The Brief

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					Autumn 2005

       The Brief

A look at growth in boutiques
By Michael Good*
Competition and change in the financial         • Retention of key staff/ownership              performance in a new environment may
services industry have fuelled an ongoing        Employees can be offered long-term            not be as easy as the principals expect.
growth in boutique fund managers,                direct participation in the business
                                                                                             These lists of pros and cons are by no
giving investors a range of new managers         through equity holding.
                                                                                             means exhaustive and do not necessarily
to choose from. However, not all               • Focus on investment management              apply to every boutique structure. But,
boutiques are alike and investors need to        It should be easier for asset managers to   generally speaking, boutiques are
be aware of the potential downside, as           focus on investment markets and not be      perceived as having a specialised focus on
well as the upside, of putting money with        distracted by administrative matters,       a particular aspect of investment
these organisations.                             which can be outsourced.                    management and providing superior
In recent years, consolidation of larger       • Specialisation                              returns (perhaps at higher risk).
fund managers has created a lack of              Boutique managers can provide a
                                                                                             As boutiques become more common and
diversity in ownership, paving the way for       service in smaller or niche sectors where
                                                                                             lose their “special” status, it may be
new entrants, including start-up                 institutions are unwilling to compete
                                                                                             harder for new entrants to survive –
boutiques and overseas entrants.                 because of limited potential.
                                                                                             unless they are tied to a major distributor
Also, the rapid growth of platforms            • Performance                                 or have locked in distribution in some
(master trusts and wraps) and back-office         At the end of the day, boutique             way. Even well-established boutiques may
service providers has made it much easier        managers need to demonstrate added          struggle with the challenges of growth.
for wholesale-only fund managers to set          performance benefits to investors.
                                                                                             Structures that do not have any
up boutique operations.
                                               The disadvantages of boutiques include:       institutional involvement face their own
An estimated 70 fund managers now call         • Dependence on key staff                     problems. Indeed, one of the strong
themselves “boutiques”, although the             By definition, boutiques are dependent       attractions of boutiques – keeping a
structure and ownership of these                 on key staff and are frequently very        stable funds management team locked
companies varies a lot.                          “star dependent”.                           into the business – isn’t always there.
Some boutiques are established and             • Return on capital
controlled by principals and have no             With some structures, it may take years
institutional backing; some are joint            to win enough funds to cover costs and
ventures with major institutions; and            provide a return to the capital investor,
some, like Tyndall, have created a               limiting returns to the principals.
boutique within its business where there       • Lack of brand penetration
is an imperative to do so.                       Lack of brand exposure and business
No matter what the ownership structure,          development experience makes the task
boutiques have generally been seen as a          of gaining inflows difficult in a crowded,
way around two potential problems: the           competitive market.
need to focus on specific styles or segments,   • Succession and exit strategies
and the risk of losing key executives -          Some principals may not be good at
particularly “star” portfolio managers.          managing a business.
In general, the advantages of boutiques        • Continued outperformance                    *Michael Good is the chief executive officer of Tyndall
include:                                         Maintaining strong investment               Investment Management
Our people                                                                                  In the press
                                                                                            Tyndall’s ten-year growth strategy gained
                                                                                            more momentum during the first quarter
                                                                                            of 2005 with good press coverage of its
                                                                                            latest plans, staff additions, achievements
                                                                                            and opinions.
                                                                                            InvestorDaily reported on the appointment
                                                                                            of two business development managers
                                                                                            (BDMs) to Tyndall’s new Melbourne office,
                                                                                            and a soon-to-be-appointed BDM for Perth.
                                                                                            Meanwhile, in a 31 January Financial
                                                                                            Standard feature, Tyndall’s dynamic duo of
                                                                                            Stephen O’Brien, head of institutional
                                                                                            business, and Jennifer Davies, national
                                                                                            distribution manager, explained how their
                                                                                            teams are working together to build funds
                                                                                            under management.
                                                                                            Tyndall’s funds were also in the spotlight
Bevan Green joined Tyndall in July last         First thing you thought of when you         during the March quarter, with the manager
year and is responsible for developing,         woke up this morning:                       winning Morningstar’s 2004 award for
retaining and managing key advisers.            My sunburnt back.                           Australian Fixed Interest Fund Manager of
He has a Diploma of Financial Services                                                      the Year and nearly toppling Maple-Brown
                                                One thing you must do (that you
                                                                                            Abbott from its top position in InTech’s
and seven years’ experience in the              haven’t done yet) before you die:           ranking of balanced fund managers for the
financial services industry, including a six-   Catch a marlin.                             seven years to December 31, 2004.
year stint in London, working for AMP
                                                Most embarrassing moment:
and Lloyds TSB.                                                                             Meanwhile, Tyndall’s Australian share
                                                Winning a school debate with a finger
                                                                                            portfolio was featured in a managed funds
Here are a few things about Bevan that          caught in my braces.
                                                                                            profile in the Age in February.
you may or may not want to know:                Best part about your job:
                                                                                            Commenting on the Morningstar win,
Middle name:                                    Bragging about our long-term
                                                                                            Tyndall Asset Management’s executive
Maxwell.                                        performance.
                                                                                            bond manager, Ross Gustafson, said the
Favourite pastime:                              Worst part about your job:                  award was further recognition of Tyndall’s
See next question.                              Public loos when on the road.               distinctive style of active fixed interest
Favourite golf course:                          Happiest moment of your life:               management. Gustafson shared some of
Nizels (NB only one “l”), Kent, England.        Apart from getting married, sinking a 20-   his views on fixed interest management in
                                                foot putt on the 18th hole at St Andrews,   an in-depth interview with the Australian
                                                Scotland - and the greens were wet!         Financial Review, published in January this
Favourite band:                                  As someone once said,                      The views and predictions of other Tyndall
                                                “The only disability in life is             spokespeople – including chief executive
Favourite restaurant:
Local fish ‘n’ chips on Fridays.
                                                a bad attitude” Motto in life
                                                               .                            Michael Good, head of Australian equities
                                                                                            research Warwick Cumming, and head of
Favourite city:                                 Favourite saying:                           equities Bob Van Munster, also received good
Rome, Italy.                                    “Drive for show, putt for dough”.           coverage across a range of publications.
Currently reading:                              Favourite holiday destination:
                                                                                            In a February issue of Financial Standard,
Biography of Ernest Shackleton,                 Amalfi Coast, Italy.
                                                                                            Michael Good explained how the recently
by Roland Huntford.                                                                         introduced International Financial Reporting
                                                                                            Standards (IFRS) had forced his company
                                                                                            to amend its constitution to provide for
                                                                                            new accounting practices.

