A DRAMATIC shift in the asset management industry is threatening to turn the tables on SA’s largest management companies. But with four of the largest managers holding a third of the industry’s assets under management and attracting 90% of inflows over the past three years, it hardly seems likely they will lose their dominant position any time soon.
RMI Investment Managers (RMI IM) CEO Chris Meyer acknowledges this, but says a tipping point was reached midway through 2015 when net inflows into boutique managers overtook those of the big four.
Boutiques attracted under R5bn in the final quarter of 2013 compared to the industry giants’ nearly R40bn, but net inflow figures by the first quarter of this year were a near perfect mirror image of the 2013 numbers.
The rise and attraction of boutique asset managers is a global trend.
According to research by US investment management company Affiliated Managers Group into the performance of boutique active managers over the past 20 years, these managers have outperformed their larger counterparts by an average of 51 basis points annually. Against their fund benchmarks, boutiques delivered 141 basis points average annual net excess returns — a compelling case for active management and using boutique independent managers to achieve outperformance for clients.
"It is much harder to generate good returns the bigger you get," Meyer says. "There is a declining return on asset size for clients, particularly in a small market like SA where it is harder to find good stock ideas to add value in your client portfolio, with the result that your performance increasingly matches the index."
The gap for boutique asset managers lies in active management as passive strategies depend on the scale that big players enjoy. Meyer says the optimal level of assets under management for boutique managers that allows for the sweet spot between a solidly profitable business but with a manageable size of assets under management to still generate alpha for clients lies between R50bn and R100bn.
"The market is ripe for the next generation of independent asset managers to take on some of these bigger players."
Meyer says the biggest differentiation is culture. Independent managers are typically owner-managed, with a closer alignment of investment objectives. Smaller teams allow them to be more investment-centric rather than product or people managers, while the smaller asset base provides them with greater investment opportunities.
Kabelo Rikhotso, CEO of Royal Investment Managers, a joint venture between RMI Investment Managers and Royal Bafokeng Holdings, says the growth in funds flowing to boutiques is a consequence of stronger returns.
"Size is an enemy of alpha, and the larger you become you either have to move closer to the index or take concentrated positions," he says. "It is no surprise to see some of the small independent managers’ portfolio returns rank top quartile in the industry ranking tables."
The scope for boutique players is significant, even though they might struggle in the short term against big-name brand recognition. "But they can compete on confidence, resilience, decisiveness, service and ultimately delivering alpha."
To overcome the challenge of scale that limits independents’ market reach, RMI IM has hired its own distribution team and partnered MMI Holdings on retail distribution, both becoming important resources for affiliate asset managers. Now boutique asset managers can benefit from a traditional distribution model to achieve market penetration without detracting from the characteristics of being a boutique asset manager.
Meyer says independent asset managers benefit when allocators of mandates are concerned about the overconcentration of their clients’ portfolios with the big players. "They worry if the performance turns down or the ‘law of large numbers’ kicks in their clients will be overexposed to a concentrated set of managers. They are also looking to differentiate their own business by selecting new managers who might be able to do a better job," he says.
Having established a foothold in a number of independent players through strategic equity stakes, RMI IM is well positioned to profit from this trend. Apart from taking stakes in smaller players, it is also keen to partner mid to larger independents that share its vision and values.