Two recent studies have shown a premium can be derived by investing in equities with boutique asset managers, but investors must choose carefully because outperformance is only in certain asset classes and the definition of boutique is subjective.
Recent moves such as that of Nick Clay and his team from BNY Mellon Investment Management to RWC Partners and Jupiter’s former European equities star Alexander Darwall going solo have highlighted the pull of boutique fund groups for managers wishing to spread their wings without the constraints of shareholders to please or corporate structures getting in the way.
Multi-boutique Affiliated Managers Group (AMG) published a study recently that found boutiques are better at generating excess returns in periods of heightened volatility than non-boutique or passive firms.
The study used data from around 5,000 institutional equity strategies and analysed rolling one-year returns for the 20-year period ending 31 December 2019, across 11 equity categories, taking into account volatile periods including the dotcom bubble and the global financial crisis. It defined ‘high volatility’ as years during which the annual average Vix was above 20.
During the dotcom bubble between 2000 and 2003 boutiques produced cumulative gross returns of 29.1% compared with 20.2% for non-boutiques. During the financial crisis, defined as 2008 to 2011, boutiques delivered returns of 1.7% while non-boutiques produced just 0.1%.
Between 2000 and 2019 the average boutique excess return compared with non-boutiques was 116 basis points (bps) during high volatility periods and 41bps in all periods. In addition, AMG said in periods of high volatility boutiques delivered average gross returns of 6.5% compared with 5.3% for non-boutiques.
AMG identified the greatest outperformance by boutiques was in global equities, emerging market equities and small cap equities.
“Two decades of data strongly indicate that now is the time for investors to turn to independent active boutique managers – independent boutiques generate the highest excess returns, relative to both passive indexing and larger active managers, in periods of elevated volatility,” says AMG chief executive Jay Horgen .
Seven IM prefers impartial research
But Seven Investment Management (7IM) senior portfolio manager Peter Sleep questions how robust AMG’s figures are, saying he does not think AMG can have enough years where the volatility of shares is greater than 20% in the last 20 years to draw any robust conclusions.
“I would much prefer to rely on impartial research from independent research houses that try to control for biases and come up with a more rigorous answer,” he says.
Sleep notes a study published last month by Andrew Clare at the Cass Business School which, while not taking into account performance during periods of market stress, does identify a boutique premium if you adjust for biases to areas like small companies.
The study compared the alpha generation of 783 euro-denominated long-only equity funds from the 120 largest asset managers in Europe with 299 funds from boutique managers between January 2007 and July 2019. It used two methods to determine alpha: an index model based on Morningstar categories; and a model based upon factors created by Fama and French (2015).
Boutiques offer premium in European mid and small cap and GEMs
Like the AMG study, it found risk-adjusted returns tended to be higher for boutiques than those generated by non-boutiques –particularly in European mid and small cap and global emerging market equities. Less so in other areas like European and global large cap.
Based on the index model, boutique funds on average outperformed funds managed by large asset managers by just over 0.8% per annum on a gross of fee basis and 0.56% on a net of fees basis, even though boutique funds tend to be more expensive because they lack the economies of scale available to those at larger fund houses.
For European mid and small cap the boutique premium identified was 0.94% and for global emerging markets it was 0.54%. But for European large cap and global large cap it was just 0.08% and 0.01%, respectively.
Using the factor model, boutique funds delivered a premium of 0.23% on a net of fees basis. Again, the premium was strongest for global emerging markets (1.74%) and Europe mid and small cap (1.04%) and reduced for Europe large cap (0.18%) and even negative for global large cap (-0.29%).
“These results suggest in particular, that if an investor is looking to invest in a European mid/small cap or in an emerging market equity fund, then they should give serious consideration to investing with a boutique fund manager,” the study said.
Sleep says this premium is worth going for but selectively as there is a high dispersion of returns for boutiques. “Just ask investors in Woodford,” he adds.
What is a boutique?
Selection is crucial because the definition of boutique is subjective. Some even view teams within larger organisations of having a boutique culture depending on their level of autonomy.
The AMG study defined a boutique as running fewer than $100bn in assets, solely focusing on investment management, not exclusively investing in smart beta or fund of funds and also having significant principal ownership. The Cass study termed it as one where the primary business of the firm is asset management, where the management owns at least 10% of the equity, and with AUM of less than £77bn.
BMO Global Asset Management multi-manager team investment manager Scott Spencer (pictured) says defining a boutique is a grey area, using the example of Artemis which has £21.6bn assets under management. “Artemis is probably still a boutique, but it’s where you want to draw the line because Artemis has multiple asset classes.”
Spencer says one reason boutiques tend to perform better in a downturn is because managers tend to have their own money in the fund and are more willing to raise cash.
“There are more boutiques that run portfolios with the ability and flexibility to have higher cash than core funds which are more tied to the benchmark.”
The BMO Gam team ends up with a larger proportion of boutique managers because they tend to meet its ‘ABC’ criteria – alignment of interests, benchmark unconstrained and capacity constrained. In fact, Spencer estimates between 60 to 70% of the names the team owns aren’t available on mainstream platforms.
The team also finds boutique managers have higher active share and that smaller firms are more willing to control capacity to maintain the performance profile rather than seek to gain assets.
“We want managers who are incentivised to perform,” Spencer adds. “You get that more in boutiques than you do in larger companies.”
Sleep says 7IM does not have a formal bias to boutiques and opts for what is best for clients which results in a mixed bag.
“In the UK equity space we have Majedie, Threadneedle and Investec, but more mega manager than boutique. In Europe we have Premier Miton and Lightman – more boutiquey. Our latest purchase is T Rowe Price Japan – very much not a boutique.”
