Boutique-envy transforms large fund manager models

Big funds management firms are adapting their business models to accommodate some of the characteristics of boutiques – the latest being the appointment of analysts to manage individual portfolios or portions of a fund.

According to the latest Australian equities sector report from retail research house Lonsec, the idea has been partially the result of funds managers wanting to drive greater accountability within the investment team. Lonsec, which is wholly-owned by Zurich, points out that Perpetual Investments has done this for several years “and it now seems to be a widely accepted concept”. The pioneer was probably Capital International of the US, which has operated with several independent decision-making teams across its product range for decades. They share research and resources but construct the portfolios separately. Lonsec’s report says that several Australian managers have introduced or flagged the introduction of analysts managing a portion of the fund. “In general, Lonsec is supportive of multiple-portfolio manager structures, however, we remain cautious of the rationale behind such moves and will continue to assess them on a manager-by-manager basis.” Another trend is for managers to provide equity or ‘shadow equity’ to their key staff to both increase levels of motivation and reduce the incidence of staff departures. Of the six managers which received ‘highly recommended’ ratings in the latest Lonsec report, only one, Citigroup Asset Management, now owned by Legg Mason, does not have a structure which allows equity for senior investment professionals. The other ‘highly recommended’ equities managers are IOOF/Perennial Value Shares Trust, Ausbil Dexia Australian Active Equity Fund, Investors Mutual Australian and Industrial Share Funds and Tyndall Australian Share Wholesale Portfolio. The Tyndall fund, which was upgraded from last year’s assessment, introduced a staff share scheme earlier this year. Brett Chatfield, Lonsec senior investment analyst, said that not only did boutiques dominate the ‘highly recommended’ ratings, the big brand managers, with the exception of BT and Perpetual, tended to be rated only ‘investment grade’ (rather than ‘recommended’). He said Lonsec had not made a strategic decision that boutiques were necessarily better placed to add value than their institutional peers, “but rather the skew toward boutiques has simply be an outcome of the research process”. The real or ‘shadow equity’ schemes being introduced by some large managers would become more prevalent, along with other ways of locking in key investment team members, as managers sought to avoid key personnel joining other firms or establishing their own. Another trend evident from the latest research has been an increase in average tracking errors, although this is still below long-term averages. In some cases, such as with Goldman Sachs JB Were, this has followed an explicit decision by the manager to increase its maximum bet from plus or minus 2 per cent to plus or minus 3 per cent. However, the Lonsec universe has been broadened to include more concentrated portfolios, which, by their nature, take significantly larger bets against the index. Although Lonsec has been researching retail managed funds since 1985, under different ownership, it appears to be gaining traction among financial planners against its much larger competitors. Chatfield claimed Lonsec had about 2,500 planners who used its research, which would probably give it about half the market share of van Eyk Research, which claims to have more than 50 per cent of the planner market covered. Lonsec is more closely aligned to van Eyk in its research style than the other two major, US-owned, houses, S&P and Morningstar. About 80 per cent of Lonsec’s research is qualitative. However, only S&P and Morningstar collect their own raw data on fund prices. Lonsec and van Eyk both use Morningstar data. Chatfield says that the Lonsec team of 14 analysts “makes it the largest retail research team in Australia”. The firm is also the only one which has internal resources devoted to agribusiness products and direct equities, which have an additional eight analysts between them.