Boutiques sock it to the big boys

Next month will mark the much-anticipated comeback to funds management of one of Australia’s most successful stock pickers, Greg Perry, and his return will be yet another reminder of the challenges facing large fund managers.

ScetchShowing no apprehension in tackling a sharemarket trading at record levels, the $500 million wholesale QED Capital Absolute Plus Fund will be a ‘‘long-short’’ fund investing in global shares chosen by Perry and his former Colonial First State colleagues Barry Henderson and Catherine Allfrey.

Only rich individuals willing to part with sums from $500,000 to $15 million will get a slice of the action, and purportedly the principals will also be putting their money on the line.

With Perry’s reputation, he’s unlikely to have trouble raising the money after the information memorandum comes out on February 28.

As Colonial First State’s head of equities until mid-2002, he was instrumental alongside his boss, Chris Cuffe, in building Australia’s biggest fund manager from scratch.

The pair’s exit, in sensational circumstances in Cuffe’s case, has coincided with First State’s steady decline in relative performance, particularly in picking Australian share winners.

Another example of First State’s decline could be found in the Intech figures this week, showing First State ran dead last out of 28 managers for calendar 2004 when it came to balanced funds investing across the various asset classes.

At the same time, increasingly the power in markets to make or break companies resides with the so-called boutiques, abandoning the traditional notion of the large, powerful and often faceless institutions that control the money flows in corporate Australia.

Sure, not all of the so-called boutiques will be runaway successes. But make no mistake, their rise and their ability to draw new investment funds away from the life offices and banks show no sign of abating.

Late last year, AMP fund managers Chris Cahill and Michael Evans started their own firm, Quest Asset Partners, which is running a ‘‘long only’’ absolute return fund, and AMP has suffered more losses since from its funds-management ranks.
There are numerous other examples of how some of the well-known industry names that have populated the large institutions in the past 15 years have decided they can make more money on their own and spend their time picking stocks rather than dealing with large bureaucracies and an institutionalised culture.

Robust investment markets, including a 28 per cent return on local shares last year, have partly disguised some of the pressures on many of the big institutions. But names like Colonial First State and AMP have struggled to keep new mandates and are facing clear fee pressures.

Most have remodelled their businesses around so-called ‘‘platforms’’ such as master trusts and wrap accounts where the funds flow looks good but the fee take is less as the actual funds-management part of the value chain is outsourced to third parties.
n boutique land, there isn’t the same fee pressure because there is great demand for boutique fund managers. In some cases, boutiques command annual fees of 1 per cent or more (after the financial adviser’s commission), twice as much as the equivalent funds at big managers and not including the lucrative performance fee structures that are too difficult for the average retail managed fund to replicate.

Some of the boutiques, like former Perpetual fund manager Peter Morgan’s 452 Capital and Anton Tagliaferro’s Investors Mutual, have become so large that they can hardly be called boutiques any more, although in the latter case, most funds are closed to new money.

Certainly, many clients believe that smaller funds will deliver better returns for investors, a concept helpful to the boutiques that are prepared to cap the amount of money they will manage. But it’s a falsehood that big fund managers can’t produce good returns, because managers such as Perpetual Investments have grown into giants in their field while still topping the performance charts.

Some of the banks have ditched the concept of achieving top-ranking performance from their marketing spiel in the pursuit of simple and risk-averse products to sell to their large banking customer base, and perhaps this is an acceptable strategy for what it is. And there is some consolation for the big players in that, if they can identify new talent and generate good returns with lower fees, the funds should flow big time. BT hasn’t quite seen the flows yet from its improvement under its head of equities, Crispin Murray, who has returned BT to near the top of the charts.

Perpetual, which has added close to $7 billion to its total funds under management in the past year to take its share of the pie to $26 billion, seems to have managed the cultural challenges of becoming too big by having a small investment team that is not distracted from the task of picking stocks according to some other corporate agenda.

The risk is always that Perpetual will have a bad year, something that would certainly knock down its breathtaking share price ($62.75 yesterday). But Perpetual has been diversifying the risks by introducing a fully fledged international equities team in a move that has been embraced by the market.