Boutique manager L1 Capital has defied the odds with another mandate win and its first research analyst hire at a time when many were saying it was the beginning of the end for start-up boutiques.

Lev Margolin, formerly from the investment banking team of Babcock & Brown in the principal investment section, started at L1 this month following constant growth for the Melbourne-based manager.

L1 was launched on the cusp of the credit crunch last August, by former Invesco analyst Mark Landau and ex-Cooper Investors portfolio manager Rafi Lamm. Since then, it has reached $250 million in funds under management. It received its fifth mandate last month from Russell Investments, forming part of the multimanager line-up of the Russell Australian Opportunities Fund (RAOF).

The steadily falling Australian share market had a few pundits predicting the flood of boutique managers would dry up.

L1, however, has had some success with a 7.8 per cent gross return since inception to June 30, 2008. L1 has become something of a poster boy for Russell as the multimanager released research on how to select and manage boutique managers. Russell awarded 5 per cent of the RAOF to L1 in an “incubation” capacity, joining six other managers. Fortis Investment Management, 452 Capital and Quest Asset Partners manage 20 per cent of RAOF each. MIR Investment Management and Plato Investment Management manage 15 per cent, and JM Financial Group manages 5 per cent.

Russell said the incubation strategy was developed to invest a small portion of the fund in a new boutique manager with an “identifiable competitive advantage”. The boutique managers research found most boutiques will on average struggle to continue posting competitive returns three years after inception. The report encouraged institutional investors to get in on the ground floor with boutiques, after doing solid due diligence on a fund, and not wait for a track record.

Russell senior research analyst, James McSkimming, said based on his experience of watching the “life cycle” of boutiques, “those boutiques that retain the investment focus associated with the inception stage are more likely to continue generating solid investment returns, relative to those that become distracted by business risk or exit strategies,” he said.

The research found the median rolling yearly excess returns for boutique managers exceeded or matched those of institutional managers over most of the last 11 years, albeit with higher risk.

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