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Monday, April 27, 2015 - 02:16
Starting out

With investor appetite having recovered since the global economic meltdown in 2008, more investment managers may be tempted to follow the example of the UK’s star investment manager, Neil Woodford (Invesco Perpetual), and others who left big firms to launch their own portfolios.

His new firm, Woodford Investment Management, raised an impressive £1.6 billion in his CF Woodford Equity Income Fund during its offer period, the biggest-ever portfolio launch and, since then, investments in the portfolio have reached £3.37 billion. Indeed a theme of 2014 in the UK (and other countries) has been investment managers leaving the home comfort of a large investment management group to set up their own firms.
While the UK investment management industry is still dominated by larger investment groups, recent years have witnessed a number of high-profile investment managers choosing to go on their own, with 2014 proving no exception. But, asks Kevin Hinton, head of distribution and client services at MET Collective Investments. “Will the ‘star’ investment managers of the large SA investment management firms also be following suite in 2015?
“In SA, there are many examples already, where investment managers have exited large and established firms at their ‘peak’ and established their own firms with relative success. Or will 2015 result in more consolidation of investment firms, as scale and costs become increasingly more important in the new regulatory environment?”
While this may all prove exciting from a ‘headlines’ point of view, should having a star investment manager at the helm of a boutique investment management firm make it an almost automatic buy, or does it complicate the investment case even further? “While each opportunity has to be judged on its own merits,” says Hinton, “there can be strong advantages to having a star investment manager running the show.
“Generally speaking, boutique investment managers will have some ‘skin in the game’; in other words, they will invest significant amounts of money into their own portfolios and so align their interests with their shareholders, he says. In addition, star investment managers do not earn that title lightly and so, when launching a new portfolio and attracting inflows, they tend to deliver outperformance in the early years.
“Many large multi-management firms are happy to back portfolio managers who choose to leave a bigger firm for a boutique,” says Hinton. “It tends to give them more autonomy with share selection rather than having to conform to a ‘house view’ or pick off a select list. It also allows them to concentrate on what they do best, rather than focusing on management issues, sitting on too many committees, spending too much time on marketing and generating assets.”
However, a boutique structure might be right for some wealth managers, but certainly not all. When a new boutique launches, he explains, wealth managers will want to look at how compatible the investment manager is to the structure, and ensure that they are not swapping big company distractions for the day-to-day complications of running a small company. Boutiques should also have appropriate capacity limits, co-investment of significance from the investment managers themselves, appropriate business resource, to not distract the investment manager and investment management support of an appropriate scale and nature.
Boutiques will tend to stick to areas of strength, have specialist knowledge or adopt a specific investment style. They may have a tendency to be more dynamic, whereas established portfolios and portfolio groups generally have core portfolios at the heart of their range.
The fear of missing out is not really part of wealth managers’ investment decisions and they will stick with long established investment managers with strong brands and track records. They simply say there may be the odd teething issue and they want to be happy that all the things that helped an investment manager produce strong returns at a bigger firm are in place. They are generally happy to watch how the new portfolio progresses for a while, before deciding to make an investment.
Will the coming year see investors face even more decisions on whether to put money with investment boutiques as the tail winds of the past number of years is abruptly ended, and alternative sources of alpha and yields need to be sought by wealth managers to satisfy discerning investors?
“More investment managers could feel happier taking on the risk of starting their own firm, given recovering investor appetite,” notes Hinton, “while the early success and support gained by the likes of Woodford could act as a source of inspiration. On the flip side, the experiences of the investment management industry over the credit crunch and following a global financial crisis could mean that the virtues of being with a larger, more diversified parent are appreciated by more wealth managers.”
Experienced investment managers with good track records see people like Woodford doing well and the assumption would be that they may be keen to take on that challenge themselves. Others, however, may be happy being in the comfort blanket of a much bigger investment management firm.

Copyright © Insurance Times and Investments® Vol:28.4 1st April, 2015
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