European boutiques capable of beating mega-funds by 1% pa

Specialist European ‘boutique’ asset managers have shown they can outperform their larger counterparts in certain equity sectors, academic research shows.

On average, equity funds offered by boutique firms outperformed mega funds by 0.56% per year, and 0.23% per year net of fees, during the period of study and depending on the methodology used.

When using an ‘index model’, these figures increased to 0.82% and to 0.52% gross of fees, respectively.

The study, carried out by Cass Business School asset management specialist Professor Andrew Clare, found “meaningful boutique outperformance” in four equity fund sectors in particular – European large-cap; Europe mid/small-cap; global emerging markets; global large-cap.

The outperformance was “particularly significant”, with a net-of-fee boutique premium of around 1% per year in the European mid/small-cap sector and around 0.50% per year in the global emerging markets fund sector.

Clare employed the ‘Five-factor model’ of Eugene Fama and Kenneth French, and another competing model called the index model (the return on an index minus the risk-fee rate of interest). The aim was to produce risk-adjusted returns using data from Morningstar.

In total 120 large fund groups were referenced and 780 long-only ‘mega funds’ across all equity sectors were compared to boutique products. The performance tracked was between January 2000 and July 2019 and the professor took subjective advice from consultants and the Group of Boutique Asset Managers (GBAM) to define the meaning of ‘boutique firm’.

The professor said: “The results provide enough evidence to warrant further analysis of this important part of the asset management industry.”

Future research, he said, should focus on the factors behind the existence of the “Boutique Premium”, such as the ownership structure of boutique managers and/or their approach to portfolio construction.

Financial advisors and fund platforms have been urged to do more to promote boutique firms on the back of this research.

Tim Warrington, chairman of GBAM, said: “Given the compounding of this premium over time could produce significant additional returns to investors, far more needs to be done by advisers and fund platforms to expose these benefits to long-term investors.”

© 2020 funds europe

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