Many mainstream equity managers have adopted various alternatives strategies which were previously the realm of boutiques, particularly long/short investing. Now, a specialist consulting firm has sought to gauge investors’ views of the boutique alternatives equities managers and whether they differentiate between the two groups. GREG BRIGHT reports.
A survey of major super funds and consultants shows a high level of understanding and interest in boutique Australian alternative equity managers.
The survey, conducted by Jon Glass, principal of specialist alternatives consultancy FineAnswers, illustrates that investors place a tangible value on having the manager domiciled locally rather than offshore for reasons of greater transparency, although a sizable proportion did not care. Just over 45 per cent thought that local managers meant greater transparency, while 34 per cent thought it did not and 18 per cent did not know. The survey was conducted in March with 32 respondents consisting of super fund executives, asset consultants and researchers.
Glass says that there are about 60 alternatives equity managers in Australia which could be classified as “boutiques”, with less than $1 billion in total funds under management. He says the findings represented good news for the Australian managers, who have often been overlooked as alpha generators in favour of bigger offshore funds and funds of funds.
More than 80 per cent of respondents were aware of boutique Australian alternative equity managers (which Glass refers to as BAALs), with a third aware of more than 10 and only 15 per cent unaware of any. Nevertheless, the survey indicated, only 30 per cent had invested in a BAAL, while 65 per cent said they would if the manager had a “strong performance proposition”. About 12 per cent said they would not invest in a BAAL, even with the performance proposition.
A question about whether investors would be happy to be involved in an “incubator program” drew mixed responses, with 40 per cent each for ‘yes’ and ‘no’ and 15 per cent for ‘don’t know’. Glass also sought to discover what were the main concerns investors had about BAALs, asking respondent to rate nine concerns covering the areas operational, investment and business risk.
The suggested concerns were:
1. operational failure (e.g. problems with valuations, settlements, reconciliations,over-complex securities in portfolio, counterparties, trading mismanagement or margining)
2. fraud, trading outside mandate or misrepresentation
3. weak investment controls
4. the use of leverage, short selling or derivatives
5. computer systems/technology/service provider failures
6. manager’s financial weakness, lack of capital and/or insurance
7. manager is under-resourced: has too few staff, not good enough staff
8. too much of your time needed to monitor the manager
9. your reputation may suffer in case of adverse performance The biggest concerns, rated more as “unacceptably high” involved operational failure and staff under-resourcing. These were followed by the perceived financial weakness of a manager (see table).
Interestingly, given the current state of markets following the credit crunch, only 6 per cent rated risks associated with the use of leverage, derivatives and shorting as “unacceptably high”. Nearly 70 per cent thought these strategies were “acceptable”.
Consultants rated more highly than funds of funds in terms of sources of advice or access in alternatives manager selection. Just over half said they would use a mainstream consultant for advice and two-thirds saying they would use a specialist consultant. Only about one-third said they would use a fund of funds in place of advice form a consultant.
Comments from respondents ranged from the negative – “don’t believe that the BAAL opportunity set is in Australia; it’s overseas” – to the positive – “BAALs have the advantages of proximity for research and the regulatory and tax environment is familiar”. Glass says the response to the survey was very good because it shows investors have an openness to the use of BAALs.
“Specifically, the responses to their concerns make it clear what sort of due diligence is required from an investor’s point of view when assessing an investment in a BAAL fund,” he says.