  Breaking news                                                                             Meanwhile, February's 2005 issue of
                                                                                            Investment & Technology, Stephen O’Brien
                                                                                            outlined the benefits of the new Certified
  Tyndall Bond team has won Morningstar’s 2004 award for Australian Fixed
                                                                                            Investment Management Analyst (CIMA)
  Interest Fund Manager of the Year.
                                                                                            Program scholarship, a qualification devised
  Happy Birthday to the Tyndall flagship fund – Tyndall Australian Share Wholesale          by Fund Executives Association Ltd (FEAL)
  Portfolio celebrates its tenth birthday!!                                                 for chief executives of superannuation
                                                                                            funds, and sponsored by Tyndall.
Research Report

Investing In Concentrated Markets
A growing concentration of banking stocks in the Australian sharemarket is forcing
active fund managers to rethink the way they structure and manage their domestic
share portfolios.
Concentrated sharemarkets are common around the world and,              asset consultants or the media.
compared with other countries, Australia does not seem to have
                                                                        Another option for dealing with the 5 per cent exposure limit is
a huge problem. For example, our largest stock, BHP, makes up
                                                                        to use a proxy for TEL. Or, on a less practical note, investors
about 8 per cent of the S&P/ASX 200 Index, while in Finland,
                                                                        could “ring-fence” TEL and treat that stock as a separate “asset
telecommunications giant Nokia represents about 40 per cent of
                                                                        class”. Active NZ fund managers have also tried to broaden
the sharemarket index.
                                                                        their universe of stocks by including the Australian market as
However, on an industry or sub-industry basis, the growing              part of their “domestic” share exposure.
dominance of banks in the Australian sharemarket is definitely
                                                                        However, in taking a large underweight position to TEL, fund
an issue. At the end of March this year, Australia's ten listed banks
                                                                        managers run the risk of performing very differently from the
made up more than a quarter of the S&P/ASX 200 Index (26%).
                                                                        benchmark and their peers. As a result, most managers tend to
The problem with concentrated markets is that volatility is likely      start with the index as their base position and then make tilts
to increase as the whole sharemarket is affected by the                 around the index weightings
performance of only a few stocks or industries.
                                                                        This approach appears to work well. The Mercer NZ survey of
                                                                        domestic share managers shows that, over the 10 years to
The New Zealand Experience                                              September 2004, all active managers have outperformed the
Our colleagues at Tyndall NZ have first-hand experience of              benchmark NXSZ 50 Index by at least 1.6 per cent per annum.
investing in a concentrated market. For the past decade or so,          Meanwhile, our colleagues at Tyndall NZ outperformed the index
the NZ market has been dominated by a single stock – Telecom            by 4.6 per cent per annum in the 10 years to November 2004.
NZ (TEL) - whose weighting within the old NZSE40 Index ranged
from about 20 per cent in the early 1990s, to a very dominant           Implications for Australia
34 per cent at the height of the “tech boom”.
                                                                        The Australian market is at risk of becoming dominated by a
By the end of 2000, TEL’s weighting had dropped back to 20 per          single industry – the banking industry - rather than a single
cent, where it hovered until 3 March, 2003, when the NZSX 50            stock, but we can still learn from the experience of active
Index replaced the NZSE40 Index. TEL’s index weighting then rose        managers in NZ.
to 27 per cent – despite the new index having 10 extra stocks –
                                                                        We can see how investing in a concentrated sharemarket index
and by the end of last year was sitting at just below 26 per cent.
                                                                        can breach a fund’s investment restrictions. We can also see that
The dominance of TEL within the index has forced our NZ                 active fund managers, unlike passive managers, are able to deal
colleagues to change the way they manage their domestic                 with this problem by avoiding a full index exposure to heavily
