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Thursday, June 18, 2015 - 02:16
What is all the hype about?

South Africa has seen an explosion of boutique investment managers in the past decade, following a similar trend in developed financial markets worldwide. To further investigate this world-wide trend, emphasising the South African context, it is important to establish the characteristics that define a boutique investment manager, albeit from a subjective basis.

Explains Louis van der Merwe, chief executive officer and portfolio manager at Truffle Asset Managers, “A boutique investment manager manages a finite amount of investment portfolios, not necessarily limited by the size of assets under management (although this is probably one of the more accepted ways to identify a true boutique), but probably more so by the skills demonstrated by the investment team resulting in a singular product offering or, in most cases, a small suite of products capitalising on the investment team’s skillset. Most boutiques are not one-stop shops, but specialise in certain types of mandates.”
He says it is fairly obvious that alpha-generating opportunities in the small- to mid-cap-listed equity space will contribute substantially more to firms with less money under management. Take as an example a listed company with a market capitalisation of R3 billion. For a boutique investment manager managing R10 billion of equities to have a meaningful part of its portfolio invested in that company (2%), the manager will need to buy 7% of the targeted company – already a large chunk of the business. For a larger investment manager managing R100 billion, the manager will need to buy 67% of the same business. Obviously then, smaller cap companies are eliminated as meaningful investment opportunities the larger the assets under management. Boutique investment managers therefore should then have a better chance in outperforming their larger peers.
“Ownership is also important in identifying true boutiques. More than 50% of the firm’s equity should be held by the day-to-day decision makers, investment and otherwise, to ensure the firm stays true to its promise. This also aligns the interests of investors and investment manager, as decisions made and implemented affect investors and investment managers.”
Boutique investment managers live and die by their firm’s performance (investment returns and otherwise), says Van der Merwe, “as in most cases their own capital is invested in the firms they run and own. As the investable horizon includes even the smallest investment opportunity, there is no excuse to allow personal account trading, therefore ensuring all the best investment ideas are accommodated in the portfolios managed by the firm. This completely eliminates potential investment conflicts of interest, as the portfolio manager invests his/her own money in the same portfolios the client invests in.”
Boutique investment firms have smaller teams, most coming from larger corporate environments. They are full of passion and belief in their investment philosophy, research capability and portfolio construction skills that they give up a regular salary and bonus cheque, in exchange for freedom to operate in the environment they thrive in.
All non-competitive support functions are outsourced to specialists in their own fields, enabling the investment manager to concentrate on one thing only – the investment-decision-making process. This leads to better client interaction and service, resulting in a co-investor relationship more so than a pure client relationship. Agile decision making is not jeopardised by obsolete in-house IT systems or administration teams, and best of breed support services add additional value to clients.”
In closing, the phenomena of boutique investment firms are expected to mushroom even more in future. Relatively unheard of 10 years ago in South Africa, the ease of outsourcing historically expensive support services and the huge pool of local investment talent will make sure of that. Although not seriously threatening the traditional large investment manager, boutique investment firms give the South African investor, however large or small, affordable direct access to experienced and passionate investment skills, and access to more investment opportunities, that should ultimately result in superior returns.

Copyright © Insurance Times and Investments® Vol:28.6 1st June, 2015
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