David vs Goliath… Does size matter?

Investors often look for a big name when choosing an asset manager, with many assuming that by betting on Goliath they will be assured of superior service, better investment returns and less risk exposure.

But does the amount of assets under management guarantee these benefits? Or are the odds secretly tipped in favour of the underdog David, just as in the original tale?

In the original version, Goliath wore heavy armour and carried a massive sword. David showed up to the battle armed only with his slingshot and a few pebbles, yet armed adequately for the battle, with his focus and hit ratio 100% accurate.

Agile strategies

Similarly, larger asset managers are weighed down by corporate politics that dictate cookie-cutter investment decisions and turn risk management and portfolio diversification into cumbersome processes.

The strategies can become so cumbersome in fact that they are seldom adapted because the decision-making process is so drawn out.

More agile fund managers take a more mechanical, systematic and quantitative approach to investing, and because they are not weighed down by the restriction of corporate decision making, are able to make swift decisions that minimise risk and improve returns.

Activities for better returns

This agile ability means that boutique managers can buy and sell assets without attracting attention in a way that significantly influences the value of these assets.

A Goliath fund on the other hand may only have 1% of the fund exposed to a certain counter, but because it’s so massive, the market will notice and follow suit as soon as it starts to sell an asset, driving the price down. With no control over the behaviour of a sophisticated market, the investor is the biggest loser.

Playing by the rules

Some may argue that the boutique asset managers fly under the radar of regulators, enabling them to dodge compliance and regulatory requirements.

There is no difference in the legislation and compliance requirements for large or boutique investment firms. The only difference is that investors receive a more personalised investment strategy from the smaller firm than they do from a large corporate.

Responsibility = Respons-ability

A recent industry report by Sungard Asset Arena 360 states, “Boutique firms are typically helmed by energetic, forward-thinking managers imbued with a strong entrepreneurial spirit and a passion for developing breakthrough investment strategies. This sense of purpose has often resulted in attractive returns for investors with the right kind of risk profile.”

It takes a keen entrepreneurial spirit and passion for investment for an individual to take the risk of leaving a high-paying corporate position to start or join a boutique asset manager. Such a leap of faith means the asset manager is a deeply invested in the success of his trade as is the investor who entrusts his money to the David.

Not only does the boutique asset manager have more skin in the game than one in a comfortable corporate position - the buck also stops with this person.

If an investor is unhappy with the performance of a large fund manager, there is a complicated complaints process and the fund manager is protected by an armada of corporate layers. With boutique firms, investors have direct access to the asset manager, which allows the investor to raise concerns quickly and the fund manager to personally respond and take responsibility.

Outsourcing results in lower costs

Boutique managers are not bogged down with compliance, fund administration, research and prime broking because these services are usually outsourced at a far lower cost than managing them in-house, as Goliaths do.

There are clear benefits to choosing boutique investment firms. As investors become more aware of the benefits, we will see the battle between David and Goliath play out with similar results as in the original version where David becomes the king.