Robert da Silva
The environment is ripe for experienced Australian equity stockpickers and whole teams to break away from large investment houses and set up their own funds management boutiques, according to one of Australia’s leading investment research houses.
According to van Eyk Research, a number of well-established Australian small cap managers are experiencing capacity constraints and may close to new money in the near future, which will pave the way for new entrants.
Robert da Silva, van Eyk’s head of manager research and deputy chief investment officer, said the strong performance of Australian small cap managers in the past year, combined with steady inflows, had boosted the sector’s funds under management and pushed some managers closer to capacity.
“This has created an encouraging environment for new players to emerge in the small cap space,” he said. “Boutiques that have a quality team and investment process, and a consistently strong track record, should do well.”
However, there is still a disproportionately large number of core Australian equity managers given the relatively small size of the Australian market, da Silva said. He noted that only a small number of core and concentrated Australian equity strategies had been launched in the last few years while several boutiques had been shut down.
He identified a number of major headwinds for Australian equity managers including investors’ growing preference for direct shares, a reduced appetite for risk and valuations approaching fair value.
“The consensus view is that Australian shares are close to fair value but there are still opportunities for skilful active managers to add value,” da Silva said.
“The difference between the best and worst performing small cap manager in the past year was around 40 per cent which highlighted the value that can be added by choosing the right manager. By comparison, the performance differential in the large cap space was around 20 per cent.”
da Silva’s comments coincide with the release of preliminary findings from van Eyk’s 2014 Australian Equities Sector Review, which covered a universe of 56 Australian equity strategies.
van Eyk’s qualitative and quantitative evaluation began with a pool of 98 managers. This cohort was then narrowed to a group of 39 large cap and 17 small cap strategies who were invited to participate in the full due diligence process.
Of these, two large cap managers and one small cap manager refused to be included.
Only a handful of large cap managers were awarded van Eyk’s highest “AA” rating, demonstrating superior strength particularly in relation to investment research and the ability to garner unique insights and capitalise on them.
The van Eyk 2014 Australian Equities Sector Review saw four large cap strategies upgraded and three downgraded from 2013.
In the small cap space, da Silva said there was intense competition with a higher concentration of “AA” and “A” rated managers and a substantially lower number of strategies rated “BB” or “B”. Four managers were awarded the coveted “AA” rating.
Two small cap managers were upgraded but no strategies were downgraded.
“Funds managers are not automatically included in a sector review but must pass our initial screening process,” he said. “By excluding managers who are unlikely to achieve a recommended rating from process, we’re able to focus on higher quality offerings.”
A full report on the van Eyk 2014 Australian Equities Sector Review is being finalised and will be available by the end of June.
