For Great Returns, Just Mix And Match

Sydney Morning Herald

Tuesday March 28, 2006

JOHN COLLETT

The big fund managers - primarily those owned by the big banks and insurers - have been trumpeting their good returns over last year. For the first time in a long time they have done better that the smaller, independently-owned boutique fund managers.

It is not because boutiques have lost their edge or the big brand managers have suddenly discovered something new about investing. Steven Gamerov says its has everything to do with the way they each manage money and the changing dynamics of the Australian sharemarket.

Gamerov is in a position to know. The former funds researcher leads the team that picks the funds for St George Bank's Advance Asset Management. Advance wraps up those managers into a single fund for investors. He finds the best managers regardless of whether they are boutiques or established managers.

Gamerov searches for managers that will contribute the most "alpha": the performance generated by a manager that exceeds market returns. Many talented people have left the big brand managers to start out on their own, forming the so-called boutique managers. One of the big advantages boutiques have, Gamerov says, is the small size of their funds.

That means that they can buy and sell shares quickly and invest in the smaller listed companies, which their big cousins with their huge amounts of money have difficultly doing.

However, it is far from a one-way street. Big institutions do have advantages, Gamerov says.

He says one of the reasons boutiques did not do so well last year is because they can invest in different parts of the Australian sharemarket, compared to their large peers.

When Australian shares started to recover in 2003, it was the small companies that led the way. And it was the nimble boutique managers with a propensity to invest in smaller stocks that did best.

Last year, it was the big companies' turn to outperform small companies. Gamerov says large Australian companies are increasingly generating more of their earnings from offshore operations.

The resources and global reach of many big fund managers makes them well placed to find the better opportunities among the larger stocks of the Australian sharemarket.

Gamerov says another reason that boutiques have not done as well over the past year is that the value style of investment adopted by many boutiques has been out of favour.

Value investing involves picking shares that are trading below fair value, have strong cash flows and pay healthy dividends.

Over 2005, it was growth managers, especially those that took big tilts to the resources and energy sectors, that did best.

Growth managers are more prepared to invest in a company on the basis of future earnings growth.

One or two years of past performance is no basis for making sweeping statements about whether or not the best may be past for boutique managers. And the line between what constitutes a boutique and a big brand manager is blurring anyway, as the latter responds to the threat posed by the boutiques. Some have responded by re-negotiating remuneration packages with their key staff to hold on to them.

They have also launched share funds holding fewer stocks than their traditional funds. These concentrated funds also have limits on how big they can grow.

Gamerov says mixing mainstream managers is not going to work for investors as it leads to over-diversification, with the result being index-like returns.

Gamerov employs the concentrated funds of the big managers in combination with boutiques to produce the best results for investors.

He tends to use early stage boutiques that are managing a small amount of money because, he says, this is when they produce their best returns.

Gamerov says it is all about finding the best sources of alpha and that is always going to be a combination of boutiques and established managers. It is what will work best for investors over the long term.

FISCAL FACT

Boutique managers can hold high levels of cash if they think the market is expensive. That's one of the reasons some boutique managers have underperformed the ASX over the past year.

© 2006 Sydney Morning Herald

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