The Boutique Premium

Stockholm (HedgeNordic) – US headquartered Affiliated Managers Group (AMG) recently hosted a presentation for the members of the CFA Society of Sweden at Nobis Hotel, entitled “The Boutique Premium.” There has been a hot debate about the value of active investment management for nearly half a century now, with studies suggesting that the average fund manager fails to beat his benchmark net of fees. The more serious investors amongst you might wonder “why invest with an average fund manager” when there are some clearly very focused and committed fund managers out there? According to a study by AMG there is still hope for active investment management.

At the presentation Hugh Cutler, responsible for managing AMG’s global distribution platform, explained that the performance of an important industry subset, namely boutique investment managers, has been largely overlooked. In a proprietary study of nearly 5,000 institutional equity investment strategies from over 1,200 investment management firms around the world, analysing trailing one year returns net of fees for the 20-year period 1995-2014, the Group found that boutique investment management firms outperformed both non-boutique peers and primary indices in nearly all categories, often by a substantial margin.

For the purpose, boutique investment managers were arbitrarily defined as: having significant principal equity ownership of at least 10%, investment management is the sole business (i.e. independent), manage less than US$100bn AUM, and excludes smart beta and fund-of-funds only managers. The source for the data used was the MercerInsight MPA^TM global database. The strategies were equal weighted, with the boutiques counting for 68% of investment managers but 47% of strategies in the data set.

The study found that boutiques outperformed primary indices in 9 out of 11 categories, with an average annual net excess return of 141bps. The strongest outperformance was in the Global equities, Emerging Markets equities, and all (Value/Growth/Core) US Small Caps equities categories. Boutique investment managers outperformed non-boutique investment managers by an annual average of 51bps during this period. The study also suggests that the average boutique strategy outperformed its primary index with high frequency, and outperformance was persistent. The level of outperformance was weaker in the last five years of the study, but boutique investment managers were still outperforming.

Core characteristics that position boutiques well to consistently generate superior long-term performance include: direct equity ownership and incentive systems align interests more closely with investors, multi-generational management and succession plans keep key principals motivated, entrepreneurial cultures are encouraged with partnership orientation, investment-centric organizational alignment focusing on investment returns, and key principals are committed to building enduring long-term franchises. Cutler also mentioned that principals of boutique investment managers are often co-investors in the strategies, which further acts to align fund managers’ interests with their client investors. As Americans put it: “They have skin in the game.”