Flexibility allows boutiques to outperform larger investment houses; small and mid-cap investments have outperformed
The themes for running a successful multi-manager portfolio in 2004 were threefold, according to funds of fund managers. Firstly, find the hot boutiques; secondly, go small/mid cap; and finally, invest in the low-correlated asset classes like commodities.
Robert Burdett, joint head of multi-manager services at Credit Suisse, says: "Boutiques have performed well because they are more flexible than the big investment houses. Smaller boutiques do not invest in an index and managers that are running them have higher incentives than others. A performance fee is usually offered and funds are based on absolute returns."
One boutique that Burdett feels has offered good performance for clients has been Thames River Capital. For example, the performance history for the Thames River Eastern European fund shows it is up 26.3% year to date as of 30 September. He thinks this market has been one of the best performers because the slowdown in global growth has not had an impact on Eastern Europe.
The Japan Thames River fund has also performed well and has climbed 7.58% against the Topix index of 2.76%. Although the country has had some signs lately that the recovery there is weakening, Credit Suisse remains overweight in Japan because Burdett feels deflation will be coming to an end, which will help companies to continue restructuring.
Bambos Hambi, head of multi-manager at Gartmore, also sees the advantage in investing in boutique managers. He says: "This is because managers are driven by performance fees and are also owners in the company and invest in their own funds. Boutiques are also more prepared to move away from the benchmark to generate absolute returns."
Burdett also thinks clients have favoured funds that have good risk control mechanisms in place. The JO Hambro UK Growth fund, run by Mark Costar at boutique firm JO Hambro Capital Management, fits this bill. It has been up 7.9% for the past year against the FTSE All Share which has only been up 4.3%. This portfolio invests in both small and large cap stocks in the UK capable of generating growth throughout the economic cycle. Before selecting a stock, Costar makes sure the stock is understood in terms of its business model, its product, its market and finance. The portfolio is constructed not to be too risk averse and has a balanced selection of stocks.
According to Hambi, the tightening of regulation has also seen clients wanting more diversity in their portfolios. Intermediaries have become more accountable if they give the wrong investment advice to clients and are demanding funds that provide clients with more diversity. More and more investment houses have been launching multi-manager funds as a result. Instead of setting up there own teams, they feel it is better to outsource the funds to experts in the field.
Another trend for the past year has been towards mid cap and small cap stocks. These companies are not so well researched and there are a lot of inefficiencies in the marketplace.
Patrick Armstrong, director of fund and manager selection at Insight Investments, says: "Throughout the first quarter of the year small and mid cap companies were performing well. This changed at the end of the first quarter when large caps outperformed. This was because the small/mid cap stocks outperform at the beginning of an economic recovery and large caps outperform at the later stages of a recovery."
Another big play this year has been commodity funds. A theme for Hambi has been higher oil prices and he has favoured funds in this area. For example, the Investec Global Energy fund has been up 40% for the year and the ABN Amro Resource fund has been up 27%, according to Hambi.
Royal Skandia views commodity funds as being a top seller this year. Nic Burton, marketing manager at Royal Skandia, says: "We have seen more selection in the commodity area. For example, the MLIM Gold fund has been selected consistently by intermediaries as it has performed well. Property funds have also performed well."
Burton thinks lower risk funds have fallen out of favour and more riskier ones have become popular as confidence returns to the market.
Armstrong is also unsure whether investor confidence is returning. Although markets are starting to accept more risk there still has not been significant money moving into equities. One area that Armstrong views as having a tough time this year has been hedge funds, because the markets have not been as volatile. It has been harder for them to make money.
"US funds have also not performed as well as other markets because of the weakening of the dollar and rising oil prices," says Armstrong. He believes UK funds have performed well because companies there have stronger dividend yields and enjoy a more positive currency situation.
Armstrong sees a continuing trend for more investment in UK funds. The country is in the best position because of low valuations. Also the economy is stronger and companies have stronger balance sheets. Armstrong has a value bias as he believes earnings estimates are far too optimistic and will not be achieved.
Putting the tech into protection
Square Mile’s series of informal interviews
Fallout from Haywood suspension
Launching later in 2019
£80bn funds under calculation