This article was first published in the second quarter 2016 edition of Personal Finance magazine.
The annual Raging Bull Awards pay tribute to the unit trust fund managers that consistently out-perform. This year, a record number of awards, 24 out of 40, went to asset managers that are not among the top 10, as ranked by the size of their assets under management.
In addition, Nedgroup Investments, which outsources the management of its funds largely to smaller fund managers, walked off with the Raging Bull Awards for the South African Management Company of the Year and the Offshore Management Company of the Year.
“Top 10” asset management companies dominated the awards for specialist equity funds, interest-bearing funds and rand-denominated global funds (see “Certificates won by large managers”, below).
At the 2003 Raging Bull Awards, only three of the 32 awards were presented to companies that were not among the top 10 asset managers. That, at this year’s ceremony, significantly more awards were won by small fund managers is partly because these companies have grown in number since 2003.
Ryk de Klerk, an executive director of PlexCrown Fund Ratings and, together with ProfileData, the compiler of the statistics used to determine the winners of the awards, confirms that more small asset management companies have become eligible for awards in the past 10 years.
At the 2006 awards, about 213 rand-denominated funds qualified for awards (53 for straight performance, and 160 for risk-adjusted and straight performance). Of these, about 24 “small-institution” funds qualified for awards based on risk-adjusted performance (15 percent of the field).
At the 2016 awards, about 613 rand-denominated funds qualified for awards. Of these, about 238 small- institution funds qualified for awards based on risk-adjusted performance.
“I would define small-institution funds as those that are relatively unknown and not so much in the public eye. Large institutions would be those on your top 10 list, as well as Marriott, Momentum/RMB, Oasis, Prudential, Investment Solutions and Metropolitan,” he says.
Many small managers are considered to be boutique managers, because they are owner-managed.
The worldwide move to establishing boutiques started over 15 years ago. Catalysts included the frustrations of top fund managers with “asset management by committee”, which left no room for flair and spontaneity, as well as corporate office politics. Furthermore, analysts realised that the performance of asset management firms did not improve as they got bigger. Remuneration also played a role; boutiques with lower overheads promised both higher salaries and higher returns.
Research by fund analytics group Lipper shows that, since the financial crisis in 2008, boutique asset managers have been more successful at capitalising on market uncertainty and mispricing, and have increased their market share.
Do smaller asset management companies actually have an advantage over their top 10 peers?
Yes, says Rob Spanjaard, the chief executive and founder member of boutique manager Rezco Asset Management.
“Points in favour of boutique managers are that fund managers have to spend less time thinking about promotions and negotiating corporate politics. Boutiques can also invest a higher percentage of their portfolios in smaller companies, which can be an obstacle for bigger companies,” he says.
Most boutique managers interviewed for this article say larger funds are hampered when it comes to the speed at which they can buy or sell a large number of shares in small companies.
For example, a unit trust company that invests 10 percent of its R10 billion in assets under management would invest R1 billion. The stake would have to be built up slowly so not to attract the attention of competitors and increase the price. Likewise, selling an investment of R1 billion would have to be done over a long period. On the other hand, a company that wants to invest 10 percent of its R100 million in assets under management, or R10 million, would be able to execute the buy and sell legs of the investment much more quickly.
Large asset managers are particularly constrained when they want to invest a meaningful share in smaller companies. When stock markets are volatile, it is difficult to sell out of a small company quickly, so small companies are off-limits to large unit trust funds. As a result, large funds can under-perform small funds.
Nic Andrew, the head of Nedgroup Investments, agrees that, in general, boutiques have both the willingness and the ability to take active positions (meaningful stakes) when investing in equities.
However, Andrew says not all boutiques have the characteristics that he looks for when choosing an asset manager, nor are the desired characteristics to be found only in boutique management companies.
