A benign environment for developed market equities over the past eight years, underpinned by the actions of central banks, has also accentuated the attraction of exchange-traded funds (ETFs). A rising tide has lifted most boats, irrespective of their seaworthiness and ability to withstand potentially stormier waters ahead.
The increasing popularity of low-cost passive funds challenges many traditional fund management businesses.
One attempt to safeguard profit margins has been to seek greater scale, as illustrated by the proposed merger between Aberdeen Asset Management and Standard Life. While this may help create stability through diversification, as well as opportunity for cost cutting, it is open to debate whether it will lead to better results for investors.
I have long advocated the merits of smaller and more focused boutique asset managers. Typically, I find they have a culture emphasising performance above growth in assets under management.
They are often less marketing-driven and more disciplined, restricting capital inflows before the size of assets detrimentally impacts performance. The ones I favour have fund managers with “skin in the game”: investing alongside external clients in the funds they run. They eschew benchmarks and invest with conviction in select companies they research thoroughly. While the average active fund may disappoint, why settle for average?
My preferred boutique fund managers may not always outperform a benchmark index over the short term, but do have records of adding long-term value. I am confident they can continue to do so.
One example is Phoenix Asset Management, manager of the Aurora Investment Trust. Established by Gary Channon in 1998, Phoenix follows a value-based approach to investing that focuses on UK-listed companies. It strives to buy quality businesses with trustworthy management that trade on at least a 50 per cent discount to the assessment of intrinsic value. It conducts forensic due diligence, monitors companies closely, and has the courage of its convictions, typically holding only 12 to 20 companies in the portfolio.
The team at Phoenix is aligned with its clients through meaningful ownership of the fund. Its focus is on performance, as highlighted by the fact that the Phoenix UK fund has been closed to new investors for much of its 19-year life. Phoenix does not receive a management fee from Aurora, but instead only gets a performance fee when the trust outperforms the FTSE All-Share index.
It is an unusual fee structure, but rewards the successful application of active management. It is also inspired by Phoenix’s track record.
While it only took over management of Aurora at the beginning of 2016, the trust is managed in line with the Phoenix UK fund, which has generated an annualised return of 10 per cent (net of fees) since launch in 1998, nearly double the 5.3 per cent compound return of the FTSE All-Share index.
If the growth in passive investing is a call for change in the industry, boutiques such as Phoenix Asset Management offer an alternative.
Tom Yeowart is the Portfolio Manager of Troy Asset Management’s Spectrum Funds
