Fund flows might be dominated by the larger asset management firms but there are plenty of boutique businesses that offer the potential for strong returns, Troy Asset Management’s Tom Yeowart argues. 
In a previous article, fund-of-funds manager Yeowart – who runs the £126.9m Spectrum fund – pointed out that many of his largest holdings are boutique asset management houses as they tend to have a “genuine focus” on generating good performance across a limited number of strategies.
There are a number of features that the manager is looking for when investing in a boutique, such as a strict focus on a specific part of the market, a culture that encourage excellence, continued investment in the business and a lack of internal or external pressures to make needless changes.
Spectrum’s top holdings
Source: Troy Asset Management, as at 31 May 2018
“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,” he said. “This means my largest holdings tend to be in boutique asset management companies.”
In the following article, Yeowart highlights five boutique asset management houses that look like they are doing all the right things.
Egerton Capital
First up is Egerton Capital, which is the largest holding of the Spectrum portfolio through John Armitage’s Egerton Capital Equity fund.
The firm’s investment philosophy is built around a fundamental, bottom-up, research-intensive approach to stock selection which has the ambition of creating portfolios that are “dynamic, eclectic, and uncorrelated”.
“It is a boutique that was set up in 1994 by John Armitage and Bill Bollinger. They have two strategies: a long/short hedge fund and a long-only fund. The long-only fund, which is the one in which we invest, is global in nature and is essentially looking to buy good-quality businesses that are growing and are performing very well from an operational standpoint,” Yeowart said.
“Armitage ticks a lot of boxes for me when it comes to his characteristics – his performance track record is incredible, he probably doesn’t need to do the job but he is so passionate about what he does.”
Findlay Park
Spectrum also has a position in the $11.5bn Findlay Park American fund, which was one of the multi-manager strategy’s original holdings. Findlay Park’s investment philosophy concentrates on free cash flow but also strives to limit mistakes in individual investments.
“Findlay Park was set up in the 1990s by James Findlay and Charlie Park. They are very focused on one strategy: the American fund. They did have a Latin American strategy but that has now moved to Brown Advisory. They closed the business to new investors quite early on and are very focused on performance,” Yeowart explained.
Performance of fund vs sector and index over 15yrs
Source: FE Analytics
“Findlay Park is a fund manager that has produced really strong risk-adjusted returns over time. In recent years they have made a market-like return, but have done this while averaging around 15 per cent in cash.”
He also highlights the firm’s ability to adapt as one of its attractive features. The fund originally had a small-cap focus with a value tilt, but now invests more in large-caps and puts a lot more attention on companies with pricing power and the ability to compound at decent rates of return.
Phoenix Asset Management
Another boutique that Yeowart is a fan of is Phoenix Asset Management, which has a value-based approach and has managed the Aurora Investment Trust since January 2016. One of the reasons he likes the group is because of its ability to critically assess its mistakes and learn from them.
“Part of their philosophy is that they want to be a ‘learning machine’: they state outright that part of being a good investor is looking at your mistakes and constantly improving,” he said. “I think that is quite common to the managers I hold – they will look at the past to see where they have done badly and how they can avoid that in the future.”
Performance of trust vs sector and index under Phoenix
Source: FE Analytics
Yeowart gives the example of a review that the firm carried out after its first 10 years, which concentrated on its past investments. It concluded that while performance had been strong and better than the FTSE All Share, it had been selling winning companies too soon and recycling the profits back into deeper value opportunities.
“They realised if they held onto these companies and let them compound, they would have turned strong returns into excellent returns. Since 2008 they have tended to hold their winners for longer,” he said.
“Housebuilders are good example: they bought them in the financial crisis and did Phoenix’s typical thing of buying more as it got more painful. They then held onto housebuilders and only started reducing them last year, producing some wonderful returns. It’s only by looking backwards that you can improve your future returns.”
Lindsell Train
The Spectrum fund also has holdings in two Lindsell Train funds: Lindsell Train Global Equity and Lindsell Train Japanese Equity. Both funds are in the top decile of their respective peer groups over one, three and five years; Lindsell Train Japanese Equity, which has a longer track record, is also the third-highest return of the IA Japan sector over the past decade.
The boutique’s approach focuses on the belief that durable, cash-generative franchises are rare and undervalued by most investors for most of the time. This leads to concentrated portfolios with the bulk of investments being in the consumer branded goods, internet/media/software, pharmaceuticals and financials spaces; holdings are rarely sold from or added to the portfolios.
Performance of fund vs sector and index over 10yrs
Source: FE Analytics
“Nick Train and Michael Lindsell want to find quality compounders and all their effort goes into looking for companies they believe will grow at a high rate return over the long term with strong sustainable cashflows and margins. Their track record suggests they done a very good job of it,” Yeowart said.
“Importantly, they have built up a culture that fits their personalities and temperaments perfectly. Lindsell Train’s environment has been set up emphasise the managers’ strengths. Of course, there will be markets where it’s holdings are less in vogue but over time it should produce very healthy compound returns. And you just know that when things aren’t going well, there will be no pressure for them to change to approach – that’s a strong attraction for me.”
Polar Capital
Yeowart noted that Polar Capital is somewhat different to the companies highlighted above as it has a large range of funds spread across a number of different areas. However, he describes it as a “collection of boutiques within a boutique”.
Spectrum owns the Polar Capital Global Insurance fund, which is managed by Nick Martin and Alec Foster. Both managers previously worked at Hiscox, an underwriter at Lloyd's of London, which specialises in niche areas of the market, and are “very well connected” within the insurance industry.
Performance of fund vs sector and index under Martin
Source: FE Analytics
Explaining that Polar Capital Global Insurance is seeking out the best capital allocators within that space, Yeowart said: “There are a lot of insurance companies that don’t play cycle very well and underwrite business at times when you’re not getting much in return; the managers look for businesses with a history of profitable underwriting, which tend to be niche operators in commercial lines of insurance.
“With this fund, you have a market-beating return with less volatility through two managers that are doing just one thing and doing it very well. Just knowing that their fund will tend to be less economically sensitive is attractive; the insurance industry will always be in demand and, if anything, growth in insurance is only going one way as new markets like China are opened up.”