Both managers run a number of multi-manager portfolios – comprised of a variety of funds across all asset classes.
The pair told FE Trustnet why they use boutique funds to add value to their portfolios and which ones they are particularly optimistic about for the future.
David Coombs
FE Alpha Manager David Coombs (pictured) has long been a proponent of using boutique funds, which make up a large proportion of his Rathbone Multi Asset Enhanced Growth, Rathbone Multi Asset Strategic Growth and Rathbone Multi Asset Total Return Portfolios.
"In our view, you have to take a long-term view with equities, which I know is nothing secret," Coombs said.
"We want a fund manager who takes active bets against his benchmark and is willing to make high-conviction calls even if it affects performance over the short-term."
"With boutique funds, there tends to be less supervision of the manager, which means that they can be more flexible as they are not worried about brand. They also restrict inflows which can mean that they attract more sophisticated investors."
The smaller size of boutique funds often makes them more nimble than their larger rivals, allowing them to react faster to market moves, grabbing opportunities and avoiding sharp falls.
"Because of that, boutique funds tend to see less lumpy inflows and they don’t get CIOs telling their managers to rein in their tracking error because they are underperforming," Coombs added.
The manager says boutique funds are not without their risks and that investors need to be aware of these before committing their money.
"Of course I am not knocking larger fund houses, and boutique funds underperform like any other, but I feel confident that you won’t get a style drift if they do. Boutique funds also tend to have more punchy mandates and higher Alpha ratios."
"Those reasons can give boutiques a slight edge, but we filter out a lot and of course there are some bad boutiques as much as there are good ones," he added.
Edgbaston Asian Equity
One of the niche funds Coombs is backing is the Edgbaston Asian Equity fund, run by Charu Fernando.
"[The manager] looks for cheap companies with certain levels of profitability, such that they can balance the business risk with balance sheet risk," Coombs said.
"Their investment universe covers Singapore, Hong Kong, Australia, Taiwan and Korea, as well as emerging and frontier markets, such as Vietnam."
"The stock screen is run every week and fundamental analysis is conducted on companies in the top quartile."
"In terms of liquidity, a stock can be no more than a third of the daily volume. Turnover is expected to be about 30 per cent per annum, and the fund typically holds only a small amount of cash."
Since launch in 2010, the Edgbaston fund has returned 22.3 per cent compared with 14.37 per cent from its MSCI AC Asia Pacific ex Japan benchmark.
This fund's steep minimum investment of $2m means a multi-manager fund represents the only way of accessing it for the vast majority of investors.
The fund sits in the Offshore Mutual universe.
Ennismore European Smaller Companies
Coombs also highlights the five crown-rated Ennismore European Smaller Companies as a boutique fund he holds across his multi-manager range.
Ennismore European Smaller Companies has €268.2m in assets under management and is domiciled in Dublin.
It is managed as an absolute return portfolio with the objective of generating positive returns irrespective of market conditions rather than comparing itself against any benchmark index.
That approach seems to have worked, as the fund has made positive returns over eight out of the last 10 calendar years, posting losses only in 2008 and 2009.
The fund also protected better in the market crash than its peers, falling by just 5.83 per cent while the major equity indices posted losses of more than 20 per cent that year.
The fund has gained 244.97 per cent over the last decade. Although it has no specified benchmark, as a point of reference the FSTE Europe index has made 165.65 per cent over this time.
Performance of fund vs index over 10yrs
Source: FE Analytics
The fund’s largest regional weighting is to Germany, accounting for 24.8 per cent of the total AUM.
Mark Harris
Mark Harris (pictured), who runs a number of multi-asset portfolios at City Financial, has more than 10 years’ experience running funds of funds. He says boutiques have always made up a significant proportion of his funds.
"With boutique managers, I think there is just a different type of motivation," Harris said.
"These managers have to do well as their revenue stream will be representative of their performance and they won’t be gifted assets under management like they would if they were at some of the larger firms."
"It is normally a portfolio of their ideas and usually high conviction, so they are very motivated to do well."
"However, when investing in a boutique fund you run the risk of looking particularly silly if the managers don’t succeed."
"Thankfully, we have seemingly had a very high rate of success. At the end of the day, it is all about taking a different opportunity which people don’t seem to be doing anymore," he added.
CF Miton US Opportunities
"One of the boutique funds I have bought recently is CF Miton US Opportunities," Harris said.
"It has a mid to small cap bias in the US and is set to benefit from a recovery from both the consumer and housing sectors. The fund, although launched very recently, has started to gain traction and pick up inflows."
"It is a very interesting fund and when it comes to the US we all struggle to find a fund that can outperform the S&P, so it does seem genuine that you need a smaller to mid cap fund to outperform."
"There have been a few success stories from the likes of Schroders and Findlay Park in that area of the US market," he added.
CF Miton US Opportunities is managed by Nick Ford and was only launched on 18 March this year.
The fund has slightly underperformed against the IMA North America sector so far, however, the time period is too short to hold any significance.
Performance of fund vs sector since launch
Source: FE Analytics
The fund requires a minimum investment of £1,000 and has an annual management charge of 1.5 per cent.