Small Asset Managers outperform larger peers during the recession, as flexibility proves resilient in volatile markets

In what has been the most volatile market environment for more than half a century, white label funds, managed by Small Asset Managers, outperformed larger funds by huge margins, dispelling some of the myths about these types of funds.

Over the past few years white label funds have become popular and have grown at a prolific rate mainly due to the investor protection and investor friendliness provided by these structures. Metropolitan Collective Investments (MetCI), a market leader in the white label fund industry has seen assets under management increase exponentially from a R2bn in 2002 to about R25bn in 2009. According to latest statistics, less than 3 out of the 10 most expensive single manager collective investment schemes in SA are white label funds, while less than 4 out of 10 amongst fund of funds in SA are white labels, based on total expense ratio – (TER).

Robert Walton MD at MetCI says like all collective investment schemes, white label funds have become well-liked with retail investors - mainly due to the transparency, disclosure and the regulatory framework that is easily understood and designed to protect investors. The success of white label funds can be attributed to the huge opportunity it created for small managers to focus on their core business - managing assets - while service providers like MetCI provide compliance, administration and other support services. Walton says, this partnership works if one considers the performance of many small managers in what has been an extremely difficult period for investors.

Two white label funds managed by MetCI showed the best performance at the recent Raging Bull Awards. The Dotport Stable Prudential Fund of Funds and the BlueAlpha All Seasons Fund managed by MetCI won the Prudential and the Flexible Asset Allocation categories respectively. The award which measured total returns in a three-year period showed that Dotport yielded a cumulative return of 33,1% (vs an average return in its peer group of 18,6%), while the BlueAlpha fund yielded a 47,4% return (vs an average return of 16,5% in its category).

This comes as no surprise as some of the attributes contributing to the success of smaller asset managers are that:

• Small managers are more flexible in their asset allocation strategies. Active managers who outperform the index do so based on their ability to generate alpha based on small and medium cap investments

• Small managers tend to have lower staff turnover and develop a better level of understanding of the companies they invest in

• Small managers almost always have a personal stake in the business. Considering that most of their fees are performance-based they have a genuine stake in acting in the best interest of investors.

The success of white label funds at the Raging Bull Awards is evident of the buoyancy ofsmall managers relative to their larger peers and should be carefully considered by investors.

Walton says that while both local and international evidence supports the case for small managers, there has, however, been some criticism leveled against white label funds - mostly unfounded. The most popular perception being that white label funds add another layer of costs to investors.

According to Walton there is also perception by some that white label funds are riskier than other collective investment schemes. He says as a financial service provider, the main aim of MetCI is investor peace of mind. So while MetCI takes care of the day to day compliance and administration of the funds, it also conducts the necessary due diligence and management performance assessments of its funds under management. Most importantly, says Walton, the fund’s ability to pay out investors is underpinned by Metropolitan’s balance sheet.

Finally as is the case with all investment types like retirement funds or absolute return funds, investors must apply the same investment considerations when choosing a white label fund like the fund’s mandate, fund managers experience, track record and the like.