A few years ago, staff defections were common as whole investment teams left big name players to set up shop on their own.
In those days markets were strong, jobs buoyant and bonuses high. Today the landscape has been vastly transformed. As economies around the world move into negative growth and markets continue their global meltdown, the environment for boutique fund managers couldn’t be any more different.
Yet for three ex-Goldman Sachs JBWere investment managers, going it alone was not an issue despite the volatile markets.
Fairview Equity Partners was set up by investment managers Chris Adams, Michael Glenane and Leigh Cronin in October 2008,
“You have to put the decline in the markets in perspective. We are now entering a time where there are a lot of investment opportunities,” Cronin says.
For Glenane, moving into a boutique structure has enabled the team to effectively seek out such opportunities.
“As a boutique we are better placed to source opportunities. We can devote more time to picking stocks than you would if you worked in larger institutions. Being a boutique allows you to focus on your job,” Glenane says.
Mass support
Nevertheless, the environment remains tough for an emerging boutique player.
Access to capital and the stability of a business are real challenges for boutique managers in the current environment, according to Zenith Investment Partners director David Wright.
“With investors sitting on their hands and not investing, it will make it harder to raise more funds under management. Access to capital and having enough cash in the balance sheet to enable these firms to pay salaries and keep their doors open will be critical in this current environment,” Wright says.
For Fairview Equity Partners, such issues are likely to be overcome through the backing of alliance partner National Australia Bank (NAB).
NAB’s direct investment business, nabInvest, owns 45 per cent of the business. Not only does this business bring financial backing, but also a network of the bank’s 564 financial planners.
“For us distribution was critical. Some backers have only a cheque book, but we were looking for someone that not only provided us with genuine ongoing support but with the distribution strength,” Glenane says.
Solaris managing director Denis Donohue has also emphasised that distribution and a strong balance sheet will be critical to the success of a boutique.
“It will be very difficult in these markets to raise funds under management. For us, access to capital and distribution is important if Solaris is to keep its doors open,” Donohue says.
The firm opened its doors in November 2007 after its team controversially walked out of the Suncorp equities business.
To date, the firm has secured nearly $1 billion in inflows. While the bulk of its flows are from the institutional market, the manager still scored listings on the BT, Asgard, Avanteos, Perpetual Wealthfocus and IOOF platforms.
This year the team also took out the Morningstar Emerging Manager of the Year 2008 Award.
For Donohue there is no looking back.
“With the big corporations you get all these structures like chief operating officers and chief executive and so much of the focus is on internal issues.
With boutique managers it’s a flat structure and we are all focused on the same goal, which is growing the business and securing good investment returns,” he says.
Although Solaris managed to outperform the S&P/ASX 200 Accumulation Index by 5.7 per cent, he acknowledges 2008 was probably the most difficult market ever faced by an Australian equities manager.
“Last year’s investment success is as much a tribute to the team’s resolve to build a great investment business as it is to investment expertise,” he says.
Stand-alones
While Solaris and Fairview Equity Partners have the backing, other fund managers have braced the market storm alone.
“We will get through the crisis. It’s been a tough year but we are pretty well capitalised and thus well positioned to ride it out,” Integrity Investment Management managing director Paul Fiani says.
Fiani understands distribution plays an important role in growing the business, but with already $1.5 billion garnered in funds under management, the company is well placed to ride out the storm.
The firm was able to quickly secure the support of its institutional clients when it was established in early 2007, winning $1.2 billion in just six months of opening.
The firm has also expanded into the retail market, with its flagship Australian equities fund now available on the MLC MasterKey Custom, BT Wrap, Macquarie Wrap and Avanteos platforms.
While many fund managers, including the big global players, have shed staff, Integrity recently scaled up its business, appointing an account manager in February.
For Fiani it is about independence and although “a few incubators” approached the manager, he says it was important to keep control.
“We are in a very good position now and are in control of our own destiny. In a global firm you are captive to the demands of a big, bureaucratic and political organisation. At Integrity I am not spending time dealing with unhelpful interference from offshore or answering never-ending global email trails. Rather, I am just focused on managing money,” he says.
Similarly, SG Hiscock has also been on a growth path, appointing two portfolio managers in the past 12 months.
“Our SGH20 Fund [a high-conviction fund] has been performing really well and due to increasing demands from client flows coming in, we have had to scale up our resourcing,” SG Hiscock chief executive Steve Hiscock says.
For SG Hiscock the markets have been extra challenging given three of its eight funds are concentrated in the property sector, an area particularly savaged by the markets.
“The listed property fund sector, including both local and international markets, has certainly been challenging for us. But really we are excited about the sector as a whole as it is providing some very good valuations for the long term,” Hiscock says.
A boutique player since 2001, Hiscock says some investors have been with the firm for many years and therefore communication remains established and open.
“The average experience in our company has been 18 years in the industry, so we know the participants in the industry,” he says.
Hiscock sees challenges in an environment of falling revenues and fixed costs, but believes the boutique structure is flexible enough to meet this challenge.
“We have a cost structure that is flexible. A significant level of fixed cost in an environment of falling revenues could lead you into trouble. But the bulk of our costs are flexible, so when we experience a significant fall in funds under management like we have seen in the current market, then our costs come down in line with that,” he says.
While these boutique fund managers remain confident of riding out the market storm, some in the industry expect a number of boutique managers to fall.
In January, investment firm Schroders predicted a consolidation of the Australian funds management industry triggered by the market downturn.
“If you look at the list of Aussie equity managers out there, there is some 130-plus managers running an equity fund. There are almost more fund managers than there are stocks. Quite clearly this is ridiculous,” Schroders chief executive officer Greg Cooper said at the time.
In early January, Credit Suisse announced the sale of its traditional funds management business to Aberdeen Asset Management, while Societe Generale merged its asset management business with Credit Agricole.
“I think you will see more of that – where asset management is a small part of a much larger business,” Cooper says.
Wright says he believes the market will be particularly challenging for the stand-alone boutiques.
“The firms that don’t have the distribution or tie-ups will find it incredibly tough. Not all will survive. It’s pretty clear that there will be some consolidation. You don’t need 150 Australian equity managers – that is not sustainable,” he says.
But for Glenane, the outlook remains positive for boutique managers.
“I am surprised how enjoyable it is. As a boutique manager we are lean and mean and hopefully this will stand us in good stead in troubled times,” he says.
