FE Trustnet has touched upon some of the possible reasons for this in articles focusing on boutiques this weekend: chiefly, specialist areas tend to be those where niche knowledge pays off.
They also tend to be areas where the benchmark is not a good guide to follow. Fund managers at large asset management companies tend to be more constrained by their benchmark, while boutique managers often have the flexibility to ignore these constraints and add value where they see fit.
Emerging markets
Investors are often urged to make emerging market equities a significant part of their portfolio for the long-term economic growth potential they offer.
However, as FE Trustnet highlighted in a recent article, the performance of the average emerging markets fund has been disappointing over the last five years.
The MSCI Emerging Markets index has made only 5.81 per cent over the past three years, and only 24 out of the 49 funds in the sector have managed to beat that – most of them by a small amount.
There are a handful of funds that have produced massive outperformance over that time, however.
Funds from Aberdeen and First State dominate the list of top performers: Aberdeen Global Emerging Markets Smaller Companies has made 52.19 per cent over this time while First State Global Emerging Markets Sustainability has made 44.17 per cent.
Six of the top-10 performers are from these two companies, with one more run by Aberdeen’s Hugh Young for SJP.
Top-performing emerging markets funds over 3yrs
Source: FE Analytics
First State is itself a boutique investment manager, with no ties to a larger asset management company or bank.
Unfortunately many of its funds are now closed and the firm is considering whether to soft-close all of its remaining onshore and offshore vehicles.
Aberdeen Emerging Markets is also soft-closed, meaning that investors have few options with a track record of consistently outperforming the index to select from.
The three most likely candidates are managed by boutiques: McInroy & Wood Emerging Markets, Somerset Emerging Markets Dividend Growth and Somerset Global Emerging Markets.
The McInroy & Wood fund, which has five FE Crowns, receives little marketing attention and does not appear on the radar of many investors.
It is also only available on a few platforms, which partly explains why it is only £45.5m in size.
However, the fund is a top-quartile performer in the sector over one, three and five years, returning 80.94 per cent over the longer period while the MSCI Emerging Markets index made only 25.24 per cent.
The fund is available with a £10,000 minimum investment and has ongoing charges of 1.69 per cent.
Two funds from specialist emerging markets boutique Somerset complete the top-10.
Somerset Emerging Markets Dividend Growth is a £180m fund that is currently yielding 3.3 per cent.
It has made 30.49 per cent over the past three years, almost six times the returns of its benchmark.
The managers told FE Trustnet about the fund in detail in an earlier interview.
The Somerset Global Emerging Markets fund is only £9.8m in size, but has made 14.44 per cent over three years, almost triple the returns of its benchmark.
Both Somerset funds are available with a minimum initial investment of £2,000. The Emerging Markets fund has ongoing charges of 1.85 per cent while the Dividend Growth fund has ongoing charges of 1.36 per cent.
Healthcare
Boutique funds also tend to outperform in the specialist area of healthcare.
The sector includes funds that invest in a wide variety of companies, as well as those that concentrate on early-stage drug companies, which are more risky but can produce very high returns.
Polar Capital Healthcare Opportunities is the best-performing fund in the sector over three years.
It has beaten off competition from funds run by industry giants Invesco, Fidelity, Schroders and L&G.
It has made 53.71 per cent over this time, roughly in line with the MSCI World Healthcare index, which has made 54.14 per cent.
Performance of fund vs index over 3yrs
Source: FE Analytics
The $389m fund has five FE Crowns and is domiciled in Ireland, with ongoing charges of 1.74 per cent and no minimum initial charge.
There are a number of investment trusts run by specialist managers that have produced large returns over a longer period, including the Biotech Growth Trust, run by Orbimed, a management company that exclusively runs medical assets.
The Biotech Growth Trust has made 116.86 per cent over three years, and 682.49 per cent over 10.
It is expensive, however, with ongoing charges – inclusive of a performance fee – coming in at 2.77 per cent last year, according to the AIC.
Asset-backed securities
Asset-backed securities are attracting a growing amount of interest from professional managers.
Philip Milburn and David Roberts, fixed income managers at Kames, told FE Trustnet last week that they are building a position in these instruments, in their case in residential mortgage-backed securities on Californian homes.
The sector was ignored by investors for many years following the crisis of 2007, which saw a housing price crash in the US and many people who had invested in the assets lose their shirts.
However, Milburn and Roberts are not the only managers who think the asset class represents a decent opportunity.
FE Alpha Manager David Coombs, head of multi-manager at Rathbones, also told FE Trustnet that he is building a position in this area.
Simon Callow, manager of the CF Miton Diversified Growth fund, also said he was buying the debt, through one of the only routes open to UK retail investors.
He has bought a position in the PFS TwentyFour Asset Backed Income fund, launched late last year by specialist fixed income boutique TwentyFour Asset Management.
Callow says that the large European banks are being forced to sell secure asset-backed securities because of new regulatory changes coming in, meaning that retail investors can profit from these high-yielding instruments.