Fund managers’ performance – new research shows size not driving factor

New research by South Africa’s leading provider of multi-manager investment portfolios shows that size is not the driving factor in fund managers’ performance and refutes the argument that investors are necessarily better off buying smaller, more nimble managers.

Mark Lindhiem, head of manager research at Investment Solutions, said that the company has researched the performance of asset managers over the past 9 years which includes 2 bear markets and one long bull market.

“This study concludes that being small and nimble has definite advantages in rising equity markets, but in bear markets like the recent global financial crisis, many smaller managers have found themselves with significantly fewer assets as markets fell and investors withdrew to the safety of cash.

“Clearly this is not good for business and can and even jeopardise the survival of these smaller managers.”

However Lindhiem notes larger managers also faced tough times and the trend by a number of the large asset managers to break their investment businesses into smaller boutiques or silos during the bull market has in some cases saved them from possible extinction.

“By creating different boutiques or franchises, the larger managers have ensured they can survive and even be very competitive with the smaller specialist and more flexible houses.”

Lindhiem advises however that asset managers really need to be evaluated over the full length of a market cycle and points out that experience and skill of the individual asset manager is the ultimate arbiter of funds’ performance rather than size.

Reference can be made to the Alexander Forbes Manager Watch survey of July 1998.

“Nearly 70% of the 25 managers in that survey don’t exist today or have been restructured into different organisations.

“A material number of these had weak performance over 3 or 5 years and as far as size goes, the smaller managers have disappeared altogether while the large ones have been substantially restructured and exist as different organisations today.”

Lindhiem said that those that have survived tend to have a common ingredient being smart people with a supportive and enabling environment and with sufficient aligned incentives in place.

Lindhiem also pointed out that there have historically been two main drivers in the trend toward boutiques.

“Firstly, those who left the larger houses to enable them to drive their own destinies by avoiding some of the restrictions of a larger organisation and also to have a greater share in wealth creation should they deliver. Nowhere is this more evident in the local hedge fund industry which has attracted some of the brightest minds.

“Secondly, the larger asset managers have broken their businesses into product or style centric silos to give the impression of smaller more nimble and competitive offerings within the confines of a larger organisation.

“This enables them to compete on more equal footing with the independent boutiques without losing the talent.”