Investing early in Boutique Managers adds significant value says Russell research
Boutique L1 Capital appointed as new manager of Russell Australian Opportunities Fund
SYDNEY,21 July 2008 –Maximising the benefits of investing in boutique managers requires identifying the right managers; accessing them early; and monitoring their performance and organisational structure, according to a Russell Forum research report titled Boutique Investment Managers.
The report found that there are a number of important criteria to selecting and managing a boutique manager, however investing in the right boutiques in their early life cycle can add the most value. The report found that median excess returns for boutique managers have been impressive during the first 1-3 years of operation and both behavioural and business-related factors will determine how a boutique manager will evolve and perform during its lifecycle.
Presenting at a Russell Research Roundtable tomorrow in Melbourne, James McSkimming Senior Research Analyst at Russell Investments said: “Over the years, Russell has watched a significant number of managers progressing through the various phases of the lifecycle, 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 number of boutique investment managers in the Australian equity market has rapidly grown over the last two decades. This trend has been mirrored internationally as experienced investment managers depart large institutional firms to set up their own businesses.
“The explosion of boutiques can be a blessing for investors, because it significantly increases the opportunity set of managers. However, it also increases the burden of selecting good managers from a larger list of candidates. To maximise the benefits of investing in boutique managers, investors must know what they are looking for,” Mr McSkimming said.
Although there are clear benefits in using boutique managers, selecting the right ones is not easy. According to the report, the task of identifying a good boutique shouldn’t be very different to selecting any quality investment manager. In Russell’s experience, there is no substitute for a) knowing the managers intimately; b) conducting regular onsite qualitative evaluations by experienced manager research analysts; and c) complementing these efforts with extensive quantitative analysis of manager portfolios, trading behaviour, risk exposure and performance.
The typical boutique has delivered some attractive performance for investors but has achieved this out-performance with greater benchmark-relative risk. The report found that the median rolling yearly excess returns for boutique managers have exceeded or matched those of institutional managers over most of the last 11 years. In 2007 boutiques had an exceptional year outperforming their institutional peers by more than 2 per cent. This has tapered off slightly this year, with boutiques outperforming the institutions by 0.9 per cent in the year to March 2008.
“As a group, boutiques have performed extremely well over the past several years in a potentially challenging financial landscape. However, boutiques often achieve this outperformance by taking greater benchmark risk although it is generally the case that the increased excess returns compensate for the additional risk taken,” Mr McSkimming said.
The recent appointment of L1 Capital (“L1”) as a new manager in the Russell Australian Opportunities Fund (RAOF) was prompted by the Russell research on Boutique Investment Managers.
Still in its infancy stage, L1 Capital was formed in 2007 and is an innovative boutique manager which focuses on a bottom-up stock selection process. Wholly owned by two portfolio managers, L1’s investment strategy is to identify undervalued stocks that have strong company management, attractive industry structure and favourable operating trends.
L1 Capital will manage approximately 5 per cent on RAOF in an “incubation” role. The incubation strategy was developed to invest a small portion of the fund in a newly formed boutique manager which has an identifiable competitive advantage.
Chief Investment Officer Australasia, Symon Parish said: “The addition of L1 Capital to the Russell Australian Opportunities Fund is a strategic move which will add value to the already existing set of managers. The boutique is in its very early life stages and its growth and performance outlook over the next few years is tremendous,” he said.
RAOF now has seven managers including Fortis Investment Manager Australia Ltd (20%); 452 Capital Pty Ltd (20%); Quest Asset Partners Pty Ltd (20%); MIR Investment Management Ltd (15%); JM Financial Group Ltd (5%); Plato Investment Management (15 %) and L1 Capital (5%).
RAOF aims to provide investors with exposure to a diversified portfolio of Australian shares and employs a multi-manager strategy to enhance the various strategies used to manage the fund. Managers of RAOF generally have high tracking errors and lower benchmark awareness and specialise in a various range of alternative and higher risk strategies such as long/short, small capitalisation and absolute return. Due to the nature of the fund, RAOF is targeted towards investors with a long-term investment horizon and who are willing to accept significant volatility in returns.
James McSkimming will be presenting the results of the Russell Forum paper titled Boutique Investment Managers at the Russell Research Roundtable series in Melbourne on the 22 July at 12pm at The Wine Room, The Westin and in Sydney on 1 August at 12pm at The Barnett Room, The Westin.
Issued by Russell Investment Management Ltd ABN 53 068 338 974, AFS Licence 247185 (“RIM”). This document provides general information only and has not been prepared having regard to your objectives, financial situation or needs. Before making an investment decision, you need to consider whether this information is appropriate to your objectives, financial situation and needs. This information has been compiled from sources considered to be reliable, but is not guaranteed. Past performance is not a reliable indicator of future performance. Any potential investor should consider the latest Product Disclosure Statement (“PDS”) in deciding whether to acquire, or to continue to hold, an investment in any Russell product. The PDS can be obtained by visiting www.russell.com.au or by phoning (02) 9229 5111. RIM is part of the Russell Investments (“Russell”). Russell or its associates, officers or employees may have interests in the financial products referred to in this information by acting in various roles including broker or adviser, and may receive fees, brokerage or commissions for acting in these capacities. In addition, Russell or its associates, officers or employees may buy or sell the financial products as principal or agent. *AUM Is current as at 31/3/08