Three Australian-based global equities boutique managers - Hugh MacNally (Private Portfolio Managers), Monik Kotecha (Insync Funds Management), and Stephen Arnold (Aoris Investment Management) - discuss the advantages of a boutique and their approach to portfolio construction when using a managed accounts structure.

Being in a boutique relieves you of the corporate pressures. You’re not part of a big conglomerate, where decisions are driven from head office,” says Hugh MacNally - Director and Founder of Private Portfolio Managers (PPM). “Instead, boutique managers either live or die by their own efforts. It’s this degree of autonomy that boutiques thrive with, and which I believe provides boutique managers with a definitely competitive advantage.”

Speaking at an IMAP Specialist Webinar Series on ‘The advantages of being a boutique manager’, Hugh says the availability of information today has essentially removed many of the advantages previously enjoyed by global equity managers based in financial hubs, like New York, London, and Hong Kong. He says this has delivered an advantage to Australian-based global equity boutique managers.

“The amount of information that is available today is unprecedented, and it can be acquired inexpensively. This makes it a lot easier for investment management to become decentralised, which has seen a rise in boutique managers.”

It’s a view supported by Stephen Arnold - Managing Director and Chief Investment Officer at Aoris Investment Management - who believes that being a boutique manager has provided Aoris with a considerable advantage in the global equities managed accounts space.

“What gives us an edge is that we have a single strategy, and managed accounts is just one way in which clients can access that strategy. We’re not a firm that has a strategy of owning lots of stocks. We’re very transparent with the investments in our portfolio,” he says. “It’s a commonsense approach, so when people see the stocks in the portfolio and read our investment philosophy, it makes sense to them.”

Sitting at the heart of PPM’s approach to investing is its investment philosophy, with two elements underpinning the business’s outlook to investing: the return on capital that companies generate; and risk management.

“We have a strong focus on the return on capital that companies are generating, because that’s how we earn our return for our clients,” says Hugh. “And the second element to our investment philosophy is how we manage risk.”

Hugh says there are two risks that the team at PPM want to manage. Firstly, by looking for companies that are financially very strong and able to withstand periods of difficult economic conditions. And secondly, by searching for companies where valuations are not aggressive.

“The reversion to the mean in valuations is brutal, so by avoiding excessively priced stocks - particularly in speculative times - provides a substantial advantage,” he says.

PPM assiduously applies these two elements of its investment philosophy across its portfolios, which comprise of about 20 stocks in developed markets that have a long history of operating performance.

It’s a similar approach shared by Insync Funds Management, with its Chief Investment Officer, Monik Kotecha, adding that Insync’s foundational premise behind investing is that share prices follow the sustainable earnings growth of a business.

Insync looks at two key attributes that help it to identify businesses that can deliver this sustainable and high earnings growth well into the future. These are companies with a: very high returning and profitable business model (across Insync’s portfolios, the average return on investor capital is 40 per cent); and which have a long runway of growth ahead of them.

“The way we seek to identify these companies is through mega trends,” says Monik. “A mega trend is like a giant tidal wave. It can be defined as a gathering wave of change that is slow to form, nearly impossible to reverse, significantly influences the future, possesses an aura of inevitability, and has a far and wide-reaching impact on society.”

Some examples of mega trends include: the move to contactless payments, the sustained rise in expenditure on pets, the acceleration in chronic diseases with the rapidly ageing population, and the adoption of alternative energy sources to combat climate change.

“Insync invests in companies that can continuously reinvest their cashflows at very high returns, which we believe generates the best compound earnings growth and shareholder results,” says Monik.

However, he acknowledges that due to Insync’s very specific metrics and process around investing, it means that its investable universe is relatively small, sitting at about 150 very profitable businesses with strong tailwinds behind them.

“So, from a managed accounts perspective, we have a diverse portfolio of 30 stocks that are typically industry leaders across 16 global mega trends,” says Monik. “And while there is diversification within the portfolio, we also seek to understand the correlation and covariance between these stocks to ensure that we’re managing the risk, while also trying to maximise the returns at the same time.”

Aoris Investment Management’s approach to investing is to also own high quality, wealth creating businesses. Aoris Managing Director and Chief Investment Officer, Stephen Arnold, defines ‘high quality’ as being businesses with a long and proven track record, which operate in growing markets, and are themselves growing faster than their markets.

“We like to invest in companies that are ‘all weather’ businesses that generate high rates of return in all economic scenarios. We also like companies with conservative balance sheets, and which have management that operates the business conservatively,” says Stephen. “By putting all these factors together, it gives us confidence that we own a business that in five or 10 years from now, will be significantly more valuable.”

As a consequence of setting the bar high for its stock selection, Aoris only maintains a maximum of 15 businesses in its portfolio. By doing so, Stephen says it allows the business to strike the right balance between price and company quality. Aoris also maintains a single strategy approach to investing, which is applied across multiple implementation options, including managed accounts. Stephen believes this approach clearly differentiates Aoris from most other global equity managers.