Outperformance Comes in Small Packages

South Africa’s asset management industry remains concentrated. In 2020, the top 10 firms held almost 70% of total assets under management (Alexander Forbes Manager Watch™ Annual Survey). This concentration has reduced from c.75% in 2015, showing that boutique asset managers (boutiques) are increasingly becoming an attractive alternative to their larger peers.

A boutique is typically a firm with assets under management (AUM) of less than R50 billion. South Africa is home to over 100 firms which fit this criterion, including 36ONE Asset Management (36ONE). Boutiques, however, are not just differentiated by their size. They are typically independent, owner managed firms with a bespoke approach or expertise in a specific area of investing. Most importantly, boutiques have been shown to consistently outperform their larger peers across geographies, including South Africa.

A study by US-based Affiliated Managers Group showed that this outperformance can range from 0.4% to 1.5% p.a., depending on geography and investing style (e.g. value, growth and other factors). In South Africa, evidence of outperformance was found in a study by RMI Investment Managers where independent managers of institutional funds, such as 36ONE, were found to have outperformed their larger bank/insurance owned peers by at least 2% p.a. 36ONE’s track record is a clear example of this boutique advantage with 100% firm-wide investment outperformance in the last 10 years.

Although each boutique is unique, we believe that there are six key characteristics which explain this ability to consistently outperform. The below list has been compiled from various sources of research on boutique investment firms and feedback from 36ONE’s own clients.

Boutiques outperform due to the following key characteristics:

1. Founder-led with culture driven by passion for investing
2. Simple organisational structure with low staff turnover
3. Agile in markets
4. Focus on investing rather than asset gathering
5. Aligned interests
6. Accessible to clients

1. Founder-led with culture driven by passion for investing

Most boutiques are formed based on a founder’s unique investment approach which has been proven to be successful over time. Firms which are in their next generation of leadership are still likely to carry on the legacy of their founders.

2. Simple organisational structure with low staff turnover

Less bureaucracy and hierarchy can lead to more efficient and effective decision making. Boutiques have smaller teams that can operate well with a flat organisational structure. This promotes independent thinking and accountability for decisions made. These types of environments naturally attract and retain talent which can excel in financial markets. Low staff turnover is therefore more likely. Stable teams can lead to consistent performance over time as they understand their edge and how to apply it in different market conditions.

3. Agile in markets

Boutiques are more agile than their larger peers and can rapidly respond to new information. This size advantage enables smaller managers to maximise opportunities to buy securities at reasonable valuations and sell securities at more attractive price points in a relatively short period of time. Additionally, boutiques can offer greater diversification with the ability to invest in smaller companies. This edge has become increasingly important in South Africa as delistings from the JSE have caused a net loss of companies over the last two years.

4. Focus on investing rather than asset gathering

Given the benefits of agility in markets, boutiques are willing to limit asset growth and concentrate on performance. They tend to be asset managers and not asset gatherers. Boutique teams are also more likely to focus solely on their investments with straight-forward product offerings that best showcase their edge. This compares to larger managers with many resources and time allocated to marketing and other activities to support and grow their large assets under management.

5. Aligned interests

As many boutique firms are owner-managed, it is likely that a material portion of the fund managers’ wealth is invested alongside clients with additional exposure through equity. This alignment ensures that the investment team has a long-term outlook with a focus on preserving capital. The founding managers normally have deep, long term relationships with investors that have endured different market cycles.

6. Accessible to clients

Without layers and layers of personnel, boutiques offer clients direct access to key decision makers. This supports the long-term relationships that boutiques build with clients of all sizes.

Conclusion

We believe that this is an opportune time to explore the advantages of boutiques. The current market environment has been characterised by high levels of uncertainty leading to unprecedented volatility. These challenging conditions favour managers that can be agile with organisational structures which support efficient and effective decision-making. Boutiques are well-placed to help clients navigate this environment with a historic outperformance which is likely to continue. 36ONE, as a leading boutique investment firm, exemplifies these six characteristics which have contributed to the success of our firm over the past 16 years.