Boutiques, not just a shop window on a wider universe

By Siobhan Cassidy, MoneyMarketing Contributor

 In a a financial universe dominated by powerful, large-scale asset management firms, one might wonder why anyone except the super-rich would entrust their savings to a smaller player, a so-called boutique boutique firm. Yet, these smaller firms play a key role in the investment ecosystem and the economy.

Although South Africa lacks an official definition, boutique asset managers are generally understood to be smaller, independent and often founder-run or owner-managed firms with assets under management (AUM) typically ranging up to R100bn.

Giving access to a broader investment universe

In South Africa, boutique managers can access a wider range of investment opportunities than their larger counterparts. “If you are a massive player managing R500bn-plus, your ability to invest in mid-sized or small-cap stocks is extremely limited,” explains Shane Tremeer, Chief Executive Officer of Denker Capital. “Any holding you had in a small cap of R10bn or less would dwarf the market cap of that underlying small cap stock. With a smaller manager, you can take holdings in the smaller and mid-cap sectors without dominating the investor register. Typically, in our environment, we cover just over 100 listed stocks on the Johannesburg Stock Exchange (JSE). Bigger managers are largely restricted to the Top 40.”

By allocating capital to less researched and often undervalued companies outside the Top 40, boutiques help mitigate the concentration risk within the JSE. Smaller companies, often ignored by large managers, can represent significant opportunities for boutiques. These firms conduct extensive due diligence, uncovering value that others might overlook.

Tremeer says, “The Top 40 tend to be extremely well researched – maybe you can extend that to the top 60 stocks – but from then on, it’s a handful of people providing research and analysis of those companies. There are fantastic companies that have been around for decades in that space, which are unloved. “There is a lot of opportunity in that mid and small cap space. These companies play an important role in the economy, and may not be the big, sexy, well-known businesses.”

Developing specialist skillsets

Lonwabo Maqubela, Deputy Chief Investment Officer at Perpetua Investment Managers, adds that where a large manager does access smaller stocks – they might own, say, 25% of a company, which makes up less than 0.5% of the manager’s portfolio – it just doesn’t move the needle for them.

A boutique, on the other hand, can give investors access to these companies at a proportion of a portfolio that makes a material difference to performance. It is more meaningful and “reduces that reliance on the Top 40 ideas”, Maqubela adds.

While connecting the investor to a part of the market that wouldn’t have moved the needle for a large investor, boutique firms key role is in adding depth to the industry. By focusing on niches or specialist areas, they preserve and develop specialist skillsets, which are sometimes given scant attention or even overlooked by the industry altogether.

Focusing on relevance

Gavin Wood, Chief Investment Officer at Camissa Asset Management, agrees that it is not that the bigger managers can’t or don’t want to invest in smaller stocks. It is not a lack of interest, as “some of them have dedicated small cap teams, some of them have dedicated small cap funds”; it is about relevance, or lack thereof. “Smaller companies can never be a big portion of a large manager’s portfolio as a percentage, and that’s a mathematical fact.”

To explain his point, he gives the example of a well-known and well-loved South African restaurant group that has a market capitalisation around R3bn. If a large manager with SA equity assets under management of R300bn-plus were to “really like” the business and want to take a 1% position, they would have to buy the whole company.

As a compromise, he says, they might look at buying 10% of the shares in issue, which would give them a position in their portfolios of 0.1%. Should this turn out to be a great investment, with the share price doubling, the holding would increase from 0.1 of the portfolios to 0.2, “which is just not going to move the performance needle for the asset manager”.

The reality is that investment teams are expensive resources. “If they have an investment team of 20 or 30 individuals, it is just not worth it to dedicate a lot of time to those smaller caps because it is not going to pay off for their clients. “I have a big choice,” says Wood. “It is massive advantage in my mind that I can invest in these smaller companies, medium-sized companies that become reasonably big in my portfolios, and can have a meaningful impact on our performance.”

Alignment and superior service

A factor with boutique managers that many believe results in better alignment with investors is the ownership structure. According to Denker’s Tremeer, “The people looking after the money at owner-managed or -controlled firms tend to be more aligned with investors.”

He adds that this also means they don’t have conflicting interests, unlike a listed asset manager with many institutional shareholders who might be more interested in returns generated from a shareholder perspective than those generated for investors. Smaller managers frequently outperform their larger peers. Don Andrews, Head of Surveys at Alexforbes, says: “The latest results from the Manager Watch™ and BEE Manager Watch™ surveys demonstrate the competitiveness of smaller, majority black-owned managers.”

He says the latest data, reflecting the one-year performance calculated as at 31 December 2024, compares portfolios and strategies in the SA Large Manager Watch (SA LMW) and Global Manager Watch (Global LMW) categories in the Manager Watch™ survey with those in the BEE Manager Watch™ survey. The SA LMW and Global LMW focus on larger asset managers, while the BEE survey tracks smaller, majority black-owned managers who are not yet eligible for participation in the Manager Watch survey. “The Camissa Balanced Fund, featured in the BEE survey, ranked as the top-performing portfolio across the SA LMW and Domestic Balanced categories in both surveys, achieving a solid one-year return of 18.62%,” he says.

Delivering consistent returns

In the Global Balanced category of the Manager Watch survey, Coronation Segregated Full Discretion led with a one-year return of 17.79%. The BlueAlpha BCI Balanced Fund, in the BEE survey, delivered a one-year return of 17.54%, which would have placed it as a close second in the Global LMW category if it had participated.” Also, Tremeer points out, Denker’s balanced fund won the Best Aggressive Allocation Fund category at the Morningstar Awards last year, as a result of delivering consistent risk-adjusted returns over time. He adds that “there have been a number of cases where boutiques have become mid-sized managers through consistent performance”.

It is obvious, however, that making a business’s performance well-known depends quite heavily on the size of the marketing budget. Camissa’s Wood notes that it is worth remembering when large managers point to their 20-30-year track record that much of that record was created when they were boutiques. “The relevance of the track record for considering their ability to repeat it in future is diminished by the fact that they are now so much larger and have so much less choice.”

Catalysts for economic growth

According to Patrycja Kula-Verster, Primary Markets: Equity Origination Manager, at the JSE: “Boutique asset managers are vital to South Africa’s economy, investing in small-cap companies that drive growth, create jobs and benefit local communities.” Tremeer of Denker says that by “providing a flow of money into an under-loved and unresearched part of the JSE, you do stimulate economic growth in certain areas”.

Maqubela believes that boutiques can make a difference to South African businesses, “Especially where a boutique is active and is a material shareholder, they can drive engagement,” he says. He adds that while it is often said that boutiques don’t really have influence, sometimes their clout can be underestimated. In the recent past, in the case of several local companies that have been bought out by bigger players, he says, “As one of the top 10 shareholders in those companies, we had engagements with potential buyers working to improve the ultimate price that shareholders got.”

Maqubela also talks to the boutique firms key role in providing a second round of capital when Private Equity firms exit an investment. Samantha Pokroy, founder and CEO of Sanari Capital, a private equity firm focused on investments in growth companies emanating from Africa, agrees. “Boutique asset managers play an important role in supporting exits for private equity-backed assets,” she says, adding that smaller firms “continue the important tradition of in-depth valuations and price discovery – for the benefit of all market participants”.

Whether by offering the diversification benefit of funds that can perform very differently from larger managers, supporting smaller listed South African businesses, capitalising on their size advantage to invest more meaningfully in those smaller businesses, or paving the way for the next generation of big asset managers, boutique firms key role as part of the asset management ecosystem must be acknowledged.