Comparing managed funds? Here’s why boutique fund managers beat the institutions

Lincoln Indicators
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Lincoln Indicators

Dec 1st, 2020
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The decision to hand your hard-earned cash over to a professional money manager is not one to be taken lightly. With your literal life savings and future security on the line, it’s not a decision you want to get wrong.

The obvious safe bet might be to join the crowd and invest with any one of Australia’s large institutional fund managers. They certainly project the image of confidence and capability.

Trusted by so many Australians, it’s easy to assume that the largest and most well-known managers produce superior investment returns, what with their glossy marketing brochures, huge staff numbers, lavish sporting sponsorships, and TV ads all signalling success.

But don’t be fooled, these big marketing budgets can hide years of underperformance. Greater scale does not result in better returns — the reality can be quite the opposite.

As detailed by numerous studies*, smaller boutique equity fund managers significantly outperform larger managers over the long term, generating outperformance above benchmarks compared to large institutional managers across multiple Australian equity strategies. This phenomenon is not unique to Australia with the outperformance of boutique fund managers consistently observed in the larger U.S. and European markets**.

You might then wonder how these institutions continue to attract such large fund inflows?

We have to think of this in the context of the current popularity of passive investments, including low-cost index tracking ETFs. Many large fund managers are feeling pressure to cut fees, while at the same time, outperformance above a benchmark index is considered to be less important.

The result has been that many once active institutional funds are sliding towards becoming closet index trackers. The game, therefore, is now about attracting maximum fund inflows and collecting their associated management fees.

Yet a larger fund size comes at the expense of investment performance. In fact, there is an inverse relationship between the size of a fund and its ability to generate alpha — that is the outperformance above a benchmark that can be attributed to active management.

Institutional fund managers have limited flexibility and limited ability to actively manage equity allocations of their large funds. Like an index, they tend to be concentrated in large and highly liquid stocks, not having the flexibility to add smaller, more illiquid, yet higher growth companies that can deliver outperformance.

Further, the principal managers of large firms are less likely to hold a direct ownership stake in the business and are more likely to be compensated for short term outperformance. This can result in portfolio churn, or a high turnover of stocks held.

Boutique investment firms, on the other hand, are typically small and nimble with more freedom to optimise internal processes. Because they don’t face the liquidity issues of larger firms, they have a larger selection of stocks to choose from including up-and-coming small caps. They also tend to be independently operated and majority owned by the portfolio managers, ensuring a long-term outlook to the benefit of their members.

Without the distraction of having to meet high quarterly funds under management targets, boutiques are free to focus on what should be most important: generating long term, risk-controlled outperformance.

Given these benefits of managing a small fund, some boutique managers choose to cap the amount of money that they are prepared to accept, ensuring that scale does not negatively impact performance. This can result in higher fees, but that shouldn’t be a concern — at the end of the day it is the net return, inclusive of fees, that is important.

So rather than following the herd, take the time to consider a high- quality independent boutique fund manager.

Boutique managed funds: they’re not all the same

While it’s large institutions that grab the attention, there are thousands of boutique managed funds to first consider.

However, when comparing funds — large or small — protecting against the downside is often overlooked. It’s easy to be wowed by the headlines returns, but what the fund didn’t lose is just as important.

This is especially important during a bear market or correction. Case in point, the Coronavirus Crash of 2020 where the Australian equity sector lost 9.5% over the six months to 30 June 2020 and more than half of the managed funds in the sector recorded double-digit losses.

According to fund investment research group, FE Analytics, of the 277 funds within the Australian Core Strategies sector, only six recorded a positive return over the first six months of 2020***. That’s just 2.6% of all funds in the sector.

One of these top performers was the Lincoln Australian Growth Fund (Retail), which recorded growth of 4.2% over the six months to 30 June 2020***.

The fact that the Lincoln Australian Growth Fund was one of only a handful of funds amongst its peers to record a positive return is a reflection of Lincoln Indicators’ proprietary Financial Health methodology.

Backed by this ground-breaking methodology, the boutique fund manager only invests in quality, financially healthy companies and avoids those at risk of corporate failure. Lincoln’s bottom-up approach to stock picking employs a quantitative methodology, with every stock systematically screened through 12 accounting ratios. The effectiveness of this approach has been demonstrated over decades, through both bull and bear markets.

Looking longer term, over a five-year period a $100,000 investment in the Lincoln Australian Growth Fund (Wholesale) would today be worth approximately $170,000 — well above the returns of the ASX All Ordinaries Accumulation Index, where that $100,000 would be worth around $143,000****.

This performance saw the Lincoln Australian Growth Fund (Wholesale) recognised as a top-performing Australian equity fund by FE Analytics^, who awarded it a FE fundinfo Crown Fund Rating of five — the top rating that identifies “funds that have displayed superior performance in terms of stock picking, consistency of outperformance against a credible benchmark, and achievement of results at a relatively low risk”.

Lincoln has been delivering market beating returns for its members since 2005 thanks to its active investment style and quantitative methodology, that take advantage of all market conditions, along with its competitive management fees and will continue that approach into 2021 and for the years to come.

