With many investors considering re-entering the markets, we consider the opportunity of investing through boutique funds.
The managed funds space has historically been dominated by a handful of large companies offering a wide array of managed funds to investors. More often than not, these funds perform solidly until their large size inhibits their ability to generate outperformance.
More often than not, risk management then dictates the portfolio composition rather than the skill of the manager. This often leads to good managers seeking new opportunities in which to generate their returns. In doing so, they often take equity positions which provides motivation to outperform the index and their peers. In my experience, these managers are willing to go that extra mile.
Opportunity for smaller funds
Boutique fund managers do not necessarily have the scale of the big institutions but if they are well resourced, they can really make their mark.
Due to their size, large managed funds can often find it difficult to initiate and eventually wind down a position in a company, their own sales and purchases alone can easily move the price of a share.
More often than not, this leads to a manager investing in liquid companies with the unintended result of hugging the index. This counters the reason why you invest with an active fund manager in the first place.
Flexible Investment Strategies
By contrast, smaller fund managers are able to move in and out of their investments much more readily. Furthermore, these managers have usually provided themselves with a greater level of freedom in the investments they can make, allowing them to hold a larger proportion in cash or move from smaller to larger companies as opportunities arise.
Last year I tipped stock picker funds to outperform index funds for 2009 in our February edition, and although we have seen somewhat of a recovery since our lows in March, until the global economy is growing again and Government budgets are financed, I suspect we aren’t through the woods yet and are likely to see a continuance of volatility in the investment markets over the next 2 years.
This provides opportunity to managers who are flexible with their investment strategies and investors would do well to consider boutiques as an alternative to some of the large fund managers.
Putting their money where their mouth is
Unlike many other industries, a managed fund provides no instant reward for your money you purchase shares/units in a fund on the premise that they should be a greater value at some time in the future and are reliant upon the manager delivering.
I have always felt that a true test of character is whether someone is willing to put their money where their mouth is. Fund managers for these smaller investment houses tend to own equity in their company and as a result I have always taken a keen interest in boutique funds. After all, they have a vested interest in ensuring the fund is performing over the longer term.
This issue sees us featuring two of the most successful boutique Australian share managers in the market; the Wilson HTM Priority Growth Fund, ranked number one over 3 years* and Prime Value Growth Fund, one of the top performing funds over the last 5 years.
Performance of the largest Australian Equity funds vs Prime Value Growth Fund and Wilson HTM Priority Growth Fund (Figures to 28th February 2010)