game

True boutique managers have substantial ownership in the companies they work for, and they are often fully invested alongside their clients. This does change the dynamic because they are not just working for a pay check or a bonus. Their own wealth is in play.

“A lot of boutique managers come from a background of managing funds in corporate businesses, but they have now started their own firms, using their own money,” Swart says. “Often all their wealth is invested in the company, so there’s more incentive for them.”

Smaller teams are more flexible

At asset management firms with smaller portfolios and with less management hierarchy, fund managers have the ability to be more decisive.

“At bigger firms there are many different layers and processes managers might have to go through to make a decision,” Swart says. “In a smaller firm, there is much more flexibility. The fund manager can make and execute a decision without having to go through layers of admin.”

Clients have direct access to decision makers

As boutique managers handle much smaller portfolios, they often have direct contact with their clients. This means that investors are able to speak directly to decision makers about how the funds are being managed.

“At a lot of corporate giants there is little chance as a financial adviser or an investor to have direct access to the fund manger or company owner,” Swart says. “But boutique managers are able to ‘look the client in the eye’. They can tell them why they made certain investments, explain their convictions, and if it works or doesn’t work, they can explain to the client directly why those decisions were made.”

This not only gives clients much more insight into what is being done with their money, but also allows them to make much more informed choices about which managers to use. Having the opportunity to really engage with the practices and philosophies used by boutique managers can give investors a much higher degree of comfort that their money is being looked after in a way that they agree with.

Boutique managers have a record of out-performance

Using the figures from Moneymate up until the end of June 2015, Swart points out that in the two biggest unit trust categories – South Africa multi asset high equity and South Africa multi asset low equity – smaller managers feature very prominently in the performance charts.

Over the last three years, nine of the top ten funds in the multi asset high equity category and eight of the top ten in the low equity category are run by smaller managers. Over five years, six out of the top ten in both categories are managed by smaller firms, and over seven years, five of the top ten multi asset high equity funds and six of the top ten multi asset low equity funds are run by smaller managers.

“I think that says something about the ability to perform and deliver alpha,” Swart says. “Due to a combination of the above factors, I believe boutiques do bring something to the table.”

Swart does however acknowledge that big asset managers have their own advantages too.

“It shouldn’t be an either-or decision, including boutique managers instead of big, established managers,” he says. “It should rather be a combination. A well diversified portfolio would include both.”

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Pretty good article, but written by Autus’s marketing director so very one-sided. I wish he’d elaborated on the advantages of the bigger asset managers too, there are numerous and it would’ve given a more balanced perspective. Many of the bigger asset managers are also life assurers, so they’re unlikely to produce impressive returns. But the pure fund managers like Allan Gray, Coronation, Foord and Prudential are really top of the pile.

The boutique managers may be a little more flexible but they also carry more risk because they usually only have one or two key decision makers and not a larger research team behind them. “Skin in the game” also has it’s pros and cons – it makes decisions more emotion-led and that’s dangerous in this industry.

How da Hell you get to say Allan gray is top of the pile? they dont beat the jse 40 index and they dont have a tax free account.Those intelligent baboons missed listed property and are still convinced it was the correct decision,as per there presentation at the sandton convention center.

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