3 Good Reasons To Buy… Into Boutiques

By Rafiq Taylor, portfolio manager at Sanlam’s multi-manager business

Large, established asset managers still have much to offer investors. Other than their established brand and track record, the larger managers are also able to exploit economies of scale in the fixed interest space and still exhibit asset allocation skill. However, by ignoring the smaller boutiques, investors could miss out on some attractive outperformance.

These are the top 3 reasons to seriously consider including some boutique managers in your portfolio:

1) A greater opportunity set in the equity space

Large managers have a limited number of stocks on the JSE in which they can hold a meaningful stake, say at least 2% of their portfolios. For example, a R500bn asset manager can play in a universe of only about 40 stocks if it doesn’t want to own more than 25% of any of those companies’ free float.  In contrast, a R50bn boutique manager has more than 120 JSE stocks to choose from without owning more than 25% of the company. Boutique managers are therefore able to exploit market opportunities that are not available to larger managers. This is due to the practicalities of trying to build-up a meaningful shareholding across multiple portfolios.

2) Agility

Another benefit of boutique managers is that they are nimbler and more responsive to opportunities in the market. Because of their smaller holdings in companies they can move quickly to take advantage of market mispricings – before those mispricings are traded out.

3) Manager ownership

Many of these smaller businesses are run by experienced individuals who used to hold senior positions at large asset management companies before breaking away to start their own businesses. These talented individuals have ploughed a lot of their own time and money into a new venture they are truly passionate about. With ownership comes the drive and motiviation to succeed. We view those manager owners with true skill as the next-generation asset managers, and they have the ability to become larger managers over time.

Small alone is not enough

In the context of a low-return environment, small managers’ advantages – a greater opportunity set, fluidity, and ownership – form the bedrock to potentially generate positive alpha for investors. However, this potential will only be unlocked if the small manager displays true fund management skill.

Can they pin-point the anomaly?

When analysing manager skill the first question that needs to be answered is whether a manager is exploiting a specific anomaly in the market. Then one needs to explore whether the manager understands why this anomaly exists and whether this anomaly will persist. To utilise this anomaly the managers need a repeatable process that put their beliefs into action to generate alpha consistently over time.

Going forward, in an environment of expected lower returns, these boutiques will make a big difference, as they can trade faster, and are more likely to outperform. They have already proved themselves in a very short space of time.

Sanlam Select – choosing the skilled small managers

Because the barriers to entry to becoming an asset manager have been reduced, sifting through the universe to find talented managers is not a simple task. However, we believe we have the skill to find these managers and to identify the next generation of truly skilled managers. As part of Sanlam’s diversified multi-asset investment strategy, the multi-manager business recently developed a platform of boutique managers, called the Select range of funds by Sanlam.

Although the track record for the Sanlam Select managers is still relatively short, returns for these boutique managers demonstrate that spending the time to uncover truly skilful managers, even though they might be relatively unknown, is indeed being rewarded. In an environment where returns on equity markets are expected to be relatively modest compared to the last 10 years, good boutique managers are in high demand. Little wonder these managers’ share of market has grown by more than 50% over the past two years!

A showcase manager: Capricorn Asset Management

The Sanlam Select Flexible Equity Fund has been managed by Capricorn Asset Management since October 2014. Capricorn’s skill lies in their ability to identify themes from a top-down perspective, which helps them to identify the sectors where there are opportunities to exploit these themes. They have a momentum bias and maximize the upside of the equity market while limiting the downside experience through defensive stock selection, opting for certainty of cash flows from the stocks they select.

Capricorn’s investment philosophy sets them apart within a market where the focus is mostly on bottom-up fundamental analysis. Capricorn have proven themselves to be very skilful in the hedge fund space, and we believe that this skill is transferable to the long only space, especially within a flexible fund where they are granted more freedom than in a traditional equity fund.

Disclaimer:
All reasonable steps have been taken to ensure the information in this document is accurate.  All the information and opinions provided are of a general nature and are not intended to address the circumstances of any particular individual or entity and should not be interpreted as advice.
Sanlam Collective Investments (RF) (Pty) Ltd a registered and approved Manager in Collective Investment Schemes in Securities. Collective investment schemes are generally medium- to long-term investments. Past performance is not necessarily a guide to future performance, and that the value of investments / units / unit trusts may go down as well as up. A schedule of fees and charges and maximum commissions is available from the Manager on request. Collective investments are traded at ruling prices and can engage in borrowing and scrip lending. The Manager does not provide any guarantee either with respect to the capital or the return of a portfolio. Please refer to the Minimum Disclosure Document of the funds to see if performance fees are charged and how it is calculated. Sanlam Multi Manager International and Capricorn Asset Management are authorised Financial Services Providers in terms of the Financial Advisory and Intermediary Services Act, 2002.