The benefits of a boutique: Why bigger doesn’t always mean better
The idea that smaller, more agile boutique fund managers have an advantage when it comes to performance is nothing new.
Often, the more money a small, highly successful fund takes in, the more difficult it is to maintain a liquid position in a small-cap stock or to seek out new opportunities.
Remaining open to new investment too long can also change the fund’s profile as managers are forced to invest in larger companies to deploy growing investor capital.
In this article, we look at three reasons why it pays to be nimble.
- Ownership model
Boutiques have more freedom to manage money without having to follow a company-wide philosophy they may not support. Having generally started the business themselves, boutique owners have conviction in the investment processes that they have developed and a strong commitment to disciplined execution of those processes. They tend to be quicker and nimbler, with greater focus as less time is dedicated to the organisational politics of larger institutions.
2. A numbers game
As a fund becomes bigger, the quantum of money that needs to be invested in each stock to hold a meaningful exposure grows. A small fund can easily buy and sell positions in large capitalisation stocks without having much market impact. However, a large fund that tries to invest in small-cap stocks is likely to experience some difficulty taking a large enough position that impacts fund performance. This means that as fund size grows, the universe of available stocks shrinks because the manager has to cut off the smaller market capitalisation opportunities, which in many cases may be the best opportunities.
For example, a 4% allocation of a $100 million fund requires a $4 million investment, which for a company with a market capitalisation of $800 million, would be a manageable 0.5% holding of that company’s stock. However, for a $2 billion fund, the same 4% fund position would require an $80 million investment and represent a substantial position in the company of 10%.
3. Skin in the game
A boutique fund manager also has more skin in the game which greatly increases their motivation to outperform. A fund manager with a personal stake in the boutique has everything riding on the success of the fund, including their wages, their savings and ultimately their job. By contrast, an employee at an institutional manager who has a mediocre year is not going to be nearly as worried.
For example, Phoenix Portfolios staff hold a 55% interest in the company. This ownership model promotes long-term stability and a strong alignment of interest between employees and investors. Phoenix also aligns its interests with those of investors via co-investment stakes in the funds it manages.
An October 2020 study by Morningstar’s Director of Manager Research, Russ Kinnel, found that of the 7,424 funds in the United States, only 1,155 had managers with more than $1 million of their own money invested in the funds they were managing. This equates to only 15.5%. Coupled with Kinnel’s assertion that manager ownership is the second-best predictor of outperformance (after fees in the first place), it literally pays to have skin in the game.
In practice, this means large funds tend to focus on companies in the ASX100 and their returns typically ‘hug’ the index. Smaller boutique funds have a greater opportunity to outperform, although this isn’t a guarantee of success in its own right, and every investor should always do their own research before choosing the right fund manager for their own circumstances.
For more information about the benefits of boutique investing and the Cromwell Phoenix Property Securities Fund managed by Stuart Cartledge, please visit their website here or fill in the contact form below.
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Stuart Cartledge is the Managing Director of Phoenix Portfolios and the portfolio manager for each of the company’s property portfolios / funds. Prior to establishing the business in 2006, Stuart had built a very strong track record in the listed...