Last week we gave insight into how to use investing as part of IHT planning. In this article Ed Midgley, Head of sales at Vertem Asset Management, discusses how size is not a barrier when it comes to advisers and the great scope they have with AIM portfolios.

At Vertem we consider ourselves to be boutique and are amongst a number of new Discretionary Fund Managers (DFMs) set up over the last few years who fall into this category. We also believe that for ‘boutique’ you can read ‘bespoke’ – and this is where adviser firms can truly see the benefits of dealing with a smaller DFM.

We regularly see adviser firm’s panels of DFMs populated by the same behemoths of the industry, often the offerings from those DFMs are very similar, indeed it can sometimes be difficult to spot the difference. Size is not a barrier to considering a DFM for use in an adviser’s business – in fact Rory Percival stated last year at a DISCUS event that the FCA do not consider size an issue.  Here are three reasons you may want to look at us boutiques:

1. We can fish in a much bigger pond

The larger the DFM firm becomes, the more restricted the potential offering – and this can lead to portfolios looking very similar from the big players. Let me give you a brief example: a DFM firm has say £4bn AUM and decides to make a fund ‘buy’. Let us say that they want to put 3% of their AUM into the fund, but want no more than a 10% exposure to it (after all they don’t want the fund manager to suddenly wake up next morning with a cash locked fund). To ensure they keep within their criteria, the fund needs to be circa £1.2bn in value and this is where the problem arises Circa 90% of available funds are below this value.

Vertem did some research recently into whether big equals are better when it comes to performance and we came up with some very interesting statistics. We looked at the total return of all surviving IA UK companies and IA UK equity income funds for a 3-year period to the end of 2016. We looked at the 25 best performers and the 25 largest funds over that period. Only 3 of those largest funds appeared in the top 25 performers. We also looked at the smallest funds against the worse performing and found small funds do not dominate amongst the worst performing funds.

What about stocks? After all, many advisers see DFMs as providers of bespoke stock portfolios. Here we looked at the top performers in calendar years 2016, 2015 and 2014. In 2016 only 3 of the best 50 performing UK stocks were amongst the largest 100 (and 5 of the 50 worst were amongst the largest 100). We saw similar statistics in 2015 with again only 3 of the top 50 performing stocks amongst the largest 100 (and now 10 of the worst 50 in that group) and in 2014 the winners fared slightly better with 11 of out of 50 on the up side but again 10 of the worst 50 performers in the largest 100.

If the larger DFMs have to fish in a small pond (arguably stocked with big fish), are they able to provide significant advantage against their peers? Perhaps more advisers should also be considering the boutique DFM who can fish in the bigger ponds. Those stocked with the big and the not so big fish.

2. We have greater scope with AIM Portfolios

Not all AIM stocks are small but a significant majority are probably out of the reach for the larger DFMs. Rather like the fund analogy above, a DFM with significant AUM which makes a stock a ‘buy’ needs to be able to satisfy the demand.

The smallest of AIM stocks have potential liquidity issues so even the boutique may be hard pressed to hold these but there is still significant value to be had in the middle ground – which is where the boutique can add value.

At Vertem we are able to make AIM portfolios truly bespoke on a client by client basis, whether they need to gain BPR or benefit from it already.

3. There is less chance of a conflict of interest

A lot of large DFMs have multiple business channels – these include gaining new business direct and via advisers. Many of the big players also provide in-house financial advice.

The boutique DFM on the other hand tends to work with introduced business only and will not get involved with providing financial advice. At Vertem we have no facility to provide financial advice and no intention to change – advisers can work with us knowing we are there to enhance the relationship, not to dip our hand in their cookie jar.


This post was created for the DISCUS website by Ed Midgley, Head of Sales at Vertem Asset Management. You can find out more about their investment services here ›