Boutiques boosted by markets, not the RDR

With more power resting in the hands of specialist fund buyers as advisers increasingly outsourced investment selection, brands would count for less and boutiques would come to the fore.

That was the theory. But has this happened? And more importantly, is it justified by performance?

There is a long-held theory that investors blindly follow brand names but that this will change in the post-RDR era. However, the reality is less clear cut. In terms of performance, there are certainly sectors where boutiques have stood out.

Looking at three-year performance, for example, boutiques are well represented in the emerging markets, UK Equity Income, UK All Companies and smaller companies sectors. In the emerging markets sector, Somerset Capital and McInroy & Wood have held their own in performance terms – both are among the top 10 funds for the period.

Equally, in the UK Equity Income sector, funds from Chelveton, Cazenove, JO Hambro Capital Management (JOHCM) and Unicorn have performed better in three years and proved less cyclical than some of their larger cap-focused equivalents.

In the smaller companies sector, Cazenove, Marlborough and Discretionary sit alongside Fidelity, Schroders, Baillie Gifford and Henderson in the top 10 funds, though Marlborough and Discretionary have had weaker short-term performance.

Finally, the UK All Companies sector also contains a disproportionate number of boutique funds among its top performers, including Liontrust, Ecclesiastical, Cavendish and Cazenove.

So, there are sectors where a focus on boutiques seems merited, often where smaller company performance can make a difference. But it is notable that in sectors such as Europe ex UK no boutique managers have outperformed. The market’s focus has been on higher-quality, larger-cap companies, and the likes of Jupiter and BlackRock have reaped the spoils.

Equally, bonds have been the investment of choice for investors hungry for income, and here boutique fund managers are under-represented. Some boutique managers, such as Carador, have proved popular in niche areas of the market such as floating rate notes, but Newton, Pimco, Royal London and Old Mutual still dominate the traditional corporate bond sectors, while M&G has monopolised many of the fund flows.

Since the start of 2013, overall assets under management for UK fund managers has risen 5.5 per cent to £726bn. A number of boutique managers have been beneficiaries of this, particularly those with a small-cap specialism. For example, Marlborough has seen assets under management rise 66 per cent, Unicorn 43 per cent, Cazenove 16 per cent, Majedie 16 per cent and Liontrust 11 per cent.

However, this appears to be a consequence of buoyant equity markets rather than a philosophical shift on the part of investors. Julian Lewis, chief investment officer at boutique group Cavendish Asset Management, says the group’s increased fund flows are due to investment considerations, not a preference for boutique managers. He says the group has seen less direct advisory business and more discretionary fund manager business as platforms have become more important.

Brian Dennehy, managing director of Dennehy Weller & Co, says the size of a fund management house is immaterial. “Our main concern is to choose funds with momentum, and therefore with a greater likelihood of outperforming in the immediate future,” he says.

While the RDR can benefit boutiques, it also puts pressure on fees, which means companies need larger funds to be profitable. Chris Sexton, investment director at adviser firm Saunderson House, says: “Investment fees are too high; this has made it possible to launch boutique funds easily. We use some boutiques – Somerset Capital, for example, which has a solid process. I don’t think it [the RDR] will kill boutiques, just any managers who aren’t differentiated.”

There are also increasing regulatory costs, particularly from European initiatives, which are creating higher fixed costs for asset managers.

The RDR does not yet seem to have benefited boutique fund managers, with any gains made largely as a result of increased buoyancy in equity markets, where boutiques can differentiate themselves. That said, following larger managers has in many cases been justified by performance.

Investors could reasonably be accused of performance-chasing, but not of a mindless adherence to certain brands.

Cherry Reynard is a freelance journalist