share portfolios.                                                       weighted stocks or industries.
Prior to TEL’s listing in 1991, it was quite common for a balanced      Australian balanced fund managers also need to consider the
fund mandate to require that no more than 5 per cent of the             amount invested in a company’s bond offerings, as mandate
total portfolio be exposed to any single company stock. But             restrictions are often related to total investment – both shares
once TEL entered the index, it became far too easy to breach            and debt – within a company.
that requirement – so stock restriction clauses were changed.
                                                                        Concentrated markets also call for greater diversification of
In some cases, TEL was specifically excluded from the restriction,      balanced portfolios - both within and between asset classes –
or there was a higher limit imposed on TEL’s exposure. But more         while still maintaining the ability to add value against market
commonly, fund managers lifted the maximum limit for a single           benchmarks. This might mean lifting the exposure to global
stock to 10 per cent of the total portfolio. A second response to       assets, while investing less in the concentrated asset class.
the “Telecom effect” was to gradually increase a fund’s
exposure to overseas shares, at the expense of domestic shares.
More recently, in March 2003, the NZ Stock Exchange tried to
get around the problem by introducing the NZSX 50 Portfolio
Index, where all stocks are capped at 5 per cent. The Portfolio
                                                                        This is a précis of the Summer 2005 Investment Research Report. For a copy,
Index better reflects the holdings of a typical retail investor, but    please contact Tyndall Investor Services on 1800 251 589 or visit the Tyndall web
it has not been embraced as a benchmark by wholesale investors,         site
                                                           3 MONTHS            6 MONTHS                1 YEAR               3 YEARS              5 YEARS            10 YEARS
FOR PERIODS TO 31 MARCH 2005                                      (%)                  (%)                 (%)               (% PA)               (% PA)               (% PA)

Australian shares
Tyndall Australian Share Portfolio                              4.82               14.81                27.89                15.28                18.40                   n/a

Tyndall Australian Share Value Fund                             5.01               15.23                28.80                16.00                19.21                14.67

Tyndall Australian Share Wholesale Portfolio                    5.12               15.48                29.36                16.59                19.77                14.59

Tyndall PST - Australian Share Portfolio                        4.38               15.72                27.83                16.62                18.83                   n/a

Tyndall Australian Core Share Fund                              5.18               14.15                26.41                   n/a                  n/a                  n/a

Benchmark Index
S&P/ASX 200 Accumulation Index                                  2.74               14.47                25.63                10.94                  9.73               12.25

Australian fixed Interest
Tyndall Australian Bond Fund                                    0.24                 1.91                5.11                  6.68                  n/a                  n/a

Benchmark Index
UBSWA Australian Composite Bond Index                          -0.03                 1.77                4.80                  6.32                 6.58                8.17

International fixed Interest
Tyndall International Bond Fund                                 1.60                 4.16                8.03                  9.09                  n/a                  n/a

Benchmark Index
Composite World Govt Bond Index                                 1.62                 4.27                7.35                  9.03                 8.37                  n/a

Diversified funds
Tyndall Diversified Bond Fund                                   1.20                 3.07                6.98                  7.66                  n/a                  n/a

Benchmark Index
Composite Diversified Bond Benchmark                            0.79                 3.02                6.07                  7.67                  n/a                  n/a

With the exception of the Tyndall PST - Australian Share Portfolio, which is calculated after tax using redemption prices and net of fees, all other Tyndall fund performance
figures are calculated using redemption prices, net of fees, assume the reinvestment of distributions and do not take into account taxation. The value of an investment can
rise and fall and past performance is not indicative of future performance. n/a - figures not available as these funds have been open for less than these periods.
For up to date performance figures, please contact Tyndall Investor Services on 1800 251 589 or visit
Note 1: Benchmark performance figures are calculated using closing market prices, gross of fees and tax and assume the reinvestment of distributions.

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                                                                                         in, or omissions from, this document. Investment decisions should
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