Interesting story last week that Charles Stanley have decided to take Terry Smith’s Fund off their buy-list. I’m sure Terry will be round to box their ears on that decision, momentarily! Amazingly investors now look at a fund of £19bn as ‘too big’. It wasn’t that long ago I remember a fund being at £1bn and we were challenged by investors to justify holding it any longer. Inflation hasn’t been that much but clearly expectations have risen. So, if Investors are nervous about the bigger funds, what about the smaller ones?
The recent PWC report about the demise of Asset Managers makes for some sombre reading. However, I am not one who believes totally in these speculative reports. As Mark Twain once famously declared. “Reports of my death are greatly exaggerated”. We all now work in a very entrepreneurial industry. New ideas, new funds, new marketing initiatives etc… So, as entrepreneurs, we find ways of enabling our survival. We adapt! Sure, there are those who probably are flat earth believers that will go the way of the dinosaurs, but the vast majority are looking at new ways at providing new and innovative ideas and products for investors.
The reason is simple. They have to. Every time we meet a new manager we ask, “What is different about your fund and what makes it stand out from the crowd?” If they say performance, then the response is short and sweet. The past is no guarantee of future returns and as such we put no value on it. It can help from a marketing point but in reality, we are looking for a different message, a story that resonates with us and potentially investors. The beauty of our work is that we do from time to time come across these managers and we hear some great ideas investors will truly benefit from. The challenge is to convince investors the established are not necessarily the best, or the ones that will give investors what they need for the future changes of the investment marketplace. The story has to stand up to scrutiny and due diligence of the highest order, not just by our distributors but by some of the hard-ass interrogators that exist! Plain vanilla doesn’t exist in the boutique space as there is little appetite for this from investors. The fees are reasonable as costs are pretty well fixed because they control them, albeit there are some fixed costs that have to be covered but intellect is easy; it’s the managers. Middle office and back office is often outsourced as are many of the other support functions until the managers reach a scale which means that those functions get brought in-house.
Some years ago, we worked with a manager who had zero assets under management but a huge amount of energy and a world of ideas. 10 years later they have £12bn under management and have won numerous awards. All credit to them! If they did not have the drive and initiative to come to market, then many investors would have been poorer for it. We need these new ideas to put pressure on the ‘old school’ managers and to make sure they don’t sit on their potentially suspect laurels. The boutique managers drive initiatives and encourage new ideas that many investors may be unfamiliar with. Initially these ideas may be picked up by UHNWI and Family Offices but very quickly the retail space adopts the strategy and slowly but surely it becomes the norm.
With innovation there comes risk but if there is a synergy with the manager then the alignment of interest makes it all the more involved. If a boutique manager messes up, then the withdrawals will affect them massively as they are not diverse enough to fall back on other strategies. So, if the fund fails then they fail. That pressure puts the fund at the centre of their lives. In the past I have often worked with managers in the larger houses who didn’t always invest in their own funds. When it comes to a boutique then their very future is in the fund. You don’t get much more involvement than that!
Access to boutique managers is often much easier and the aspect of ‘Star Manager’ has yet to materialise, so meeting with them and getting to really know what makes them tick is so much better in these early days. Very often it becomes problematical to meet the established managers unless at formal events where trite presentations are rolled out, whereas most investors want to get to the nitty-gritty and sit across the desk from the person who is going to be responsible for their client’s monies.
So, what are the risks? Clearly the big one is that they are no longer around after a short while, i.e. they go bust! Well the fund will still be around as it is held by a Custodian etc so no real asset risk there but a pain to change the manager. The reality in risk is that the fund doesn’t grow and you are left with concentration risk. You want to redeem and a dilution levy hits you. You know the scene!
Thankfully many managers now realise they can’t launch a fund with less than $50m in the first few weeks so a good book-building exercise is crucial in order to get it away. Once the $50m is achieved then allocators can start to build a position and as long as there are more than a handful the fund should grow, so concentration risk reduces daily. However, investors should pay attention and happily, boutiques are happy to share the information as they see it is an important part of their own growth and will partner with quality firms so as to build up their assets. That friendship will be invaluable one day not that this is forming any part of financial advice on their success, moreover an observation that their interests are very much aligned with the investors. Let’s remember Terry Smith’s business was a boutique less than 10 years ago.
So, if you are looking for a new idea, a good value proposition, a partnership and in-depth knowledge of the product then you won’t go too wrong getting into bed with a boutique manager!
Have a great week….