One of the interesting points about some of the award-winning funds is how small they are relative to their peers. For example, the Mazi Capital Equity Fund, which won the Raging Bull Award for the top-performing South African equity general fund on a risk-adjusted basis over five years, had assets of just R233 million, whereas the average fund in the sector had assets of R2.3 billion at December 31, 2015. Similarly, the winner of the award for the best South African multi-asset equity fund over five years, the Rezco Managed Plus Fund, had assets of only R803.75 million, whereas the average multi-asset fund had assets of R3.84 billion.
Unfair share?
Given their sterling performance over the past five years, shouldn’t these funds have attracted more investor money? That they did not may indicate that financial advisers are punting under-performing funds at the expense of those that they know are doing better. If so, why?
Spanjaard says he does not believe this is the case.
“We would recommend that, in choosing funds to invest in, investors should consider only funds with a minimum of a five-year track record. We know that it takes a long time to accumulate new investor money. We only saw flows pick up in our Rezco Value Trend Fund after five years. As a fund manager, we know we must earn the trust given to us; it is important to have consistent performance to earn the flows,” he says.
Kevin Williams, the founder of Bateleur Asset Management (the winner of the Raging Bull Award for the best South African multi-asset flexible fund on a risk-adjusted basis over five years), says the Bateleur Flexible Prescient Fund has focused on building a track record and generating respectable long-term performance at appropriate risk levels.
“Size and growth in assets have never been a priority,” he says.
Selecting like a pro
The increasing success of smaller, relatively unknown asset management companies makes selecting unit trust funds more challenging. Gone are the days when the offerings of a big-name asset manager were the default choice.
Asked how ordinary investors can learn from the selection process used by experts, Andrew says manager selection is a combination of art and skill.
“Typically, the factors that retail investors select on, namely recent performance and brand recognition, have not been good predictors of future performance. Spending the time to identify managers with strong alignment of interests, strong long-term track records through economic cycles, a focus on downside protection, a disciplined, sensible and repeatable process and philosophy and an ability (size, attitude) to implement their views should increase your odds of making a successful selection.
“Also, be very aware that all good long-term managers (especially those who take active positions) will experience periods of short-term under-performance,” he says.
Spanjaard says investors should not invest in funds they do not understand.
“Investors should research the fund’s history to see how they protect [against] investment risk and what strategies they resort to when markets are falling. When choosing funds, it is also important to choose those that do not have a high correlation with the performance of existing funds and therefore respond to downturns in a similar way. Look at the top 10 holdings of your chosen fund, for example, and make sure it is not too similar to the top 10 of a fund that you are already invested in,” he says.
Williams says investors should choose a fund with a clearly defined and thought-out investment process to which the fund managers adhere.
“The asset management company should also have a strong investment, operational and compliance team, and not be overly reliant on a couple of individuals. The company should be focused on investment returns and not asset accumulation and have built up a solid track record over a lengthy period that includes some challenging market conditions. It’s easy to perform well in a rising market,” he adds.
All the founding members of boutiques we spoke to say their companies face many obstacles.
Smaller companies may be avoided by financial advisers, because they are perceived as higher risk, despite the fact that many of them have a track record of risk-adjusted out-performance over five years and a handful of prestigious awards.
Malungelo Zilimbola, the founder of Mazi Capital, says one of the main challenges is attracting interest from retail investors and financial advisers.
“Large managers are either linked to life companies or banks, or have sales forces that distribute their products. We have been very successful in raising institutional money, and this has helped us create a good investment track record. Attracting investments from individual investors and financial advisers proved to be challenging despite the fact that we have won two Raging Bull Awards and a Morningstar award, and have an impeccable investment performance track record,” he says.
Williams says costs and regulatory compliance pose a challenge when establishing a new company.
“Distribution and the ability to attract assets will only come after building up a solid track record, so concentrate on generating the required returns and make sure that the business is appropriately capitalised,” he says.
Andrew says the main risks facing boutiques include key-person risk and business risk.
“When you invest in a boutique, you are buying into a few individuals’ core skills. With respect to business risk, you have to check that they have sufficient capital to survive and to invest in sufficient resources,” he says.
He says the other risks are high operating expenses, compliance risk and strategic risk – the risk of not focusing on core competencies.
