Boutique managers beat mass-market rivals in Alpha test
Smaller fund houses are massively over-represented in FE Trustnet’s list of FE Alpha Managers.
A quarter of FE Alpha Managers come from boutique investment houses despite the fact that these funds represent less than 10 per cent of all the funds under management in the IMA universe.
Data from FE Analytics
shows that boutique funds collectively hold £58.7bn AUM while March’s fund statistics from the IMA – the latest available – report that net assets under management currently stand at £613.2bn.
A total of 39 out of 157 FE Alpha Managers – or 25 per cent – head up funds managed by boutique houses.
The FE Alpha Manager rating is awarded to the top 10 per cent of fund managers who have a proven record of outperformance in both rising and falling markets.
While some of the most recognisable figures in the investment management industry such as Neil Woodford, Richard Woolnough, Angus Tulloch and Adrian Frost all have excellent track records managing giant funds, the consensus is that smaller, more nimble funds have a distinct advantage over their mass-market rivals.
"Smaller funds have a lot more flexibility than the big funds," said Darius McDermott, managing director of Chelsea Financial Services.
"It’s a question of liquidity. If a boutique manager changes his mind about a particular sector then it’s much easier to get his £1m out of, say, the banks than it is for a large asset manager to move £1bn."
A glance at the performance tables shows this to be the case. The top two best-performing UK Equity Income funds over the last five years by some distance are Unicorn UK Income and Trojan Income.
Our data shows that they have returned 22.33 per cent and 20.11 per cent respectively compared with losses of 10 per cent from the average UK Equity Income fund. They are headed-up by FE Alpha Managers John McClure and Francis Brooke. Between them these funds account for just £636.5m.
Performance of funds vs sector over 5-yrs
Source: FE Analytics
FE Alpha Manager Tim Wood is also well worth a mention. His McInroy & Wood Smaller Companies portfolio is number one in its IMA Global sector over three and 10-year periods, as well as a top-five performer over five years.
MFM’s Mark Slater is another stand-out manager; his MFM Slater Growth fund is the best performing portfolio in the entire IMA unit trust and OEIC universe over three years, with returns of 132.9 per cent.
While the extra liquidity is a factor that has contributed to boutique funds’ performance edge, McDermott thinks that this analysis doesn’t tell the whole story.
"Most boutique managers probably worked at bigger houses to begin with," he explained.
"They often say that they prefer the working environment at a boutique where they sit on fewer committees, have no monthly meetings and have the freedom to pursue their own ideas but it probably comes down to remuneration."
"Top managers with top-quartile track records over the long-term carry a lot of clout and are quick to recognise their worth. They can set up their own franchise and get paid twice as much."
He added: "Another important factor is that some of the very best managers often get recruited by existing boutiques who use the pull of a working environment without the red tape and attractive performance fees to lure talent away from the mass-market houses."
While boutiques have some advantages, McDermott stresses that investors should definitely not overlook giant funds.
"The likes of Invesco, First State and M&G have accrued vast amounts of assets for a reason," he commented. "We still believe you should hold the big funds if they are the best in their sectors."
defines a boutique as having less than £7bn assets under management in fewer than 12 funds.