The Titanic vs the speedboats of the asset management world

With more than a thousand registered unit trust funds in existence, selecting the right fund manager for your client can be a daunting task.

Many advisers often follow the prevailing trend and tend to stick with the bigger well-known brands (Titanic), in particular, those companies that spend millions each year on marketing campaigns, whilst ignoring the smaller boutique type managers (speedboats). We think that advisers should broaden their thinking and temper their biases so as to consider the value that boutique managers may be able to offer their clients.

Balancing the scale of considerations

When comparing the large financial services companies with the smaller boutique investment firms, the following positive and negative factors should also be considered:

Pros of a speedboat compared to the Titanic:

• Increasing and maintaining speed through the waves is fairly easy. Large investment companies frequently become victims of their own success. These companies grow exponentially until they reach a certain level where, due to the size of the assets they manage, are only to invest in Large Cap companies and are thus pretty much confined to the Top 40 shares on the JSE. With approximately 400 companies listed on the JSE across the Main Board and Alt-X, this provides abundant opportunity for boutique managers to generate Alpha - excess return above their benchmarks by investing in smaller companies with better opportunities for future returns. What is impressive is that this is done without having to take on any additional risk.
• Captaining the vessel and keeping the crew motivated is easier when the crew is smaller. Boutique firms are typically private companies, owned and managed by the enthusiastic, avant-garde professionals who founded them. These companies also have the ability to make quick investment decisions without interference from trustees or officeholders intent on serving the corporate agenda.

Vested interest increases motivation

More often than not boutique investment firms are born when key members of the investment team at the large asset management companies decide to pursue greener pastures, thus taking with them a wealth of knowledge and years of experience gained whilst working for these corporate giants.

Members of these investment teams often invest their own personal money in the funds they manage. This vested interest in the future long-term success of the company provides them with the motivation to out-perform their peers.

Don’t ignore companies of scale

There are also some downsides in choosing a boutique firm over a larger company.

• Complying with maritime law and the costs of keeping the boat on the water can be quite daunting. The costs of running an asset management business have increased significantly in recent years. Licensing fees, compliance costs, human resources are but just a few of the mountain of costs involved in running a successful asset management business.

This puts the larger firms at a slight advantage since most of these companies have internal divisions tasked with compliance and keeping up to date with the changing regulatory environment, whilst the various fund managers focus on their primary task of managing money.

No security blanket for boutique firms

When it comes to describing a boutique asset manager, there is no one-size-fits-all definition. Some of them have only recently set up shop while others have been in business for years. Many of these established practises have come up with innovative ways to overcome the limitations of their own internal systems and others are outsourcing back office functions. This allows the professional investment staff to remain focussed on wealth creation for their clients.

Boutiques are the speedboats of the investment world, delivering relative outperformance whilst being able to respond swiftly to changing market conditions. The successful independent boutiques are able to provide an investment alternative that can meet the evolving needs of today’s investor. Advisers will be well served to take a closer look at them.