Study finds small is beautiful in asset managers

AMG, an asset manager that invests in boutique asset managers, has released a study that looks at 20 years of performance data of independent boutique asset managers globally, looking especially at their performance during periods of volatility.  

Their study has found that boutique active managers outperformed both non-boutique active managers and passive indexing over the past 20 years, delivering the highest excess returns during periods of elevated volatility.

Firms in which AMG is invested include brands such as AQR, Artemis, Winton Capital, ValueAct, Tweedy Browne, Systematica and Pantheon, with USD600 billion in assets, while the study incorporated data from more than 1,300 investment management firms around the world and nearly 5,000 institutional equity strategies encompassing approximately USD7 trillion in assets under management.

As the dataset was 20 years to Dec 31st 2019, AMG recently ran some performance stats of their boutiques to 9th April, including AQR, Systematica, Winton and First Quadrant.  

Over the last 20 years, the study found that independent active boutiques delivered nearly 3x excess returns against passive indexing when volatility was high: The average boutique outpaced its relative index in all 11 equity product categories and delivered 241 basis points of net excess returns relative to indices in periods of elevated volatility, compared to 82 basis points of outperformance during all other periods.    

The study also found that independent boutiques significantly outperformed non-boutiques in periods of elevated volatility: The average boutique outperformed the average non-boutique in 10 out of 11 equity product categories by an average of 116 basis points in periods of elevated volatility and 41 basis points in all other periods.

The report says: “Above-average levels of volatility create advantageous levels of dispersion: Extreme market disruptions and high levels of volatility are not prerequisites for boutique alpha-generation, as reflected by the dispersion of excess returns across the volatility percentiles. Rather, above-average levels provide asset dispersion which enhances the outperformance of active managers.”

Professor Amin Rajan at Create comments: “This report once again confirms that the multi-boutique model runs with the grain of the craft nature of active management.  It proves that size is not always the enemy of alpha, if you give autonomy and space to talented individuals to generate high conviction ideas and implement them.”        

Jason Hollands at Bestinvest says: “This is an interesting piece of research. Talented managers can of course be found in asset management firms of all sizes, but large groups invariably have very wide product sets and are unlikely to be consistently ahead of peers across all areas. In contrast, most boutiques focus on a narrower range of assets classes where their expertise really do stand-out from the crowd and they have to sink or swim first and foremost based on their investment success rather than distribution muscle. Culture is a really important part of the mix and one of the attractive aspects of most boutiques is that fund managers have much greater ownership over their investment processes and are not dragooned into following a single philosophy or house view that they may not have conviction in.

“The current market turmoil, is clearly leading to significant dislocation across markets. This is creating real opportunities for fundamental investors to add significant value compared to the indices, through avoiding those stocks most exposed to potential capital destruction and picking up long-term winners whose intrinsic value simply isn’t recognised in current pricing”.

“The unprecedented volatility in the market today is prompting investors to consider whether they can afford to take a passive approach to managing their portfolios,” says Jay C Horgen, President and CEO of AMG. “We believe that active management plays an important role in client portfolios at all times, but now more than ever. Two decades of data strongly indicate that now is the time for investors to turn to independent active boutique managers – independent boutiques generate the highest excess returns, relative to both passive indexing and larger active managers, in periods of elevated volatility. The contrast between active boutiques and passive indexing in periods of volatility could not be more stark, with independent boutiques outperforming indices in every investment style studied, by an average of 241 basis points.”

Horgen says: “With their unique entrepreneurial cultures; highly focused, specialised investment processes; and direct ownership of their businesses, independent boutique firms are most closely aligned with clients’ interests and able to protect capital and nimbly pivot to the investment areas of greatest opportunity in general – and especially in times like these. AMG’s unique partnership approach preserves the fundamental elements that have made excellent boutique firms successful over time – and our independent Affiliates, recognised globally as leaders in their areas of specialty, are well-positioned to generate long-term alpha, especially in challenging market environments such as this one.”