Last week, Seneca’s Simon Callow (pictured) told FE Trustnet that he prefers to back boutique funds that feel they have something to prove, which he believes can have a positive impact on their performance.
What’s more, many investors find that boutiques have greater agility due to their smaller size, so can therefore react quickly to changes in the market.
However, boutique funds haven’t always been seen as the gold at the end of the rainbow and are still recovering from the hit to sentiment that came with the global financial crisis.
James Klempster, portfolio manager at Momentum Global Investment Management, said: “Post-financial crisis, when people were still very nervous, there was a real rush to bigger names because there was a certain comfort that came from that.”
“People are looking for more ‘boutique-y’ names now and I find that to be a positive sign for consumer sentiments. It shows a return of animal spirit and that people are becoming more daring.”
Despite their desirability, there are still many interested investors who are simply out of the running to invest in such funds.
An example of this is the Heronbridge UK Equity fund, a five FE Crown-rated boutique which has proven to be immensely popular among multi-asset managers, including Klempster, Rathbone’s David Coombes and F&C’s Gary Potter.
However, the fund was soft closed in 2013 and cannot be purchased by retail investors.
Simon Evan-Cook, multi-asset manager at Premier Asset Management, said: “If I was an individual investor, I might feel slightly aggrieved if I just couldn’t get into a particular fund because it had filled up without being able to get so much a look-in, but Ican understand why boutique fund managers are going down that route.”
“What we’re finding is that a lot of boutique fund managers are approaching the fund of fund management or the discretionary fund management market first of all, then they’re able to deal with maybe 50 clients with larger pots of money each rather than dealing with the public where there are a lot of individual investors, which can bring challenges in terms of communicating with clients.”
Evan-Cook (pictured) believes that making these funds accessible to a wider range of investors could defeat their purpose and emphasised that one of their major strengths is their small size.
“There’s a problem in becoming too popular – you can’t do what you used to do when you were producing excellent returns, so I think the really good boutique fund managers are tending to fill up their capacity using the management market first of all and maybe
even bypassing the retail market altogether.”“I think this is a fairly wise way of doing things. With the risks of boutique fund managers being high as well as the rewards potentially being high, offering them to professional investors first of all who can put them into a larger portfolio makes good sense.”
It can also be argued that boutique’s positive traits can also count against them.
For example, Callow told FE Trustnet that boutiques are “very grateful” when new money comes into the company. However, this dependence on larger investors could mean they are at risk if a major investor dips out.
Adrian Lowcock, head of investing at AXA Wealth, said: “The key issue is whether or not the boutiques themselves have the right structures in place, the right legal entities, the right compliance and so forth. Are these businesses sound and solid? Is your money safe?”
“A lot of the platforms do their own due diligence when they’re looking at putting a fund onto a platform, so the investors have got that extra level of research. [Platforms] won’t put a fund on unless they think it’s safe and appropriate to do so. Some little-knowncompanies may not reach the regulatory requirements of the platforms.”
The lesser-known the fund is, the greater the risk they pose from this point of view. Lowcock adds that if an investor in interested in a boutique that isn’t on a platform, it is important to find out why it’s not listed.
“The vital thing is making sure you have enough protection and quality. Availability on a platform is quite critical,” he said.
“Doing your own research and finding out which boutiques perform, and reading some of the specialist financial papers will help you do a bit of research to dig them out, then you can always make enquiries. Just because something isn’t on a platform, it doesn’t stop you asking questions and finding out if it’s available.”
Klempster (pictured) also warns investors to proceed with caution when considering boutique funds, explaining that there are a lot of average strategies which look exciting in terms of positioning but amount to nothing.
“It’s identifying the true gems amongst that which is the difficult thing,” the multi-asset manager said.
“Also, and by no means is this a universal truth, but small firms do have a greater risk associated with them, so you’ve got to have a higher degree of confidence that you’re investing into a fund which is managed by a safe pair of hands.”
Boutique funds came into the spotlight in a particularly big way earlier this year as star manager Neil Woodford launched the CF Woodford Equity Income fund in June.
Evan-Cook believes that well-known managers such as Woodford or Nick Train and Michael Lindsell who have branched off to launch their own boutiques are good starting points for retail investors looking to invest in boutique funds.
However, he notes that not all boutiques have the profile of the above and stresses the need to make sure that boutique fund managers have the skills and experience similar to the household names at bigger fund house before investing.
“We get to meet boutique fund managers face to face and spend an hour or two at least with them to understand how they operate, what risks they take, their philosophy and process, everything about that fund. A retail investor doesn’t necessarily get that type of exposure, which makes it much harder to judge the difference,” he explained.
“For every boutique fund we think is excellent, there’s probably just as many out there which are bad and they’re likely to be a lot worse than a bad fund run by a large company, so the results are going to be more polarised.”
“If you find a good one you’re going to get absolutely excellent results, if you find a bad one you’re going to get worse results than you’d get from going to an off-the-peg fund that’s a large blue-chip asset manager.”