Three top boutique funds

A professional investor tells us where he'd put his money.This week: Tom Yeowart, Troy Spectrum Fund.

The growing popularity of passive investing is creating strains for traditional fund-management businesses. One response has been to seek greater scale, as illustrated by a number of high-profile mergers within the industry. A larger business may help create stability through diversification, but this doesn't address the reasons why many investors have sought an alternative to active management.

Greater simplicity and the lower fees offered by passive funds have acted as powerful spurs. So too has the performance of the average active fund and the fact that many have failed to offer anything different from funds that track the index.

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However, boutique fund managers follow a different path. Rather than seek size and scale, they demonstrate the advantages of a more focused approach. They are truly active, eschewing benchmarks, and investing with real conviction in companies that they believe will create significant value over time. They are also structured and organised in a deliberate manner, with a clear investment philosophy and a culture that we believe helps drive long-term success.

One example is Phoenix Asset Management. Phoenix was established by Gary Channon in 1998 and took over management of the Aurora Investment Trust (LSE: ARR) in 2016. Phoenix follows a value-based approach, investing in UK-listed businesses, typically when they are out of favour and beset by a range of issues.

The group invests in the belief that these issues are transient in nature and that the firms will rise "phoenix-like" to deliver better results. The approach has achieved strong results, informing Phoenix's decision only to take a fee when Aurora beats the FTSE All-Share index. It is an unusual fee structure, but one that rewards successful active management.

Another favourite is Polar Capital Global Insurance, which is managed by Nick Martin. The fund invests in speciality non-life insurers, such as Chubb and Arch Capital, which provide products that are often required by law and so are constantly in demand. The manager avoids insurers that take too much risk and focuses on those with a record of profitable underwriting.

The returns earned by these businesses could be about to improve. The price of insurance should rise after this year's hurricanes; higher interest rates will boost the returns on insurers' investment books; and a reduction in US corporate tax rates will benefit the majority of the companies in the portfolio.

My final example is EPE Special Opportunities (Aim: ESO), a listed private-equity company. EPE trades on a sizeable discount to its net asset value, the bulk of which is comprised of a 24% stake in Luceco, a leading UK LED lighting business that is growing strongly. EPE's other holdings include Whittard of Chelsea, a purveyor of speciality tea and coffee, and Pharmacy2U, an online pharmacist, both of which have good operational momentum. There is also a sizeable cash pile of around £30m to be deployed when further compelling opportunities arise.