DFMs rethink giants for core allocations as boutiques shine

Buffettology and Evenlode among the small firms topping charts

The prevalence of boutiques in core asset classes such as UK equities is prompting a rethink from DFMs over whether allocations to funds from small firms no longer needs to be limited to niche areas.

Portfolio Adviser crunched the numbers across 12 of the most popular Investment Association sectors and found that funds from SME firms were among the top performers in areas like global equities, emerging markets, Japanese equities and UK Smaller Companies.

International equities top quartile over three years

Even in populated sectors within asset classes such as UK equities, boutiques delivered strong performance.

In the IA UK All Companies sector four out of five of the top performers on a three-year view were from boutique outfits with Chelverton’s UK equity fund leading the pack, followed by Sanford Deland’s £1.1bn Buffettology fund.

On a one year view Nick Train’s Lindsell Train UK Equity fund is top of the IA UK All Companies chart, returning 17.3% versus the sector’s -0.3%, and Hugh Yarrow’s (pictured) Evenlode Income ranks third (16.7%) after Aviva Investors UK Equity (17.2%).

UK equities top quartile over three years

Boutiques traditionally counted on for specialist expertise

GDIM investment manager Tom Sparke says his current exposure to boutiques tends to be in more specialist areas but adds he would not discount using smaller firms for any aspect of portfolios. He notes Evenlode, Chelverton, Neptune and Castlebay are all good performers in the crowded UK fund marketplace with “intriguing propositions”.

At Psigma Investment Management, roughly one third of its 32-name buy list is held in boutiques.

However, it tends to rely on boutiques when investing in less liquid areas of the market like fixed income. In 2012 it partnered with TwentyFour Asset Management on a credit mandate for its portfolios.

“We don’t have a rule as regards to which sectors we like, but generally we think it makes best sense within the fixed interest markets,” says Rory McPherson, head of investment strategy. “These can be more complex and more illiquid than equities and our view is it makes sense to have high transparency and control within the underlying assets. Specifically, we want exposure to short-dated, short-maturity and higher yielding credits.”

Fixed income was one area where boutique funds did not beat out rivals from larger firms. Funds from FTSE firms Rathbones and Schroders represented the best of the sterling corporate bond space, while Royal London snagged two out of five spots in the sterling strategic bond category.

TwentyFour also appears on Sparke’s buy list alongside Alquity, which specialises in high growth markets in Africa, Asia and Latin America, and Gravis. He highlights Gravis UK Infrastructure in particular for excellent performance providing returns of over 10% on a low-risk base.

Nimble boutiques vs cumbersome giants

Many of the members of boutique asset management lobby group New City Initiative have niche specialities, such as Jacob Rees-Mogg’s Somerset Capital. Others, such as Robin Geffen’s Neptune and Polar Capital offer both specialist and core equity products.

NCI argued there is a clear performance advantage at boutique asset managers, in a recent report it published with data from Mercer Capital.

“As large asset managers get bigger, performance sometimes gets worse as it is not as easy to move in and out of trades,” said one NCI member quoted in the study.

“Even if investors are paying lower fees at these large fund managers, they might not be getting the performance they deserve. Boutique asset managers can give investors exposure to niche or specialised products, which is much harder to do at larger fund managers.”

BMO GAM investment manager Scott Spencer, who sits in the multi-manager team, says that because active managers at smaller firms are not as beholden to benchmarks as rivals from larger firms they can hold up better in volatile environments.

“We search for managers and firms who have incentives to perform rather than to raise assets, funds and managers who control the capacity and managers who are not afraid to invest away from the benchmark,” says Spencer. “You do find that many managers at smaller firms do better when volatility increases as they are willing to be less constrained by the benchmark or when their style and way of investing is in vogue  as they have the freedom to fully express this approach.”

He says the multi-manager team are “big supporters” of investment boutiques like Findlay Park and Edgewood for US exposure, as well as Prusik for Asian Income and Coupland Cardiff’s Japan Alpha fund.

Don’t romanticise the boutique

Tilney is agnostic on boutiques with “niche investment houses” like Evenlode, Findlay Park, Tellworth, Lyrical and TwentyFour, featuring on its 92-strong buy list, says managing director Jason Hollands.

Alongside sit large, diversified groups like Blackrock, Fidelity and Schroders and firms that are “in between in size and scope” like Liontrust and Baillie Gifford.

But Hollands believes some people are guilty of romanticising boutiques based on the perception that “managers are less constrained and often are co-owners of the business and masters of its destiny”.

“Of course boutiques are not a panacea and time spent managing the business is also time spent not managing the funds,” he says. “Businesses with a narrow focus can come under pressure when the asset class or their style is out of favour with the market environment, whereas larger group have fortress-like qualities.”

His comments chime with research from AJ Bell tracking the trajectory of the UK’s most well-known star managers while they were at larger asset managers and after they had left to set up their own independent ventures.

With the exception of Nick Train, every other manager saw their performance drop off after setting off on their own, most notably with Woodford, whose average annual alpha on the Woodford Equity Income fund has been -7.24% since launch compared to the 4.27% average annual alpha he delivered at Invesco.

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