Boutiques take hold in NZ

KiwiSaver has been a driving force in the rise of boutique fund managers in New Zealand, one analyst says, but New Zealand still has a highly concentrated market with some capacity issues.

Friday, June 24th 2016, 6:00AM

by Susan Edmunds

David Scobie, of Mercer, recently released research that shows nine of the 11 major fund managers in the New Zealand market have some form of ownership by key staff. That compares to 2008, when five of the biggest operators were in full corporate ownership.

Scobie said the growth of boutique managers was a global phenomenon.

“Helping drive the rise is the fact that boutique structures offer investment managers, who have often forged a career as part of a larger organisation, the opportunity to work for themselves and determine their own destiny,” he said.

“A trend towards improvements in available technology, outsourcing options and custody arrangements have helped solve a lot of the back office administration problems that represented a hurdle for smaller operators in years gone by. That said, regulatory requirements and costs represent a real hurdle to new entrants.”

But he said in New Zealand, KiwiSaver had generated a growing source of funds to allocate.

“More generally, ultimately boutiques have attracted investor support because of the potential for higher returns, especially in their early years. Underlying this is the belief that boutiques can have key advantages over institutional managers.”

That could include access to some of the most experienced investment staff in the industry, and the perception that a lack of external owner meant less outside influence over the strategic running of the company.

“While the advantages hold true for some boutiques, they are not true for all such firms, and simply having boutique status in no way guarantees enhanced returns,” he said.

The five fund managers who each manage more than $1 billion collectively control over three-quarters of the assets surveyed.

Scobie said the concentration in the New Zealand market was not a concern of itself.

“But a relevant theme in NZ is whether sufficient funds can be put to work in a truly actively-managed fashion. Some of the more established, and indeed successful equity managers now have funds under management (FUM) at levels which mean they have to manage their capacity.

“In the absence of this, these managers will reduce their nimbleness in implementation and, in some cases, be obliged to invest in higher capitalisation stocks than they might otherwise. There are undoubtedly some upsides to higher FUM such as greater business strength, scope for wider resourcing and heightened broker attention. However, there is substantial evidence that active investment processes cannot be replicated at an ever-increasing scale without impacting on returns above benchmark. From an investor perspective, more choices of high quality managers who are in a realistic position to take on new mandates has to be a good thing, and there are the side benefits of helping to keep industry fees in check and assisting overall share market liquidity.”

Tags: funds management