Constant evaluation of investment performance is important for large and small asset management companies. Are there any points to look out for when re-evaluating a decision to invest in a boutique?
Andrew says Nedgroup Investments specifically investigates a manager when it changes its key investment individuals or ownership structure, there are inconsistencies or changes in its investment philosophy, it moves away from its core competencies, or the assets under management grow suddenly, or shrink. An increase in assets could be a problem if the company does have not enough people to do research before investment decisions are made.
CERTIFICATES WON BY LARGE MANAGERS
Funds managed by large asset managers that won certificates for top risk-adjusted performance over five years to the end of December 2015:
* Coronation Jibar Plus Fund: Best South African Interest-bearing Short-term Fund
* Old Mutual Global General Equity Fund: Best Global Equity General Fund
* Marriott* International Growth Feeder Fund: Best Global Multi-asset Flexible Fund
* Marriott* Worldwide Flexible Fund of Funds: Best Worldwide Multi-asset Flexible Fund
* Sanlam Global Cautious Fund of Funds: Best Global Multi-asset Low-equity Fund
* Stanlib Offshore America Fund: Best USA Equity General Fund
* Stanlib Multi-Manager Global Bond Fund: Best Global Fixed-interest Bond Fund
* Coronation Global Managed (ZAR) Feeder Fund: Best Global Multi-asset High-equity Fund
Funds managed by large asset managers that won certificates for top outright performance over three years to the end of December 2015:
* SIM Industrial Fund: Best South African Equity Industrial Fund
* Investec Commodity Fund: Best South African Equity Resources Fund
* Absa Property Equity Fund: Best South African Real Estate Fund
* SIM Small Cap Fund: Best South African Equity Smaller Companies Fund
* Absa Multi-Managed Bond Fund: Best South African Interest-bearing Variable-term Fund
* Old Mutual International Growth Fund of Funds: Best Global Multi-asset Flexible Fund
* Sanlam Global Balanced Fund of Funds: Best Global Multi-asset High-equity Fund
* Marriott is owned by Old Mutual
SMALL FIRMS THAT WON BIG
The following small asset management companies won Raging Bull Awards or certificates at this year’s awards ceremony:
36ONE Asset Management won the Raging Bull Award for the Best South African Equity General Fund for straight performance over three years to the end of December 2015 by its Equity Fund. 36ONE was formed by former Investec employees Cy Jacobs and Steven Liptz in 2004. Apart from the Equity Fund, the company has the Flexible Opportunity Fund, which has won a Raging Bull Award. The firm manages unit trusts, hedge funds and institutional segregated mandates valued at about R20.2 billion.
Autus Fund Managers won three certificates for straight performance over three years. The Opportunity Fund won the certificate for Best South African Multi-asset Flexible Fund, the Stable Fund won the certificate for Best South African Multi-asset Low-equity Fund, and the Balanced Fund won the certificate for Best South African Multi-asset High-equity Fund. Autus has eight unit trusts. The company was launched in 2004 by Christo Malan and has R2.2 billion under management.
Bateleur Capital won the Raging Bull Award for the Best South African Multi-asset Flexible Fund for risk-adjusted performance over five years by its Flexible Prescient Fund. Bateleur was founded by Kevin Williams in 2004. In addition to the Flexible Prescient Fund, the company manages the Equity Prescient Fund, the Global Equity Feeder Fund, which invests in the Ranmore Global Equity Fund, and two hedge funds. Total assets under management are about R6.5 billion.
Denker Capital manages the Nedgroup Investments Financials Fund, which won the certificate for the Best South African Equity Financial Fund over three years. Denker was launched in September 2015 and is 49 percent owned by Sanlam and 42 percent by Denker management, while nine percent is in a share trust. It is the result of merging two niche asset managers, SIM Global and SIM Unconstrained Capital Partners. Leading managers include Kokkie Kooyman, Douw Steenekamp, Claude van Cuyck and Ricco Friedrich. The company manages about R15 billion.
