The Rise of Boutique Managers

Over the past decade or so, there has been a substantial increase in the number of boutique asset managers in South Africa.

Investors have different interpretations of what boutique really means. For some, boutique is related to number of employees and size of assets, typically fewer than two dozen staff and assets less than R50bn seems to be a common rule of thumb. For others, what is often more important in the definition of boutique is the ownership structure and extent of personal assets invested by the investment team in the portfolios that they manage. Finally, boutiques have a differentiated and focused approach to investing, compared to larger managers.

Smaller asset managers can be nimbler and more opportunistic in their stock picks and play outside the large cap universe. Managers at larger firms may have greater liquidity issues if their funds are sizable, thereby restricting their investment universe, and lengthening the time that it takes to execute a view in their portfolio. Large managers run the risk of owning too much of a smaller company when trying to take meaningful position in their portfolios. The flat organisation structure of boutiques means that investment decisions are made and implemented quickly.

Typically, boutiques are owned by their founders, who often are responsible for asset management and have a significant portion of their personal assets invested in the portfolios they manage. At Laurium Capital, besides the co-founders, key people across the operations and investment areas also have ownership and are invested in the funds. Consequently, managers and employees have a vested interest in the success of the firms' funds, which better aligns them to their clients’ interests.  The relationship between a client and a fund manager is a more personal one at a boutique and there is greater scope for a shared investment philosophy. In contrast, large investment managers are too big for the client to have a properly personal interaction.

However, asset managers can often become victims of their own success. If assets under management grow too quickly, making and implementing successful investment decisions becomes more challenging.

Managing a successful boutique is not as easy as it may seem. As the company grows, it is important to ensure that the core entrepreneurial DNA is maintained and that no bureaucracy creeps into the organisation, changing the way that you manage money. We believe that the culture of the firm should be illustrated via the work ethic and behaviour of our team as opposed to being printed on brochures or emblazoned on office walls.

Successful investment management and sustainability of the businesses is often dependent on key individuals, so it is important to have a good succession plan in place and to nurture the next generation.

Although choosing a boutique asset management firm doesn't guarantee better performance, they do have the potential to produce excellent investment returns, which are less correlated to the larger managers and the FTSE JSE Top40. Including a boutique manager in your overall portfolio, should result in better risk adjusted returns for your clients. As you search for investment managers who have the potential to deliver strong results, be sure to consider boutiques.