An IN place to shop

Boutique managers have been moving into Main Street. As Zilla Efrat reports, they are not only winning those mandates, but they are also increasingly being scrutinised by asset consultants and rating houses.

Almost invariably these days, the departure of a hot shot fund manager from a major institution is followed by a wave of speculation that he or she is about to start a new boutique firm.

The managers may soon reappear at another institution, or even at a super fund, but it isn't hard to see why the market believed they were out looking for new premises to set up a new autonomous shop that would give them more control over their destinies.

There would, of course, be many success stories to have inspired them, like that of Maple-Brown Abbott, the top value manager throughout the 1990s. Also, the boutique manager formula is increasingly attracting attention and fast gaining respect, mainly because it seems to work.

The latest research by asset consultant Steven Vaughan, of Dr Steven Vaughan & Associates, shows that the average investment performance of boutique managers compares favourably with that of major institutional managers.

Vaughan recently studied 16 employee-owned and boutique firms, most of which are focused on the wholesale market. He found that over 60 per cent of these outperformed the market on a monthly basis while almost 60 per cent achieved excess returns of over 3 per cent on an annual basis.

"The incidence of positive rolling annual returns is relatively high and the avoidance of large (less than -2 per cent one year return) negative returns is high," says Vaughan.

He says this kind of performance helped the 16 firms he examined to boost funds under management by over $4 billion to $9.1 billion since December 1999 (a rise of 95 per cent) and to treble their total FUM over the past three years.

According to Vaughan, managers that have been particularly successful at increasing FUM are Contango Investment Management, Jardine Fleming Capital Partners, Wallara Asset Management and Balanced Equity Management.

But others also report that mandates have started rolling in.

For example, Perennial Investment Partners managing director Ian Macoun says over the past six months his group has won around five mandates worth about $300 million. "And, we are just hitting our straps," he says.

Ausbil Dexia's investment head Michael Wilson adds that his firm's strong performance has helped it pick up around four mandates worth about $40 million in the last few months, bringing total FUM to around $1.5 billion.

And, Focus Investment Management, which celebrated its first birthday in May, is, according to its managing director Stephen O'Brien, poised to make some mandate announcements.

A sign that boutique managers are starting to come into their own too is that rating houses like van Eyk Research are beginning to study them, even though many lack a three-year track record in a market that reveres historical results.

Head of research at van Eyk, Rob Prugue, says his group's rating process only gives a 25 per cent weighting to past history. It does look at a manager's performance at a previous employer, but will also examine whether the results were legitimately achieved by the manager, or by the entire team.

Van Eyk has already scrutinised eight boutique managers and will study four more, but the results are very promising.

Associate director Dragona Timotijevic says: "So far we have been quite impressed when we compare them to some of the big managers. At this stage we are likely to recommend at least three managers and two have the chance of getting our highest rating."

She says boutiques have much flatter management structures, much more time to spend on research and are very results driven.

So what is a boutique manager?

Macoun isn't exactly mad about the term 'boutique'. "It makes us sound like a dress shop," he says.

But, it seems, the name has stuck because these managers do have much in common with their clothing counterparts - they are typically specialists where the owners have substantial control of day-to-day business management and they operate separate to large branded institutions or chains.

But there is one major difference. The term 'boutique' implies small, but fund managers like, say, Maple-Brown Abbott with FUM of $12.8 billion by end-June 2000, are anything but small. And, in the US, some boutique managers are enormous.

Ownership, however, comes in different shades. Some are 100 per cent owned by staff, some also have a silent investor and some have institutional backing even though they operate in line with the boutique formula.

The bottom line is that those who work there have equity in the business, which keeps them there and eliminates the revolving door scenario often seen at institutional managers.

"A lot of trustees are tired of all the staff changes at the large managers," says Vaughan. "They are interested in getting a manager who has a stable team and they believe that the structure of boutiques makes them more stable."

But while there are lots of advantages to the boutique formula, there are also major risks, not least of which, according to Prugue, is the "key man" risk. These firms, he says, are often focused around one person and if that person gets hit by a bus, they are in trouble.

Another negative is that boutiques often have limited resources because they are still building up their track records and their funds under management.

Macoun warns that some managers who try to do it on a shoestring can run out of capital, which creates stresses and takes their eyes off the ball.

"It is a tough road and not all boutiques will make it," he says.

But, he believes, most signs point to further growth among boutique funds managers.

"Institutions are increasingly giving up the idea of having their own investment capacity and are deciding that they don't have to be in manufacturing," he says. "If you have a good brand and big distribution, you don't want everything running on the performance of one investment manager."

This means that institutions could increasingly diversify their managers, and thus their risks, by handing the investment job over to specialists, a trend seen in the US.

Vaughan says some of the larger super funds currently considering boutiques have good core managers in place, but are looking to diversify to smaller satellite managers that are more able to add value.

But while boutiques appear likely to get a bigger slice of super fund money, he doesn't believe they will ever dominate the market.

"Some will not attract enough money, some will want to stay small, some will grow to become mid-sized managers and some will fail," says Vaughan.