What does the crystal ball hold?

Boutiques offer savvy investors the opportunity to reap higher returns, but following a multi-manager approach is recommended.

When I started working, I was chasing a large and regular salary, an antidote to the years of student thrift. Over the years though, my objectives changed and I began to want to combine a good salary with the opportunity to be one of the decision makers and exercise my creativity.

My experience demonstrates why boutique asset management companies - portfolio managers - make their mark at one of the big corporates but tire of the endless meetings, administration and politics. They quit—as I did—and set up their own operations.

Servicing a need

The sheer number of boutique asset managers shows that they are meeting a real need in the marketplace.

By their very nature, they are closer to their clients, who are made to feel special in a way that they rarely are by one of the big corporates. The customer really is king for the boutique firm, whereas the corporate manager often has his or her eye on corporate targets. In short, boutiques breed passion while corporates often generate mediocrity.

Investing down the slope

Another key differentiator between boutiques and large corporates is that boutiques are much better placed to generate top (alpha) returns because they can invest further down the market capitalization slope.

In fact, most of the large funds showing good long-term returns generated them when they were boutiques or at least far smaller.

Richard Oldfield, chairman of the Oxford University investment committee, explains the secret of boutiques’ success, “Boutique investment managers had concentrated portfolios — portfolios with not very many holdings — and they owned only what they liked. The index was there to measure performance. Its country, sector, and stock weightings were not slavishly imitated.”

Another benefit of boutiques is their transparency. They have to justify their holdings, while investors have a tendency to simply trust the bigger guys because they are big. “Look for managers who treat shareholders like partners. The best managers provide in-depth explanations for what they have done, and they own up to their mistakes. Some of the best in this respect are boutiques,” says one commentator.

Watch your risk

Of course, the potential of higher returns always means greater risk. Boutiques generally charge higher fees and, because they lack resources, tend to spend less time on extras like risk management. There is also the risk that the star portfolio manager leaves, and a smaller business is always more vulnerable anyway.

In other words, investing with boutique managers requires in-depth due diligence. Much more time and effort is required to assess a boutique than a large corporate. For this reason, it is recommended that non-professional investors should not invest directly in a boutique but rather make use of a multi-manager or asset consultant, who is better placed to assess the risks and identify the boutique firms best suited to the investor’s goals.

Unit trust spartan

The number of unit trusts here and abroad continues to grow, and it is easy to see that this activity is generated by the formation of new, smaller asset managers with innovative ideas, rather than the existing larger corporates. We must never ignore the value of unit trusts and the value that they can add to a client’s portfolio. It helps clients and advisers manage the risk that is often overlooked by boutique companies who are not accustomed to managing risk.

Boutiques are here to stay because they offer investors an opportunity to take a bigger risk to get bigger rewards. Using the services of a multi-manager or asset consultant offers them a way to do so sensibly.