Boutiques Beat Larger Managers With ‘Remarkable Consistency’

The average active manager may be underperforming the index, but boutique asset managers have consistently beaten benchmarks, an AMG study says.

Illustration by II

Illustration by II

Investors looking to outperform markets as a whole via active management should hire boutique investment firms, according to a not-yet-released study from Affiliated Managers Group.

Money managers with less than $100 billion — a generous definition of boutique, to be sure — annually generated 62 basis points above their larger peers, on average. Boutiques beat relevant indices by 135 basis points annually between 1998 and 2018, the study found.

Over 20 years that meant investors solely in boutiques would have 16 percent more wealth than if they had hired mega-managers.

“There’s a remarkable consistency to the outperformance of boutiques,” said Hugh Cutler, head of global distribution at AMG, in an interview with Institutional Investor. “That means that as an investor if you go to a database and plug in criteria such as size and the amount of equity owned by the firm’s principals, you’ll be 16 percent better off than if you hadn’t done that.”

AMG invests in boutiques and has a vested interest in the category’s outcome. For the study, it looked at 20 years of data covering 1,300 global investment management firms and 5,000 institutional equity strategies. The study also looked at 11 product categories and accounted for survivorship bias by including strategies no longer offered by asset managers.

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AMG also defined boutique for the study as a manager whose principals owned a minimum of 10 percent of the firm and whose business is solely asset management. These managers could not be part of a larger organization such as an insurance company or bank. AMG did not look at firms offering factor-based products or funds of funds.

Boutiques did best in U.S. small-cap value equity, outperforming non-boutiques by 1.62 percent per year, and in emerging markets equity, with a 1.08 percent advantage.

AMG’s study also showed that top decile and top quartile boutiques outperformed by 2.76 percent and 1.71 percent, respectively.

When investors evaluate managers, they look for persistence of performance and other measures. AMG found that boutique managers beat their respective indices 54 percent of the time in years following one in which they outperformed, a common way to evaluate persistence of performance.

Cutler said smaller managers with certain characteristics such as equity ownership of the firm’s talent outperform for a number of clear-cut reasons. For one, the best investment management shops are willing to close to new investors funds that are growing too large. Portfolio managers that have stakes in firms’ long-term performance are most willing to close popular funds. The company loses sales in the short term, but in the long term it preserves returns. “If it’s your own firm, you’re more conscious that you carry on performance and less interested in assets,” said Cutler.

Separately, Cutler said some large asset managers that offer multiple boutiques under a centralized organization aren’t the same as boutiques that operate independently. “If you rely on centralized research and a centralized risk system, then that’s great. But it doesn’t give you that investment autonomy that you’re looking for,” he said. “We don’t tell our affiliates that you need to watch your factor exposure, for example. We’re letting them make their own decisions.”