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Hugh P. B. Cutler

Executive Vice President | Head of Global Distribution | AMG


The long-running debate over the merits of active management has intensified in recent years. One side contends that passive investing generates comparable—if not better—results. The other maintains that it’s worth paying skilled managers to capture a potential performance edge. What's lost in this debate is the reality that boutique active managers add significant value. Lost among these broad brushstrokes is the reality that active managers differ.

Not All Managers Are Created Equal

In our view, the outperformance of a key subset of active managers has been overlooked—namely, boutique managers. Propelled by their stock-picking expertise, there is evidence that these focused managers have a proven record of providing above-market returns.

Consider the results of our proprietary study, which examined the performance of active boutique managers spanning nearly 5,000 institutional equity strategies. Our analysis covered a 20-year period from 1998 to 2018 across 11 different stock categories that included a range of market capitalizations, styles, and geographies (see About Our Study below). 

The results were decisive: boutiques have added significant value relative to other active managers.

Boutiques Broadly Outperformed Non-Boutiques

How much value did they deliver? Over the past 20 years, the average boutique strategy outperformed the average non-boutique strategy by 62 basis points (bps)* per year across all categories (see Figure 1).

The results weren’t uniform, though. Strategies like U.S. Small Cap Value Equity (+162 bps) and Emerging Markets Equity (+108 bps annually) stood out for their compelling premiums. That’s not surprising—both are inefficient investment landscapes where experienced active managers stand a greater chance of capturing upside potential.

Figure 1

Source: AMG proprietary analysis and classification of firms and strategies. Firms represented include AMG Affiliates. MercerInsight® database utilized for return data.  Analysis based on rolling one-year gross returns for institutional strategies during trailing 20-year period ending 3/31/18. Past performance is no guarantee of future results.

Enhanced Client Wealth

While 62 basis points of outperformance on average might not seem meaningful at first glance, it clearly adds up over time. We found that investing exclusively with boutiques would have created 16% greater wealth over 20 years (Figure 2). 

Figure 2

Source: AMG proprietary analysis and classification of firms and strategies. Firms represented include AMG Affiliates. MercerInsight® database utilized for return data.  Analysis based on rolling one-year gross returns for institutional strategies during trailing 20-year period ending 3/31/18. Past performance is no guarantee of future results.

Accessing the Boutique Advantage

What constitutes a boutique manager, and how can discerning investors pinpoint those likeliest to add value? We believe there are several core characteristics to look for, including:

  • Principals have significant direct equity ownership, helping to ensure alignment of interests with clients
  • Presence of a multi-generational management team, fully engaged across the business
  • Entrepreneurial culture with partnership orientation, which attracts talented investors
  • Investment-centric organizational alignment, including careful management of capacity
  • Principals are committed to building an enduring franchise, embedding an appropriately long-term orientation

 

Put another way, the term “boutique” refers to more than just a manager’s size. Our analysis incorporated more than 1,300 individual investment management firms around the world. We classified investment managers as boutiques as long as they met four specific criteria:

  • Significant principal ownership (with a minimum of 10%)
  • Solely focused on investing
  • Manage less than $100 billion in assets
  • Not exclusively smart-beta or fund-of-funds

 

About Our Study

On average, the assets under management of those we classified as boutiques were $6.4 billion versus $134 billion for non-boutiques. Setting the limit at $100 billion allowed us to cast a wider net, but we also tested our analysis using $75 billion and $50 billion as an asset threshold. The differences were minimal, with a very small number of funds no longer qualifying.**

Some additional points on our methodology:

  • We used data from the MercerInsight® global database—which enables comprehensive analysis of institutional track records on more than 6,000 managers and 32,000 strategies.
  • We analyzed 1-year rolling returns for the 20-year period ending March 31, 2018: 1-year returns gave us a much larger sample size than if we had used rolling 3-year, 5-year, or 10-year.
  • Gross returns were used when comparing the boutiques to the non-boutiques, since the fee rate differential between the two groups was minimal. 

