Since the launch of our strategies in 2009, we have maintained that any structure goes, including boutiques. This focus has helped us to avoid a lot of noise. For us it’s a case of ignoring quartile-rankings and performance-chasing, and the bright lights of huge marketing budgets. Turning over all stones helps us to find those hidden gems and generate that all-important alpha.
Some of these funds, however, are difficult for retail investors to access, due to their structure. Thorough due diligence is also required.
One consideration that underscores our thinking is research that suggests that bigger funds tend to suffer from pallid performance.
Granted, this phenomenon can happen to any manager at any time, but reports suggest that certain mitigating factors may put bigger funds (this can depend on the strategy; for equity funds, we would define 'bigger funds' as larger than £1bn) at a disadvantage.
There are several reasons outlined as to why this might be the case: firstly, the manager may be compelled to hold more stocks in order to maintain a consistent level of liquidity. This can result in the potential to generate alpha being diluted.
Secondly, as a fund increases in size, it becomes a bigger slice of the business’s revenue pie; the fund is therefore of more strategic importance, meaning it can be difficult when the manager underperforms.
In our experience, we have seen managers reduce their beta or take risks in order to maintain performance levels. On the surface, this sounds like no bad thing; however, it can imply a strategy-constraint and the potential to deviate from the investment objective.
Finally, behemoth funds are often slower to move, given inflection points, versus their more nimble counterparts.
Conversely, boutique funds are usually capacity-constrained, removing pressure to gather assets at the expense of investment performance or focus.
More often than not, this characteristic is what seems to attract the most talented managers, some of whom have worked together before – Somerset Capital Management is a case in point.
Boutiques tend to support an environment which encourages fund manager flair, allowing him or her to outperform without the commercial distractions of a bigger organisation. By extension, the fund manager’s interests and time horizons are aligned to that of the investor.
Boutique funds can also be the gateway to more niche strategies, such as Asian equity value. A recent purchase is the Kiltearn Global Equity Fund, a Dublin-domiciled UCITS vehicle run by Murdo Murchison, who is also chief executive officer of the outfit.
The fund uses bi-monthly dealing to reduce the time spent on managing cash-flows in and out of the fund. In our opinion, Kiltearn’s edge is its long-term horizon, as well as having a great pipeline of ideas.
Kiltearn’s approach to value investing is quite interesting because the basic premise is that one out of two ideas will work really well, leaving the others to tick along. This is why we would not regard this as a "deep value" fund.
Kiltearn runs screens on price/book, price/earnings and dividend-yield metrics, and focuses on bottom-quartile valuations.
This is followed by fundamental work, with a focus on intrinsic value. The more valuation legs that are supportive, the better. Some 75 to 80 per cent of stocks are in the bottom quartile, with around 20 per cent in the bottom decile.
There are 70 stocks in the portfolio – the team prefers diversification to protect against stock-specific risk.
The team, which also includes three analysts, rejects stocks with weak balance sheets where they are not being paid to take the risk. Indeed, their aversion to balance-sheet risk means they will never buy very risky stocks or those that rely on macro drivers.
One of the consequences of this type of process is that managers often buy too early and sell too early. As a result, when Kiltearn buys a stock, it starts with a 0.5 per cent to 1 per cent holding and builds it up.
We believe (and have certainly found from experience) that the selective use of boutiques has allowed us to implement our asset allocation in a much more interesting and lucrative way. Their ethos benefits our long-term time horizon, and enabling us to generate alpha at a time when stock and sector dispersion is increasing.
Mona Shah is the co-manager of the Rathbone Multi Asset Enhanced Growth and Multi Asset Total Return funds. The views expressed here are her own.