First Pacific Advisors, which manages the Nedgroup Investments Global Flexible Fund, which won the Raging Bull Award for the Best Offshore Global Asset Allocation Fund for risk-adjusted performance over five years. First Pacific is an independently owned asset management company based in Los Angeles, California. Nic Andrew, the chief executive of Nedgroup Investments, says the company’s core skill is to out-perform with the broadest possible mandate, while avoiding capital loss. First Pacific is not approved by the Financial Services Board (FSB), so it may not market its funds to South Africans. The easiest way South African investors can access the Killen Group’s funds is via Nedgroup Investments.
Mazi Capital won the Raging Bull Award for the Best South African Equity General Fund for risk-adjusted performance over five years by its Equity Fund. The company was launched in 2006 by Malungelo Zilimbola. Initially, it was part of a joint venture with Visio Capital, but Mazi and Visio parted ways in 2013. Mazi manages R28 billion in hedge funds, unit trusts and segregated institutional funds.
Rezco Asset Management won the Raging Bull Award for the Best Multi-asset Equity Fund for risk-adjusted performance over five years by its Managed Plus Fund. The Rezco Value Trend Fund received the certificate for the best South African multi-asset high-equity fund for risk-adjusted performance over five years. Rezco was founded in 1981 by Wally Gray, who was later joined by Rob Spanjaard, the chief investment officer and managing director. The company manages about R5 billion in assets.
The Killen Group manages the Nedgroup Investments Global Cautious Feeder Fund, which won the certificate for the Best Global Multi-asset Low-equity Fund over three years. The company is based in Philadelphia in the United States and follows a value-oriented investment philosophy and specialises in managing funds across the asset allocation spectrum. Andrew says the company’s core skill is managing multi-asset income strategies, with the objectives of low volatility, capital protection and inflation-beating returns. He says the Killen Group is not approved by the FSB, so the easiest way South African investors can access the Killen Group’s funds is via Nedgroup Investments.
Veritas Asset Management manages the Nedgroup Investments Global Equity Fund, which received the certificate for the best global equity general fund for risk-adjusted performance over five years. Veritas is an owner-managed business based in London and was established in 2003. Andrew says Veritas’s investment philosophy combines “investing with themes” with a fundamental research process. Veritas is not FSB-approved, so the easiest way South African investors can access the company is via Nedgroup Investments.
WHEN IS A BOUTIQUE A BOUTIQUE?
There is no “one size fits all” definition of a boutique asset manager. The asset management industry does not define a boutique in terms of minimum or maximum assets under management.
It seems that the only agreed-upon feature of boutiques is that they are owner-managed and that the owners generally own a large percentage of the business. Some boutiques specialise in managing certain types of assets or funds, or in a particular investment style, and most pride themselves on having an entrepreneurial culture.
Kevin Williams, the founder and director of Bateleur Capital, says additional features of boutiques include focus, flexibility and nimbleness.
“We are not trying to be a fund manager that offers a full suite of investment products. Instead, we have a clearly defined focus on a select few equity-centric funds. Nimbleness refers to our ability to act quickly and decisively in buying or selling securities once we have made an investment decision. Nimbleness is partly, but not solely, assisted by our relatively small size.”
Malungelo Zilimbola, the director and founder of Mazi Capital, says: “There are no hard-and-fast rules on size of assets under management, given that size is always relative. For example, Coronation, Investec, Foord and Allan Gray were considered boutique managers 20 years ago and today they are no longer boutique managers. The boutique element refers to nimbleness, agility and entrepreneurial and quick decision-making processes, versus the large, unwieldy machines that the large managers become.”
Paul Cluer, the managing director of Foord Asset Management, says although Foord is one of the top 10 fund managers when ranked by assets under management, Foord believes it has many of the characteristics typical of a boutique.
“We still act, behave and generate performance like a boutique, but also enjoy the economies of scale that larger assets under management generate, especially an enhanced ability to sustain operations through periods of under-performance,” he says.
To ascertain whether more Raging Bull Awards and certificates were awarded to smaller asset management companies in 2016 compared with previous years, it is necessary to draw an arbitrary line between large and small asset managers.