 

For more information about our study or our definition of boutiques, please click here

The bottom line? It pays to be selective when you’re looking to maximize long-term wealth. Amid the active versus passive debate, we believe boutique managers stand in a class by themselves.

 

*Basis point is equal to .01%

**Source: AMG proprietary analysis

Important Information: This material has been prepared by Affiliated Managers Group, Inc. (“AMG”) and is provided for informational purposes only. This material is only directed at persons who may lawfully receive it, and you should satisfy yourself that you are lawfully permitted to receive this material. AMG is in the business of making investments in boutique investment management firms, and is not in the business of providing investment advice. This material is not intended to be relied upon as a forecast or research and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy, nor is it investment advice. The views and opinions expressed in this material are those of AMG, are as of the date hereof and are subject to change based on market and other conditions and factors. AMG makes no representation or warranty as to the accuracy of the data, forward-looking statements or other information in this material and shall have no liability for any decisions or actions based on this material. AMG does not undertake, and is under no obligation, to update or keep current the information or opinions contained in this material. The information and opinions contained in this material are derived from proprietary and non-proprietary sources considered by AMG to be reliable but may not necessarily be all-inclusive and are not guaranteed as to accuracy. Past performance is not a reliable indicator of future performance. In addition, forecasts, projections, or other forward-looking statements or information, whether by AMG or third parties, are similarly not guarantees of future performance, and inherently uncertain, are based on assumptions at the time of the statement that are difficult to predict, and involve a number of risks and uncertainties. Actual outcomes and results may differ materially from what is expressed in those statements. Any changes to assumptions that have been made in preparing this material could have a material impact on the performance presented herein. No part of this material may be reproduced in any form, or referred to in any other publication, without our express written permission.

MercerInsight provides information about investment managers and their products together with analytical functionality and is not intended to constitute advice, a recommendation, or an offer to buy or sell a specific fund or investment. Through MercerInsight, Mercer is not acting and has no intention of acting as a broker, dealer or other intermediary in connection with the purchase or sale of any fund, investment or other financial instrument. The information is not intended as a specific recommendation of any particular investment manager.

Nothing contained within MercerInsight is intended to convey any guarantees as to the future investment performance of managers or products. In addition, past performance cannot be relied upon as a guide to future performance. The value of your investments can go down as well as up, and you may not get back the amount you have invested. Investments denominated in a foreign currency will fluctuate with the value of the currency. Certain investments, such as securities issued by small capitalization, foreign and emerging market issuers, real property, and illiquid, leveraged or high-yield funds, carry additional risks that should be considered before choosing an investment manager or making an investment decision.

MercerInsight data has been prepared based upon sources, information and systems believed to be reliable and accurate. Mercer, its affiliates, and its service providers make no representations, and disclaim all express, implied and statutory warranties of any kind to you or any third party, including, but not limited to, representations and implied warranties of quality, accuracy, timeliness, completeness, merchantability, fitness for a particular purpose, non-infringement of third party rights, or ability to achieve a particular result. Mercer does not warrant the use of MercerInsight in any specific situation or for any specific application or that the data will be error free. Mercer, its affiliates and its service providers assume no responsibility for the consequences of any errors or omissions. You, and not Mercer, assume the entire liability and responsibility for data or assumptions entered into any parts of the software that have the functionality to receive user data and for any presentations or conclusions drawn from such data or assumptions or analysis results.

This document is distribiuted by AMG Funds LLC ("AMG Funds"), which is the U.S. retail distribution arm of AMG. AMG Funds is registered as an investment adviser with the Securities and Exchange Commission and as a Commodity Pool Operator with the Commodities Futures Trading Commission, and is a member of the National Futures Association.

WRITTEN BY

Hugh P. B. Cutler

Executive Vice President | Head of Global Distribution | AMG

PUBLISHED: March 6, 2019

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