The role of boutique managers in generating returns

The goal of structuring any retirement portfolio should be to have a blend of managers who excel at delivering consistent performance to their clients and tapping into a variety of sources of alpha. What retirement fund trustees and consultants should try to do is identify where the manager’s true skill lies and then appoint mandates to managers which capture the best skills of that manager. Each aspect of the overall portfolio should be managed by the manager most skilled in that area so that, holistically, the portfolio is tapping various sources of return in the most optimal way.

This could be through the use of boutique managers, large institutional managers or a combination of both. It all comes down to which mandates are the most appropriate to allocate for the fund, based on their liability profile, and then which managers are most skilled to manage those mandates. In this manager selection process, however, it is vital to make sure that all operational and compliance requirements are in place so that clients are in no way exposed to the risk of an administrative, operational or compliance failure.

A boutique manager could be classified as any asset manager with an investment team smaller than 15 professionals and assets under management below R20 billion (although this size of assets would always be a moving target) and not having the ownership of a larger financial institution. Boutique managers also tend to offer a more focused product offering that speaks directly to their skills.

There has definitely been an increase in the number of asset managers in South Africa over the past decade, with most of these starting as boutiques and some having become more established houses. Over the past decade, there was a definite need for some new players to enter the market to provide differentiated offerings. There was also a need for new companies to emerge to diversify the ownership of financial services firms and make ownership in the sector more representative of the demographics of South Africa. The industry still has a long way to go in levelling the playing fields in a post-apartheid South Africa.

Contrary to a popular perception, in my opinion, boutique asset managers do not necessarily charge higher fees although they may well offer varying fee structures and scales. The South African equity space in particular is very crowded, so managers are not going to prejudice themselves through a premium cost offering.

It is quite probable that total fees may be higher for some boutiques that charge performance-related fees and have managed to significantly outperform the market and their peers by generating sizeable income from their outperformance, thereby giving the impression that they are charging higher fees relative to their underperforming peers.

In terms of whether a boutique asset manager can offer a competitive advantage when compared to bigger institutional managers, it depends on the set-up of both the boutique and the bigger institutional managers. Boutiques are often able to make quicker investment decisions because they don’t have committee structures to work through and because they don’t have large teams of analysts who all need to have a view that is expressed in the portfolio.

That is not to say that this happens at all institutional managers but it can be a trap for the bigger institutions if the businesses are set up in this manner. Smaller asset managers also can afford to be more nimble and opportunistic in their stock picks and play outside the large cap universe.

Fatima Vawda, Managing Director

27four Investment Managers

You can view the full article on page 18 in the May issue of InvestSA HERE.