Building brand awareness is a winning formula in many industries, as it tends to result in repeat sales, and the fund management industry is no exception.
Behemoths such as Invesco Perpetual and M&G have dominated in terms of fund sales over the past decade, reaping the rewards of having successfully built up their profiles. Brand messaging has been voiced loud and clear through various marketing campaigns, including advertisements in traditional print publications such as Money Observer.
But while there is a certain comfort factor in buying a fund that is a household name, investors who ignore the smaller niche firms specialising in specific investment areas do themselves a disservice, as many ‘boutique’ fund managers more than hold their own in terms of returns.These firms spend little or nothing on advertising and instead let their performance do the talking.
WHAT’S IN STORE?
Identifying firms that can be categorised as boutique is not an exact science, but the task is made easier when we consider the origin of the word in the French term for a small shop. It is fair to say that a boutique fund manager usually sticks to one area – emerging markets or smaller companies, for example – rather than attempting to be a jack-of-all-trades across various asset classes and sectors.
Backing a boutique has several advantages as far as investors are concerned. One is that the fund manager’s interests are more directly aligned with fund performance, due to the fact that he or she has a bigger stake in the overall business. This attraction is one of the main drivers behind a new breed of boutique fund that has emerged over the past few years, created by star fund managers who have jumped ship from larger, long-established firms.
Neil Woodford, who left Invesco Perpetual to establish his own business just over three years ago, is the most high-profile name to break ranks. The army of investors who followed him will have no complaints, as his flagship fund, CF Woodford Equity Income, is up 39 per cent since launch (from 2 June 2014 to 5 June 2017), placing it at the top of the Investment Association’s UK equity income fund sector over that time.
Two other new boutiques that have sprung up are Crux and Sanditon. The former was set up by the respected European investor Richard Pease, who formerly worked for Henderson and New Star. The latter has Julie Dean, a well-regarded UK fund manager who previously worked for Schroders and Cazenove, on its books.
Ben Wattam, an investment director at wealth manager Mattioli Woods, points out another advantage of boutique funds: the greater freedom they enjoy. He says: ‘Boutiques usually have more independence in the way they manage assets, whereas in larger management groups there is often corporate pressure to comply with a company strategy or risk committee, which forces managers into more benchmark-aware behaviour.’
Because they don’t have to toe a corporate line, boutique managers tend to be truly active, as evidenced by a high ‘active share’ measurement, says Ben Willis of wealth manager Whitechurch. Willis says that by choosing a boutique, the odds of picking a closet tracker – a portfolio with an active label that in reality does little more than mirror the makeup and performance of an index – are much lower.
‘Boutiques are generally stockpicking funds rather than those making big macro calls. They show little regard to benchmarks and invest where they see the best opportunities, operating in an unconstrained manner,’ adds Willis.
ROOM TO MANOEUVRE
Boutique fund managers also enjoy a freer hand as a consequence of the small size of their funds. Unless there’s a star name – such as Woodford – at the helm, boutique funds are often small enough to be below the radars of both do-it-yourself investors and financial advisers.
According to Tom Becket, chief investment officer at wealth manager Psigma, small is beautiful as far as fund investors are concerned. This is because the bigger a fund becomes, the tougher it is for its manager to move the needle, as the pool of stocks that can be invested in shrinks. Dealing with large sums means a fund manager can only look at the largest and most liquid shares.
Becket says: ‘We have had a good experience working closely with boutique fund managers. We find them highly effective when investing in more niche areas of the market. Often funds managed by boutique asset managers are likely to be smaller, and therefore more manoeuvrable and efficient in exploiting opportunities .’
With greater freedom comes greater clout. But Premier Asset Management’s Simon Evan-Cook, who runs various multi-manager funds, points out that greater freedom is not always healthy. He says: ‘As there is not the same level of oversight and a lower head count in terms of the number of people who sit on risk committees, it is tougher to overrule a boutique fund manager. For example, I could envisage a scenario where a boutique fund manager might attempt to make a big macro call and raise the fund’s cash weighting, but not be challenged appropriately.’
David Lewis, a multi-manager at Jupiter Asset Management, agrees. He says: ‘It is more difficult to stand up to a fund manager who rules the roost.’
Lewis advises investors to focus on manager skill. He says the expertise of the fund management giants in certain areas will shine through. Aberdeen, for example, has 62 funds across various sectors and asset classes, but its strength lies in emerging markets. He says: ‘We are always on the lookout for talented people to invest in, regardless of whether they work for a small or large company.’
The proof, however, comes in the performance pudding, and on this front, boutique funds do, on the whole, stand out from the crowd. Research conducted for Money Observer by Whitechurch Securities examined how the performance of boutique funds stacked up across three IA sectors: UK all companies, UK equity income and UK smaller companies.
Four boutique funds were chosen in each sector, while a long investment timeframe was picked to allow managers’ skills to be assessed. The end of April 2009 was chosen as the starting point for the study, as it marked the beginning of the current eight-year bull market for UK equities following the financial crisis.
In each sector, the average performance of the four boutique funds was well ahead of both the sector average and the wider index – the FTSE All Share index and FTSE Small Cap (excluding investment trusts). In the UK all companies sector, the four funds chosen were: MFM Slater Growth (which returned 446 per cent over eight years to the end of May), CF Lindsell Train UK Equity (324 per cent), Cavendish Opportunities (321 per cent) and Majedie UK Focus (200 per cent).
Each comfortably beat the sector average return of 158 per cent, as well as the FTSE All-Share index return of 152 per cent.
In the UK equity income sector it was a similar story, although one boutique fund, Miton Income (up 155 per cent), slightly lagged the sector average return of 156 per cent. The other three – Unicorn UK Income (up 374 per cent), Chelverton UK Equity Income (329 per cent) and Trojan Income (179 per cent) – all produced meaningful outperformance.
This was also the case for the four boutique funds that sit in the smaller companies sector. TB Amati UK Smaller Companies led the pack (returning 421 per cent), followed by Marlborough UK Micro Cap Growth (394 per cent), Unicorn UK Smaller Companies (356 per cent) and CF Livingbridge UK Micro Cap (262 per cent).
All four beat the sector average return of 261 per cent and the FTSE Small Cap (excluding investment trusts) return of 229 per cent.
FOUR UNDER-THE-RADAR SPECIALIST FUND TIPS
Various UK boutique funds pack a punch, but most niche firms with expertise in their field are focused on specialist areas.
For bonds, Psigma’s Tom Becket tips TwentyFour Asset Backed Income, which invests in asset-backed securities, an area of the bond market other fund managers shy away from. TwentyFour is a bond specialist with no equity funds on its books.
Another specialist in its field is Charlemagne Magna Emerging Markets Dividend, which is picked out by Premier Asset Management’s Simon Evan-Cook. He also likes Lindsell Train Japanese Equity for its long-term buy-and-hold focus.
Ecofin Global Utilities and Infrastructure trust is another specialist with a strong pedigree in its field. It has a dividend yield of 5.1 per cent and a discount of 13 per cent, which the management team is keen to reduce.
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