Making sure that a fund group sticks with its area of specialisation, getting to know managers over the long term and avoiding cultures that do not challenge dominant voices are some of the ways to find the best boutique asset managers to invest with, according to Troy’s Tom Yeowart.
Yeowart runs Troy Spectrum, which is a fund of funds portfolio that has a significant weighting to products run by boutique asset managers. The £126.9m Spectrum fund has outperformed it average peer in the IA Flexible Investment sector by around 40 percentage points over the past 10 years, although it is behind its equity-only MSCI World benchmark.
Performance of fund vs sector and index over 10yrs
Source: FE Analytics
“What I’m trying to achieve is pick talented individuals and teams who are working in a culture and environment that is conducive to generating really good long-term returns,” the manager said.
“This means my largest holdings tend to be in boutique asset management companies that have been set up by the fund manager, created to very much match their temperament and personality, have few external and internal pressures and have a genuine focus on generating good performance.”
In the following article we find out what Yeowart keeps in mind when looking to invest in a boutique asset manager – although the points below also appear to be good advice when researching any fund.
Sticking with their knitting
Almost by definition, a boutique asset management house will specialise on a particular part of the market and might only run one or two funds. Yeowart sees some real benefits to this approach.
“That model provides a much better alignment of interests than a huge asset management company that is publicly listed and has pressure from shareholders to grow every year, has to keep launching more and more products – often those that are popular at the moment,” he said. 
“Don’t get me wrong, there are some very talented individuals within those organisations but from a general point of view I’d rather find organisations that have been designed around the person who is focused on just one fund. Over the long term – and if done well – that can generate some very strong long-term returns.”
A sense of ambition
While focusing on one area of investment can lead some boutiques to establish a strong reputation in their field, the multi-manager (pictured) stresses that he wants to see a business that is constantly looking to improve itself.
“It’s easy to just say ‘boutique asset managers are great’ but we are very much looking for boutiques that very much recognise they have to continue to invest in their own business,” he explained.
“Investment becomes more and more competitive each year and if you just stand still, then you’re going to be left behind. As a boutique you can’t rest on your laurels even if your performance track record has been good.”
Some of the attributes that should prove attractive investors are boutiques that continue to improve their ability to compete with their peers each year, through measures such as increasing the breadth of their investment team and never becoming complacent about their success.
Know the manager
One of the most important elements when investing into a boutique fund, according to Yeowart, is to get to the manager behind the fund and the company as a whole.
“Typically, I look for people that have enough confidence that they can have courage in their convictions but are also humble enough to recognise that they are going to make a lot of mistakes along the way,” he said.
“Good managers need to recognise that to improve they need to learn from their mistakes. I’m put off by managers that come across as arrogant; I much prefer the blend of confidence with humility. With the managers I hold, you rarely see them definitively state that they are right and everyone else is wrong.”
Another trait that Yeowart wants to see in a fund manager is a strong sense of ambition, but one that is based around building an enviable long-term track record rather than accumulating money for themselves.
He also thinks that it is vital for managers to be inherently curious, combined with an intellectual flexibility and agility. Some of the best managers he has met, for example, have been voracious readers.
“It’s easy to build up biases but it’s important to always be questioning yourself. You want to avoid thinking that some success means you have codified a process that will always work. The best managers I have met are those that just constantly want to learn,” the multi-manager continued.
“This combination of characteristics is quite rare; it’s about ambition without avarice, being passionate without being rigid.”
Know the fund
Yeowart stresses that it is vital for investors to understand what is going on within a fund at any given time and tracking how this changes over time. For example, he reviews the underlying holdings of each fund on a monthly basis to gain insight into what it is doing.
“It’s important to know the quality and value of your underlying portfolios. By doing so, I can see how a manager reacts to certain things,” he said.
“In a 20 per cent market sell-off, what are they selling, what are they buying and is there a risk they are throwing the baby out with the bathwater? You need that objectivity because the data doesn’t lie. Neither do the fund managers but like most people they are good at putting a positive spin on things.”
Avoid tyrants
In seeking out strong investment talent with a firm built around their area of expertise, there is always a risk that one voice can dominate the conversation. To avoid this, Yeowart wants to invest with boutiques that refuse to surround their managers with ‘yes men’ and encourage dissent in the investment process.
“The best teams will create an environment where everyone is encourage to express their opinion. There should not be dominant person who other don’t feel they can say ‘no’ to. If you do have somebody who is arrogant and outspoken it becomes harder for the rest of the team,” he said.
“Some organisations will build a devil’s advocate into their process to make sure the opposite point of view is examined. Much value can come from being challenged on your opinions.”
Focus on the long run
Yeowart’s Troy Spectrum fund tends to remain invested in its holdings over the long term and avoid selling out of a manager just because of a short period of underperformance. He believes that after spending time getting to know the manager and the fund, it makes sense to maintain this conviction rather than needlessly chopping and changing.
“One of the reasons we have relatively low turnover is because I’m of the opinion that you build conviction in a manager and have to learn of their strengths and weaknesses over time,” he said.
“It’s really hard to do that on a first meeting. You might get a first impression that turns out to be right but you need to see how they act over time and build up a view of how they act. It’s good to understand how they act in different market environments.”
Make funds justify their place
One consequence of taking time to understand a manager and sticking with it over the long term is that new holdings are rare to appear in Yeowart’s portfolio. He pointed out that any potential investments will have to be very impressive in order to compete with his existing holdings.
“Because I have a very clear idea of the strengths and weakness of the managers I hold, there is a really high barrier to entry for any new idea to come into the portfolio,” he explained.
“The core of the portfolio will always be in the managers I have gotten to know; any newcomers need to have their conviction built up over time. It will be a slow process for any new holding to come in.”