For example, their small size means they are more nimble and can react faster to changes in market conditions, but also means they are at serious risk should a major investor decide to pull out their money.
Hargreaves Lansdown’s Mark Dampier and Whitechurch’s Gavin Haynes both support boutique funds, especially for their diversification benefits and niche exposure, but say they are not without their disadvantages.
They listed the following factors to consider before buying this type of fund.
Key man risk
Haynes (pictured), managing director of Whitechurch, says boutique fund houses and their underlying funds are often built around a single manager, which means investors are backing the individual.
"With boutiques, if you look across the range it’s very much down to the individual that has attracted the money," he said. "There is a strong star-manager culture, so the risk is if they move elsewhere. It’s down to the individual that people have invested in."
Haynes says it is important to consider whether the manager has a vested interest in the fund or business, because if so, they are less likely to leave.
Haynes and Dampier say the manager’s long-term track record is extremely important.
"I’d want to see at least 10 years and see the manager has performed across very different conditions – that he’s been through tough times as well as performing well in rising markets," Haynes said.
Dampier, managing director at Hargreaves Lansdown, added: "The most important thing is the track record of the managers. Just because a boutique fund is [recently launched], it doesn’t mean it’s a new fund if it’s an experienced fund manager."
Dampier uses the example of Richard Buxton, who recently left his flagship fund at Schroders to join Old Mutual.
"If he had set something up, just because he set up a boutique are you saying you wouldn’t back him?" Dampier asked.
Dampier adds that key-man risk is more limited in a boutique because the manager will have a vested interest in the company, or may have even set it up.
He says if this is not the case, investors should steer clear.
"There’s no point otherwise, because [the manager] can be whittled out by something right away."
Resources
Haynes says boutique funds are often a better choice for specialist or niche sectors because the smaller size of the firm often means it will not have the resources to cover wider geographical regions such as global equities or corporate bonds.
"Boutique fund managers don’t have the resources of larger investment houses," he explained. "In some areas that can prove a hazard."
However, he says boutiques can be the way to go for specialist areas such as emerging markets or UK smaller companies.
"But if you’re investing in a much wider area, it helps to have resources around the globe."
Liquidity
The smaller size of the portfolios can make them more nimble, but also more vulnerable to liquidity risks should they suffer a poor run or have one major investor pull out.
Dampier (pictured) says boutique managers often set up funds with a heavy vested interest themselves, so this should limit the risk of an exodus of seed money.
However, he says it is important to understand how the company is structured before investing. "You have to look at the structure of a company because you don’t want to be left high and dry if [a major investor pulled out a large sum of money]," he said.
"With small funds, you should also be careful you don’t end up owning a big chunk of the fund and it doesn’t grow."
Haynes agrees and says the liquidity issues that surround getting in and out of a fund should be on investors’ minds before they put money into the product.
"You want to ensure the fund is not dominated by one or a small group of investors," he said.
Haynes adds that his team at Whitechurch does not look at funds until they reach £20m in size.
Charges
Haynes also points out that extremely small funds often have higher associated charges, which can take a toll on investor returns.
Such is the case with the Rathbone Multi Asset Enhanced Growth Portfolio, which carries an ongoing charges figure (OCF) of 3.03 per cent. Much of the £6.9m fund’s cost is due to the fact that it is a fund of funds.
Other boutique funds have similar costs to their larger peers: the five crown-rated IM Matterley Equity portfolio, for example, carries an OCF of 1.59 per cent, in line with many other actively managed funds.