The merits of active investment management have been debated for nearly 50 years. Since the global financial crisis, criticism has intensified, with many reports broadly characterizing active managers as lagging their benchmarks.
In considering this long standing debate, investors may want to delve a bit deeper into the research. The findings may not be as straightforward as they seem.
Worth a Second Look
The vast majority of this research simply groups all active managers together when comparing them to indices. Unfortunately, this kind of sweeping generalization can be problematic. After all, individual investors don’t entrust their wealth to all active managers. Instead, they’re searching for a subset of managers that may be best-positioned to outpace the market on a consistent basis.
That’s why, rather than trying to explore the merits of all active managers, we set out to examine the performance of certain segments of active managers—specifically, boutique active managers.
Boutiques Created Significant Value Versus Indices
To explore this point, we recently revisited a proprietary study analyzing the performance of active boutiques across nearly 5,000 institutional equity strategies. Our analysis spanned a 20-year period from 1998 to 2018 and included 11 different equity categories of varying market capitalizations, styles, and geographies. (see About Our Study below)
Our results stood in sharp contrast to industry reports, which have generally concluded that the majority of active managers have underperformed. Instead, we found that boutiques have outperformed benchmarks, even when factoring in fees. While results varied, the average boutique strategy surpassed its primary index—in 11 out of 11 categories over the trailing 20-year period net of fees.
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.
Across the stock categories we examined, boutique managers delivered net returns that eclipsed their indices by an annual average 135 basis points*. What’s more, the gap was persistent. The average boutique strategy outpaced its primary index more than half of the time (57%) over two decades across all categories we studied.
Get a Boost from Boutiques
Fortunately, selective investors around the world are increasingly recognizing the ability of focused boutique active investment managers to outperform both indices and their non-boutique peers. How can other discerning investors identify those likeliest to generate above-market returns? Our study uncovered several key traits to look for:
- 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
The debate over active versus passive investing is far from settled, but boutique managers have earned the right to be judged on their own merits. Lumping them in with all active managers obscures their distinctive record. It’s a disservice to them—and investors.
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.
*Basis point is equal to .01%
**Source: AMG proprietary analysis
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