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Often Overlooked Boutique Investment Managers Create Value

Often Overlooked Boutique Investment Managers Create Value

December 20, 2019


Often Overlooked Boutique Investment Managers Create Value

Active managers of all shapes and sizes have demonstrated they can deliver value to investors, but often the focus is on a handful of household names – usually among the largest firms in the world. A white paper by Affiliated Managers Group brings some much needed attention to smaller firms that have proven their worth. In “The Boutique Premium,” AMG evaluates and discusses the outperformance delivered by boutique active investment managers as compared to indices and peers.

AMG found consistent outperformance delivered across almost all categories. Looking at institutional equity strategies from 1998 to 2018, the study uncovered a number of key insights about boutiques that also upend some of the current narrative about active and passive management:

  1. Boutiques created significant value versus indices
  2. Top-performing boutiques generated exceptional excess returns versus indices
  3. Boutique strategies, on average, had a high frequency of outperforming indices
  4. Individual boutique strategies outperformed indices more often than not
  5. Boutique outperformance versus indices was persistent

Let’s take a closer look:

Insight #1: In sharp contrast to industry reports finding that a significant majority of active managers have underperformed benchmarks, AMG’s analysis determined that boutique institutional equity strategies delivered significant net excess returns relative to indices over the trailing 20-year period. Across the 11 product categories examined, boutique net returns outpaced primary indices by an average annual 135 bps (Figure 9). In fact, the average boutique strategy outperformed its primary index net of fees –in 11 out of 11 product categories.
 

Insight #2:

AMG’s analysis also demonstrates that the top performing boutique strategies added tremendous value relative to indices net of fees. Top-decile boutique strategies added an average annual 1,130 bps versus primary indices, while top-quartile boutiques added an average annual 581 bps (Figure 10). Similar to the analysis of average boutique outperformance, top-decile boutique outperformance was most pronounced in Emerging Markets Equity, Global Equity, and U.S. Small Cap Equity. Meanwhile, despite more modest levels of outperformance for average boutique strategies in the U.S. Large Cap Equity and U.S. Mid Cap Equity categories, the top performers generated significant excess returns.

Insight #3: Across all product categories examined, the average boutique strategy outpaced its primary index 57% of the time over the trailing 20-year period net of fees (Figure 11). In addition, the average boutique strategy beat its primary index in at least half of the 20 one-year rolling periods in 7 out of 11 product categories.

Insight #4: AMG also found that at least half of the boutique strategies in their data sample beat their primary indices net of fees in 8 out of 11 product categories. The proportion of boutiques outperforming indices was particularly high in the Emerging Markets Equity, and U.S. Small Cap Equity categories. Across all 11 product categories, on average, approximately 52% of boutique strategies beat their primary indices net of fees. This highlights the power of boutiques in creating substantial value, despite recent industry reports suggesting that a significant majority of active managers have underperformed indices.

Insight #5: For the purpose of measuring the persistency of boutique net excess returns, AMG examined the percentage of boutiques beating the index in a year following one in which they outperformed. The results reflect favorably on boutique managers, as their strategies beat indices 54% of the time in years following one in which they outperformed. Further, boutique outperformance persistency was at least 50% in 10 out of 11 product categories.

To read the full study, visit the AMC’s Insights section.

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