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 Handicap: Scotland - and the greens were wet! Financial Review, published in January this Putting. year. Favourite band: As someone once said, The views and predictions of other Tyndall “James”. “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 www.tyndall.com.au. Performance 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 www.tyndall.com.au Note 1: Benchmark performance figures are calculated using closing market prices, gross of fees and tax and assume the reinvestment of distributions. Tyndall Investor Services Product Disclosure Statements, newsletters and other relevant information. Freecall: 1800 251 589 (8.30am - 5.30pm AEST, Monday to Friday). This document has been prepared for financial advisers. To the Written correspondences should be addressed to: maximum extent permitted by law, Tyndall disclaims liability for errors in, or omissions from, this document. Investment decisions should GPO Box 1576 be based on information contained in the current Product Disclosure Sydney NSW 2001 Statement and applications to invest will only be accepted on an Fax: 1300 362 722 application form attached to a current Product Disclosure Statement. Or visit the Tyndall web site www.tyndall.com.au to access Tasman Asset Management Limited ABN 34 002 542 038 AFS unit price and performance data. You will also be able to access Licence No 229664 (Trading as Tyndall Asset Management).