Figures from the Association for Savings & Investment SA (Asisa) show that the top 10 companies measured by assets under management are Coronation Fund Managers, Allan Gray, Stanlib, Investec Asset Management, Old Mutual, Nedgroup Investments, Sanlam, Absa, Prudential and Foord. Statistics from Asisa show that, in December 2015, the top 10 unit trust managers managed 76 percent of the industry’s total assets under management, to the value of nearly R1.5 trillion (see Table 1).
For the purposes of this article, the large asset management companies are the top 10 ranked by assets under management, while the rest are boutiques.
Of the 48 asset management companies, about six are specialist exchange traded fund or passive investment companies and about nine are third-party fund managers. These companies provide a range of compliance and administration services, and allow boutiques to use their licences.
The largest of the third-party companies, by number of funds, as well as assets under management, is Boutique Collective Investments (BCI), which has R54.8 billion under management and 210 third-party funds.
For the purpose of this analysis, we have classified Nedgroup Investments (ranked sixth by assets under management) as a smaller company, because it does not employ fund managers. The company outsourced the management of its funds when it launched its “best of breed” investment approach in 2003.
If Nedgroup is regarded as a large manager, then 21 of the 40 awards and certificates at the 2016 ceremony were made to big companies. If Nedgroup is classified according to its underlying fund managers, 24 of the 40 certificates and/or awards were won by smaller asset management companies (see Table 2).
It can be debated whether Investec, Stanlib, Old Mutual and Sanlam should be classified as large companies or boutiques, because they have flirted with “multi-boutique” asset management models over the past two decades. Acknowledging the superior investment returns of smaller, focused teams, they have experimented with models whereby boutique investment firms were managed under the umbrella of the larger company.
In the case of Old Mutual, which became the Old Mutual Investment Group SA, its boutiques – the Value boutique, the Select Equity boutique (subsequently called Electus), Futuregrowth and Dibanisa – have been re-absorbed into the parent body and operate like different counters within a department store.
With Sanlam Investment Managers (SIM), however, boutiques such as Denker Capital have become subsidiaries, with SIM retaining a 49-percent shareholding.
As a result of these complications, we have classified all companies offering multi-boutique options as large companies.
HOW THE AWARDS ARE DETERMINED
The Raging Bull Awards recognise the stars of the unit trust industry in terms of top outright (or straight) performance, best risk-adjusted performance and best performance by unit trust management companies.
The awards cover domestic funds (South African-domiciled) and offshore funds (non-South African-domiciled funds approved by the Financial Services Board, or FSB). Awards for asset-specific sectors are based mainly on straight performance calculated by ProfileData. For multi-asset sectors, where risk-management is a major factor, awards are based on the PlexCrown Fund Ratings.
Notes on eligibility:
* Funds must have been available directly to retail investors for at least one year for risk-adjusted performance, and three years for straight performance, to be eligible for awards and certificates.
* For awards for straight performance by domestic funds (including South African-domiciled foreign funds), sectors are included if they have at least five actively managed funds with a history of three years or more.
* For awards for straight performance by offshore funds, sectors are included if they have at least five actively managed funds with a performance history of three years or more.
* Risk-adjusted awards are presented in the major domestic and offshore multi-asset sectors. Domestic and foreign (South African-domiciled) sectors are included if they have at least five actively managed funds with a history of five years or more.
* Passive funds are not included in the awards, because their performance reflects market movements rather than fund manager expertise.
* Awards are not made to money market funds because of the limitations placed on them in terms of duration and the types of instruments allowable.
* Awards are not made to Fundisa funds, because the nature of these funds does not make them comparable to other funds in their sector.
* Awards are not made to funds in the “unclassified” sub-category, because their mandates and investment objectives are not necessarily comparable.
* Funds that have changed sub-categories during the past year (even if they have been allowed to retain their performance history) are not eligible for sector-specific awards.
* To be eligible for an award or certificate, an offshore fund must have been registered with the FSB for at least three years. Funds that do not qualify for awards are also excluded from the calculation of the offshore management company of the year award.