Identifying good, independent managers has been central to our success over the past two decades.
The Nedgroup Investments range of funds has consistently delivered over the long-term for clients, who in turn have trusted us with more of their money, enabling us to grow assets from less than $1 billion to $25 billion.
Active management is tough and top active managers are difficult to identify – but there are characteristics that increase the probability of finding them. We believe, and our experience has proven, that independent boutiques are more likely to have these characteristics.
We also believe that once we have identified top boutiques, we can create a high-performance environment by allowing them to focus purely on delivering alpha for clients. Creating this high-performance environment for the managers means taking care of all the other parts of asset management that play a crucial role in sustainable investor outcomes, such as: client service, administration, and compliance at scale; investing in technology and digital capability; creating a trusted brand; product development and distribution.
What is a boutique?
There are three important components that are generally used to define the term “boutique”:
- They are owner-managed
- They are investment focused, so do not offer ancillary financial services and,
- They are small enough to remain agile.
While identifying boutiques is relatively simple, identifying boutique fund managers with a sustainable, repeatable, and proven investment edge requires much deeper analysis.
Best of Breed™ in action
Our global search for the best managers includes the normal quantitative and qualitative research – analysing their past performance and interrogating their people, processes, and philosophies. Over and above these, we also spend countless hours looking for seven characteristics that are not often focussed on, but that we believe set a manager up for long-term outperformance.
- Alignment of interest: Just as we urge our staff to invest alongside clients, we like our managers to do the same. We also advocate that the investment managers (those managing our client’s money) have a material equity ownership in their business because this encourages long-term thinking.
- An investment focus: We favour managers who are investment led rather than marketing led and are good stewards of their client’s capital. We don’t like to see managers launching lots of fad funds. We prefer organisations that have investment autonomy and low levels of bureaucracy as they are much more likely to attract and retain top investment talent.
- Flexibility: We like managers to have the ability and willingness to execute active positions. It is important that managers have a good sense of the capacity in their strategy. A very positive sign is where managers have been willing to cap some of their strategies to protect existing investors.
- Downside protection: Our team has done comprehensive research looking back at top managers over decades and analysing the source of their out-performance. We identified that a high percentage (between 2/3 to ¾) of their outperformance comes from their ability to protect capital in negative markets. We therefore interrogate managers’ approach to portfolio construction (an often-under-rated skill) and, what happens if their base-case does not actually realise.
- Long-term orientation: Ideally this mindset should be visible in both the management of the portfolio (can be seen by lower turnover and costs) and in how they manage their business. This mindset is important to help with continuity and multi-generational succession of key investment personnel.
- Passion: We have never found an exceptional manager who does not live, sleep, and eat “investments” and isn’t obsessed about delivering exceptional long-term performance for their clients.
- Clear articulation of edge and conviction: Good managers are clearly able to articulate their circle of competence and edge and have shown conviction in their philosophy through various market cycles. A useful way to test this is to carefully reread the manager’s historical investment commentaries particularly during years of underperformance.
We think there is a much higher probability of seeing these seven characteristics in boutiques than in bigger organisations that aren’t owner managed or investment focused. This is what we call the ‘boutique advantage’ and it’s the core of our Best of Breed™ partnership approach.