Size does matter

Asian equity boutique managers are hot. Jame DiBiasio asks if their performance can keep up.

Asia-based boutique fund management houses are experiencing rapid growth, which presents opportunities but also risks for their bread-and-butter clients, the high net worth investor.

The re-rating of Asian equities by global institutional investors is creating a boom in the boutique world. Established specialists such as Singapore's APS Management have seen their assets under management double, while a host of younger boutiques are attracting assets from global pension funds and other investors. It is a trend that began last year and looks set to continue for two, perhaps even three more.

For individual clients, having a fund manager add scale can be beneficial to a point. Scale lets fund managers access more asset classes efficiently and gives them greater bargaining power vis-Ã-vis brokers and other financial intermediaries. But investors need to look at boutiques and ask how big is too big? Because being a small player under the radar also has a lot of advantages, particularly when they are seeking excess returns in small- and mid-cap Asian equities, where liquidity is poor and big usually means clumsy, not beautiful.

For traditional fund management houses, bull markets and a wall of money from clients usually hides flaws, and lets mediocre managers gain easy returns. For boutiques, however, good times can pose difficulties if they aren't adept at managing larger sums of money. Moreover, many boutique managers run absolute return strategies and have to work harder to shine in bull markets; and a few Asian firms have also begun running hedge funds alongside their more traditional long-only absolute return portfolios.

The fact that boutiques are now in vogue among institutions says a lot about the high quality service they have rendered their clients in the past. Investors need to make sure that degree of performance will continue.

One of the best-known boutiques in the region that is attracting private client and institutional attention is APS. This firm has been known for its Asia ex-Japan equities expertise catering to high net worth clients, but because of its small size and Singapore base, was considered too exotic for most institutional mandates. But last year its assets under management rocketed from under $800 million to $1.4 billion, and the money is still flowing in.

Wong Kok-hoi, managing director and CIO at APS, says the inflow is because institutional investors have suffered for three years and are now willing to try new means of achieving returns - and that investment consultants, with their credibility on the line, are recommending high-octane boutiques. "Because consultants' picks did so poorly for three years, we're consultants' last resort," he says.

Lloyd George Management, based in London and Hong Kong, is another well-known boutique that has seen major inflows this year. Now with $2.1 billion under management, it has recently won mandates from global funds of funds managers such as Russell Investment Group and SEI, as well as from pension funds in Britain. "Mandates tend to be from US, UK or European funds frantically trying to switch more money into Asia," says Simon Rigby, director at Lloyd George's Hong Kong office.

"In the last five years, no one called me," says Tan Chong-koay, CEO at Pheim Asset Management, which is based in Malaysia and Singapore and manages $430 million. "Now I'm getting calls from Frankfurt, and from Switzerland."

Although boutiques have been around in Asia for a decade, their prominence is new. "Boutiques are part of the evolutionary process of the funds management industry," says Peter Gunning, CIO at Russell in Sydney. "Initially big retail banks offer investment products, then insurance companies, then investment banks. Ultimately employees at these places strike out on their own and hang up a shingle. It happened in the US and in Australia, and it's definitely happening in Asia."

A lot of the recent growth is due to layoffs in the traditional investment management world over the past few years, says Colin Lee Yung-shih, managing director at the $290 million Chartered Asset Management in Singapore: "More people are setting up boutiques. We're no longer frowned upon as renegades. Differentiation is now a selling point."

Another reason behind the growth: quality of life. Says Lee: "Institutional fund houses are bureaucratic. We wanted to practice the zen of investment, with just a concentrated portfolio of 15-20 stocks unrelated to any index or benchmark."

This atmosphere has served private clients well, as good boutiques are nimble and aggressive. Most of them don't hug benchmarks and seek absolute returns, but usually without the risks associated with hedge funds. But to earn such returns, boutiques have to specialize in less liquid assets. Asian boutiques don't invest in core US equities. Rather they look at US small-caps and Asian equities.

Finding good boutiques in this region is not always easy, however. There are a few established names, such as APS, Lloyd George and Singapore's Aberdeen Asset Management. The majority of firms, however, prefer to keep a low profile, and quite a few have avoided institutional money and stuck with just managing money for private clients.

"We do business by referrals," says Lee. "We don't deal much with consultants because we're too different."

Moreover, compared to the US or Europe, the number of Asian boutiques still remains small, despite their rising profile.

Says Rigby: "There aren't that many boutiques in Asia and that's part of the attraction of being one."

One reason is that a good boutique is like a great bottle of red wine: they tend to do well with age. Experience and an established track record account for a lot. This is in contrast to hedge funds, which are faddish, have capacity issues and close rapidly; moreover hedge funds' performance tends to decline after three years. By the time hedge fund managers start to lose their touch, boutiques are just getting started.

"No one looks at you without a three-year track record, then interest rises considerably," says Chartered's Lee. "By the fifth year you're well known."

But like hedge funds, boutique managers have to be aggressive from the start. "Boutiques have to put runs on the board early," says Russell's Gunning. "Boutiques won't last if they don't make a splash."

As small players, boutiques have some weaknesses. The biggest is stability. Gunning says: "One advantage for traditional managers is that investors have confidence in their financial backing. These managers will be around for a long time."

Big global managers also have greater leverage when it comes to negotiating fees and best execution with brokers, although this is less of a problem for the larger, more established boutiques.

"In Asia, $2 billion under management is a reasonable amount," says Rigby at Lloyd George. "Our name is known here so we've never had difficulty getting service from brokers."

This will become less of a problem as boutiques grow their assets under management. But that very success may plant the seeds of future problems, because more assets make nimble investment moves in small stocks difficult. Moreover small firms may lack the back office capability to handle rising volumes of trades.

Larger boutique managers are confident, however, that they can continue to grow assets under management without risking their performance.

"We can manage up to $4 billion with the same infrastructure," says Rigby. He acknowledges the dangers more assets pose for a manager investing in small- and mid-cap stocks. But: "Asian equity markets are growing fast. Stock markets such as Korea are deregulating and widening. You can now invest more money in them."

Lee at Chartered says good fund managers know how to optimise a portfolio to avoid having to build up the workforce. And back offices can be outsourced. "We outsource our back office to an accounting firm," he says. "This business is scalable."

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