Small investment houses, often called 'boutiques', tend to manage portfolios in a relatively concentrated manner, with fewer stocks and more aggressive performance targets. Larger investment houses often own more stocks, and aim for more stability in their performance. Which is better? Multi-manager fund house Russell has hired 21 boutique managers since the beginning of 2002 and just 12 larger firms. Does this mean that bigger isn't always better when it comes to investment management? We put some of these questions to Peter Gunning, Chief Investment Officer for Russell's regional business.

Does the increase in the number of boutiques in Russell's funds signal a new emphasis in your investment approach?

No, Russell has always believed in hiring specialist managers, and combining the best of breed in each of our funds. In fact, many Russell funds have included boutique managers for some time, including the Singapore-based APS, BEM in Australia, Lloyd George in Hong Kong and Jacobs Levy in the US. Our investment philosophy hasn't changed - we still seek out the best investment firms, using face-to-face meetings and detailed analysis to find managers in whose investment philosophies, processes and people we have the highest confidence. There are, however, a growing number of impressive boutique firms to choose from.

Is the growing number of small firms in the funds a reflection of changes in the investment management industry as a whole?

Definitely. There are essentially two factors at work here. First is that the equity market downturn has caused significant organisational stress in many firms and in some cases this has adversely affected the quality of their offering. Second is the decline of traditional balanced management and the birth of many specialist managers. The breadth of choice has widened and the quality is such that we want them in our funds. It's important to note that most specialist boutiques are run by experienced professionals who have moved from larger organisations to run their own firms. For example, Lloyd George Management is considered by Russell to be one of the top managers in Asian equities because of its ability to select outperforming stocks and it core team is a group of four Hong Kong-based portfolio managers with nearly 50 years of investment experience between them.

How do you go about finding boutique managers?

We believe our clients choose Russell for our experience and expertise in identifying interesting managers and in judging their investment ability. In our experience, many of the 'boutiques' have split from a larger investment firm where their true worth was constrained by the broader organization. Russell's focus on individuals and teams within investment managers, rather than on brand names, means we are well placed to attribute skill and performance, and can judge the worth of the new boutique. Where a boutique emerges from another source, our process is no different than for any other investment manager. Simply being a boutique is not a guarantee of investment success. Across the board, we try to gain a clear understanding of a firm's investment philosophy, process and people, which, in the case of increasing numbers of new firms, requires substantial dedicated resources and a disciplined approach to discovery research.

Are smaller firms better at adding value than larger firms?

In some cases, yes. Boutiques are more able to move in and out of smaller markets than larger firms and in some cases can hold securities which are not accessible by larger firms. For example, in our International Bond Fund, Colchester is able to add value through positions in minor markets and currencies such as Iceland and the New Zealand dollar. This would be more difficult for a larger firm with a huge client and asset base to satisfy.

Smaller firms generally have tighter decision making structures and often take advantage of this ability to move quickly in and out of securities. APS Asset Management in Singapore, which was founded in 1995, is a good example. APS targets stocks that exploit Asia's competitive advantages and have the potential for significant longer-term growth, but are trading at below market expectations.

Boutiques may have higher performance targets than larger houses, which is of interest to our clients. Large investment firms, on the other hand, take advantage of deeper research resources and can benefit from the transfer of ideas across global teams. In some investment processes, such resources are key, but in others they are not.

Do smaller management firms tend to increase the risk in the fund?

The addition of boutiques to a fund does not necessarily mean a proportional increase in risk. Indeed, if the new manager seeks to add value using different processes to the managers already in a fund, the risk at a total fund level may actually be reduced because of the benefit of diversification. We know that our clients want greater security and to be exposed to less risk than the average manager in their portfolios. But we also know that they want our funds to perform better than others in the marketplace, and to beat the index. We believe that the beauty of the multi-manager framework lies in the fact that our clients capture the added performance potential of boutique specialists, combined with more established and well-known investment houses in a risk controlled framework.

What are the main reasons behind the recent manager turnover at Russell?

Our turnover can be attributed to the current market circumstances, the growth in Russell funds, and the output of our continuously updated manager research that looks at both existing managers and at the increasing number of interesting or innovative managers in the market. Occasionally, turnover can also stem from instability in some firms. We believe our clients want to know that we are monitoring managers and making changes on their behalf when the need arises.

Our clients choose us in part because our research process is ongoing. It does not stop once managers are hired. Russell's research analysts are continually examining the available managers to enhance the manager mix where possible.

The emergence of new boutique offerings in Australasia has come at a period of growth in assets under management at Russell. Greater assets enable us to include more of these exciting managers in our funds, whilst still controlling the level of total risk. Our investment discipline ensures that manager changes will only occur when we have the highest conviction that the new fund structure will improve clients' prospects for consistent performance.