For more information on Lincoln’s managed funds click here.

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**** This hypothetical investment assumes $100,000 is invested in Lincoln Australian Growth Fund (wholesale) for 5 years at 10.13% p.a. with distributions reinvested quarterly, as compared to ASX All Ordinaries Accumulation Index at 7.21% p.a.

^As 31st August 2020, performance relates to the Lincoln Australian Wholesale Growth Fund “FE AMI Equity Australia – 5 Crown Rating. FE Crown Fund Ratings do not constitute investment advice offered by FE and should not be used as the sole basis for making any investment decisions. All rights reserved.
Past performance is not an indicator of future performance.

Important information: The Investment Manager for the Lincoln Australian Growth Fund, Lincoln Australian Income Fund and the Lincoln U.S. Growth Funds (the Funds) is Lincoln Indicators Pty Limited (Lincoln Indicators) ABN 23 006 715 573 as Corporate Authorised Representative of Lincoln Financial Group Pty Ltd ABN 70 609 751 966, AFSL 483167 (Lincoln Financial). Equity Trustees Limited (Equity Trustees) ABN 46 004 031 298, AFSL 240975 is the Responsible Entity for the Funds. Equity Trustees is a subsidiary of EQT Holdings Limited ABN 22 607 797 615, a publicly listed company on the Australian Securities Exchange (ASX: EQT).

This communication has been prepared by Lincoln Indicators, as Corporate Authorised Representative of Lincoln Financial, to provide you with general information only. In preparing this communication, we did not take into account the investment objectives, financial situation or particular needs of any particular person. It is not intended to take the place of professional advice and you should not take action on specific issues in reliance on this information without first seeking professional advice. Neither Lincoln Indicators, Lincoln Financial, Equity Trustees nor any of their related parties, their employees or directors, provide any warranty of accuracy or reliability in relation to such information or accepts any liability to any person who relies on it. Past performance should not be taken as an indicator of future performance. You should obtain a copy of the Product Disclosure Statements before making a decision about whether to invest in these products.

No content in this Communication including illustrations, tables and case studies may be reproduced, adapted, uploaded to a third party, linked to, framed, performed in public, distributed, stored, published, displayed or transmitted in any form by any process without the specific written consent of Lincoln or, in the case of any third- party material, from the owner of the copyright in that material.

Copyright in the Communication is owned or licensed by Lincoln.

Copyright © Lincoln Indicators Pty Ltd. All rights reserved.


Information in this communication is current as of publication unless otherwise stated. It is provided for educational purposes only and may not reflect current market data or opinion. It should not be relied upon in respect to any current investment decision. Investments can go up and down. Past performance is not a reliable indicator of future performance.

Important: This communication is provided by or on behalf of Lincoln Indicators Pty Limited ABN 23 006 715 573 (Lincoln), as Corporate Authorised Representative of Lincoln Financial Group Pty Ltd ABN 70 609 751 966, AFSL 483167 for information and educational purposes only. This content may contain general financial product advice. It has been prepared without taking account of your personal circumstances and you should therefore consider its appropriateness in light of your objectives, financial situation and needs, before acting on it. Investments can go up and down. Past performance is not a reliable indicator of future performance. Shares and other investments may go up and down in value, and their past performance may not be repeated and gives no guarantee of future performance. Information in this communication was current as at the date of its preparation, unless otherwise stated, and may be subject to change.

You should read and consider our Important Information and our Financial Services Guide (FSG) which sets out key information about the services we provide. Where our advice relates to the acquisition or possible acquisition of a particular financial product, you should obtain a copy of and consider the Lincoln Australian Income Fund Product Disclosure Statement (PDS), Lincoln Australian Growth Fund Product Disclosure Statement (PDS) and Lincoln U.S. Growth Fund Product Disclosure Statement (PDS) for the product at before making any decision.

At the date of preparation of this communication, Lincoln, Lincoln Financial Group Pty Ltd or directors, employees and/or associates of these entities "may hold" interests in these ASX-listed companies. Further information about particular stocks held by these entities or persons from time to time is disclosed within the Stock Doctor program and may change at any time without notice.

Lincoln, Lincoln Financial Group Pty Ltd, any directors, employees and agents of these entities, make no representation and give no warranty as to the accuracy of this communication and do not accept any responsibility for any errors or inaccuracies in, or omissions from, this communication (whether negligent or otherwise) and are not liable for any loss or damage howsoever arising as a result of any person acting, or refraining from acting, in reliance on any information in this communication. No person should rely on this communication as it does not purport to be comprehensive. This disclaimer does not purport to exclude any rights under, or warranties implied by, law which may not be lawfully excluded.

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Copyright © 2024 Lincoln Indicators Pty Ltd. All rights reserved.

All financial services are provided by Lincoln Indicators Pty Ltd ABN 23 006 715 573 (Lincoln) as the Corporate Authorised Representative of Lincoln Financial Group Pty Ltd ABN 70 609 751 966, AFSL 483167.

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