Asset management: where bigger isn’t always better

In the world of asset management, the size of a firm can be inversely proportional to its investment agility and investment universe.

Choosing an asset management firm simply on the strength of its size can prove to be a costly mistake. Novice investors may feel reassured by the massive size or global presence of an asset management firm, believing that a company managing mega-billions must be on top of its game. But while very large investment firms may well be capable and reputable, their size can become a handicap.

There are rules and limitations in the asset management industry. There are regulated limits to the shareholdings allowed by a single entity. This means that firms managing multi-billions and trillions in funds can no longer consider small cap shares, effectively shrinking their investment universe. Smaller, boutique fund managers, on the other hand, can consider the gamut of the 400 companies on the JSE main board, because there is little or no risk in their breaching the limitations.

South Africa’s stock market has seen one of its biggest bull runs in years. So most of the shares in the top 100 to top 40 are overpriced. However, there is still value in the small and mid-cap sector, typically where the boutique asset managers play and where the largest firms are restricted from participating.

These limited investment options also raise the question of liquidity. If major asset manager A buys into major enterprise B, it finds itself sitting with a huge amount of shares and possibly limited demand in the market. If the investment proves to have been a mistake, or asset manager A simply wants to offload those shares, doing so could take a lengthy period. In contrast, a boutique asset manager, with smaller shareholdings and a more diverse portfolio, is in a position to liquidate that position quickly.

Because agility is often key to success in investments, the faster a firm can move and the broader its investment universe, the better returns it can deliver to its clients. When considering a boutique asset manager, look to its track record, the experience of its staff, its governance and processes and its access to the same advanced systems used by the largest asset management firms. Question the firm’s ability to deliver a broad range of investment options, as well as its commitment to delivering the best possible returns for its clients.

The current investment market is becoming more complex, value is harder to find and asset managers are having to look at different and innovative solutions to create positive returns for clients. Given these conditions, clients are advised to consider investment styles that certain boutique managers can offer too increase clients investment returns.

GCI Asset Management, with a 14-year track record, is a small and growing firm that now manages over R1 billion for its clients.