Boutique funds have a number of advantages over larger fund houses including leaner cost bases and greater discipline when it comes to asset gathering, according to David Coombs (pictured). 
The FE Alpha Manager, who runs a number of multi-asset funds for Rathbones including the four crown-rated Rathbone Total Return portfolio, has historically always held a greater proportion of boutique funds across his portfolios than funds from larger asset management firms.
There are certainly presumptions that investors make about both large and small fund houses. While those in favour of larger firms would argue that the managers will take less risks and have greater research resources on tap, those that prefer boutiques would point out that managers have to endure less market noise and have more freedom to exercise their conviction.
From a management perspective, Julie Dean - who joined start-up firm Sanditon Asset Management in 2014 from fund management giant Schroders - says that less noise is certainly an advantage when it comes to running money for a boutique firm.
The manager says that where she is now feels similar to how she felt at Cazenove in 2007 before it was bought by Schroders, when the UK Opportunities fund she was managing was just £35m in size.
Following a period of strong returns, the fund soon grew to approximately £3bn at its peak. While she immensely enjoyed both experiences, the manager says that working for a boutique allows her more time to think clearly and not worry about competing with people who are running similar products.
“One of the hardest things to do in investment is to do something different from the crowd which bears the risk of being wrong, but you have to take that risk to be right and to generate superior returns and if you have too many people around you, that can become harder to do because you tend to lean towards the consensus view rather than something that’s anti-consensus,” she explained.
“A lot of what drives our business cycle process is looking forwards, it’s anticipating change and it’s using your judgment to say ‘I think the business cycle will unfold like this, the implications of that will be…’ and of course to get the maximum return, you buy when other people are selling and vice versa.”
“It’s difficult to go against the grain but it’s easier to do so when that’s what you’re focused 100 per cent. Here we’re totally focused on investment performance. I don’t have to manage a team, it’s all to do with thinking about the economy, about stocks, about risk and then going out and talking to clients about that.”
Coombs agrees that boutiques can be more focused on investment performance and says that their ability to hold a lower level of AUM is what allows them to do this, as they can prioritise quality of performance without the pressure of asset-gathering.
While he says that this can make boutique funds more expensive, he says he is relaxed about this if their performances justify their fees.
“I think a boutique that can limit its capacity, that has more limited distribution and therefore less volatile flows has an advantage from a performance perspective over some of the larger groups, where you feel that sometimes distribution outweighs the investment performance,” the manager said.
“Admittedly that’s a very sweeping statement but that’s been my experience in the past. Say a fund has a UK equity mandate with a bias towards mid-caps for example, they might say, ‘do you know what, we’re above £1bn so we can’t manage this strategy any more but we can close it’. They can do so because they’re quite lean organisation, they don’t have huge marketing or sales departments.”
“Their fixed cost base is quite low, therefore their variable costs are low and therefore they don’t need to manage as much AUM to make a good living. Ultimately you have to pay the fund managers economic market rates and a boutique can typically do that with lower AUM and that’s a very big advantage in my view.”
Another advantage Coombs says boutique funds have is that they run fewer mandates and are therefore more focused on the running of each product.
He argues that, if a fund manager who’s part of a large firm with numerous mandates begins to deliver a strong performance and is therefore responsible for a greater proportion of the firm’s revenue, they can be put under more pressure to reduce risk levels during short periods of underperformance.
“The risk teams tend to be bigger. There’s nothing wrong with that necessarily but when I’m looking for active managers I’m looking for managers who are actually going to take risks,” Coombs continued.
“I understand that’s a two-way stream – sometimes they may underperform significantly, but I’m willing to take that risk. Maybe that’s not appropriate for some members of the retail market.”
“I can see how some advisers may want lower levels of risk and smaller levels of outperformance, but for me I’m looking for significant outperformance and I’m willing to take that risk to achieve that. I do think boutiques, because of their focus, because they’re less impacted by flow and because their AUM is more manageable, the benefits outweigh the greater risk budgets they tend to run.”
In contrast, Schroder’s Robin Stoakley says that larger firms are often deemed by both investors and by managers of potential holdings to be more reliable, which provides them with a greater pool of stocks to choose from and a larger client base.
An example he uses is the likes of large international distributors such as global banks or insurance companies, which will want to build a relationship across countries or continents and are therefore looking for greater reassurance.
“These firms need to know that the fund manager’s brand is well-supported and obviously is out there in the market place, they need to know that the fund manager has a broad products line-up covering all asset classes and they need to know the fund manager has resources to support them in terms of presentation material or client-centric events,” the managing director of UK intermediary said.
“They also need to know that the asset manager has the ability to offer them competitive terms and they need to know that that asset manager, if they’re entering a long-term relationship, has the financial strength to ensure they’re a long-term player.”
“That’s probably a clear area where larger asset management houses tend to have an advantage over boutiques. When I look at some of the major national and international distributors we do business with – the big banks for example, you very rarely see a boutique as a player there simply because they haven’t got those attributes.”
John Clougherty, head of wholesale at Fidelity International, adds that having a large in-house investment team means that any research undertaken is deep and comprehensive.
“At Fidelity, we have one of the largest buy-side global research networks in the industry. Of our 400 investment professionals, half are dedicated research professionals in 16 locations around the world. Our analysts conduct more than 17,000 company meetings every year. Put differently, we engage with a company every 10 minutes on any working day,” he said.
“We believe this 360⁰ research perspective gives our portfolio managers significant insight, helping them to find growth opportunities or income streams that have not been priced in by the market – allowing us to consistently add value for our clients.”
However, Coombs says that, in his experience, he hasn’t seen much evidence to support that larger research teams lead to stronger performances across firms. When taking a look at top-quartile performers, he says that it is often a blend of large and small funds that have done well and not just the behemoth investment vehicles from large companies.
“I don’t think there’s a massive correlation between the number of analysts and performance. Some of the best-performing funds have no analysts at all and the manager just uses sell-side, such as Prusik’s funds,” he said.
“I’ve heard that argument before but I’m not convinced by it. Unless someone can show me the evidence that supports the idea that 50 analysts are better than two at all times, then I’m afraid I’m not convinced by that.”
