Australia, Funds Management, Personal Finance - Written by on Friday, August 1, 2008 23:15 - 0 Comments

Tougher going for boutiques

Australian Financial Review, August 2008

Australia has a long history of fund managers from established institutional houses deciding to go it alone. The allure is obvious: no constraints on the way you manage your money; a smaller amount to manage, making it much easier to chase opportunities; and of course the fact that you get to keep the rewards. But it’s getting tougher and tougher to do – particularly in a market like this one.

A sign of the success of many pioneer Australian fund management boutiques is that they can no longer be considered anything of the sort. There’s nothing boutique about Perennial Investment Partners, for example; it now has six investment management firms in the group managing $20 billion between them. Investors Mutual, formed by Anton Tagliaferro; Platinum Asset Management, launched by Kerr Neilsen; and Maple-Brown Abbott, founded by Robert Maple-Brown, have all arguably entered the mainstream too. They have $4.2 billion, $17.28 billion and $15.3 billion under management respectively, according to data from the managers themselves. 452 Capital, formed by Peter Morgan and Warwick Negus, doesn’t disclose its assets under management but has been a clear success too.

These days, though, it’s tougher going. Perhaps the biggest problem for an investment manager is the tyranny of platforms. In Australia perhaps more than any other funds management market in the world, retail investors tend to buy their products not from the manager directly, but either through an investment platform like a wrap or mastertrust, or through a financial planner (who may well in turn put them through a platform).

This gap between the customer and the provider can be a real challenge at first. In order to get on to a platform, a fund generally needs to have been rated by one of the many specialists in the Australian industry, such as Morningstar, van Eyk Research, or Standard & Poor’s (which bought another research group, Assirt). Before getting a rating, these research groups tend to want to see at least two years of positive performance on the board, and ideally a three year track record. For those who want to access inflows through platforms, that appears to condemn fund managers to three years of patient performance with almost no money before they can hope to get any retail flows in.

If a manager convinces a large seed investor or an institution to give an early mandate, the problem is lessened. But in any event, a market like this makes attracting capital tougher too, whether institutional or retail. People have a tendency first to pull money out of equities when things get tough (and most boutiques do tend to spring up in the equities area), or to stick to familiar names if they do want to brave the market. The near-failure of Basis Capital last year did not help the perception that boutiques are riskier places to be in than big financial institutions in a tough market.

One person who has recently gone through the process is Peter Sartori. After stints at First State, Scudder and Credit Suisse Asset Management, focusing on Asian equities, Sartori set up Treasury Asia Asset Management three years ago.

He opted not to go it entirely alone, instead putting his new fund under the umbrella of the Treasury Group, which also seeded Orion Asset Management. “They funded our business, and also provide all the other services that are outside my investment expertise,” he says. “I was prepared to give away 40% of my business for them to do that so I could sit there and concentrate on running money.”

As he recalls it, the first six to a year months was not a problem. “I didn’t really think about it too much: I was head down, let’s get some performance on the board and see how I go.” For him, the challenging bit was the next year, trying to secure some inflows to go with the fledgling performance. “Then it was a bit nerve-wracking.” But by 18 months of operation everything happened at once: a series of major institutional mandates came in and from there he has not looked back, passing $1.1 billion under management and having to close the fund to new institutional money. Along the way the fund has received positive ratings from van Eyk, Lonsec and Zenith, and consequently ended up on a number of platforms. Raising money from retail is, though, “a much longer, slower process.”

While it’s gone well for Sartori, he has no illusions about the headwinds a new manager faces. “The first 18 months is hard. Simple as that. When you’re trying to make some breakthroughs, and you don’t have recognition from the platforms and the consultants, it’s a long hard road.” And he was raising his money in a bull market. “It would clearly be much, much more difficult in the current environment.”

As another boutique manager puts it: “I wouldn’t like to try and kick one off at the moment.”

The investment group Russell recently released a study on Australian boutique managers. It classifies half of the 120 active Australian equity products available as boutiques, up from one third of the total five years ago. On Russell’s numbers, the median boutique has beaten or at least broadly matched the performance of institutional managers over most of the last 11 years; in 2007, outperformance was more than 2 percentage points, although it’s come back a touch in 2008. Getting these returns, though, has typically involved more risk.

Jon Eggins, author of the study, concluded that median excess returns are most impressive during the first one to three years of operation, suggesting that it’s best to get into a boutique early, when in fact most investors relying on platforms won’t even become aware of the existence of these boutiques until after that timeframe.

New managers do continue to spring up: Russell itself recently appointed L1 Capital, a bottom-up Australian equities stock manager formed only last year, into its Russell Australian Opportunities Fund. But for people going it alone now, the quest to get money in the early stages is going to be tougher than ever.

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