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Forever changes

Gary Potter, co-head of BMO Global Asset Management multi-manager team

Gary Potter tells Julian Marr how the multi-manager team at F&C Asset Management look to stay ahead of the pack in a world that is constantly changing

How to lead the field in a changing investment world

Change is everywhere and the world of investment is no exception. Using his own career as an example, Gary Potter, co-head with Rob Burdett of F&C’s multi-manager team, says: “After I joined the industry 33 years ago, my first real experience of change was the ‘Big Bang’ of 1986 but, since then, we have seen the likes of Fimbra, Lautro, Imro, the PIA, the SIB, polarisation, depolarisation, open architecture, restricted architecture and multi-ties.

“The FSA is now the FCA. Peps are now Isas. We have platforms, clean share classes, re-registration and CPD. In macro terms, economies, stockmarkets and indices are constantly changing and then there are all the changes at the fund level. Here, happily, technology has changed hugely too, helping us to understand more clearly, for example, whether a manager performs better in bull or bear markets – and so to identify the very few who can do both.

“It is about ‘value for money’, not ‘cheap at any cost’. If you want cheap, go to the pound shop.”

“Liquidity analysis is very important too – making sure you know how long it would take a manager to liquidate their portfolio if they had to. So is guarding against ‘style drift’ – is a manager value or growth-oriented and have they moved their style at all? If you pick funds yourself, you have to do all this work – and more – to justify your existence.”

You also need to keep tabs on fund groups, which regularly come and go – Potter instantly name-checks Cazenove, Friends Ivory & Sime, Gartmore, Hill Samuel, Mercury, Morgan Grenfell and Save & Prosper – as do chief executives and chief investment officers. “For better or worse, a business’s leaders really do create its culture,” says Potter. “So, other than the fund managers, you had better make sure you understand what may be changing a company and its culture.”

Ah yes, the fund managers. Here, over the last 12 months or so alone, the roll call of change would include Richard Buxton, Graham French, Richard Hodges, Mark Lyttleton, Chris Rice, Sanjeev Shah, Cormac Weldon and of course Neil Woodford. “It does not surprise us in the least that some of these big names have moved on from their often very large funds,” says Potter, detouring neatly and briefly into a couple of favoured themes.

“We do like funds that control capacity as this allows a manager to carry on delivering performance – in fact, 80% of the funds we own in our ‘Boutiques’ portfolio are capacity-constrained. Another point to make here – and of course I would say this, wouldn’t I? – is, in today’s TCF-oriented world, the fund of fund structure is the most efficient for running investment solutions.

“There are very few transaction costs, no admin issues, no VAT on fees and, importantly, no CGT on transactions. If a manager moves, say, and a private client or model portfolio then needs to make a change, it is a tax point – in a fund of funds, it is not. Finally, of course, as fund of fund managers, we still legally can and do negotiate rebates on our clients’ behalf. It is about ‘value for money’, not ‘cheap at any cost’. If you want cheap, go to the pound shop.”

Change may be everywhere in investment but, suggests Potter, not everyone is dealing with it as adequately or promptly as they might. “Most people’s buying habits involve rear-view mirror investing,” he says. “They look at what has done well or badly and then follow the trend. But sometimes you have to go against the herd – after all, a changing world means funds that have not been performing well can always start doing much better in the future.”

When it comes to a herd mentality, particular offenders in Potter’s eyes – and he is aware not everyone will thank him for saying so – are the model portfolios, many of which he believes are swarming within an increasingly small number of increasingly large funds. 

“We all know the sorts of names but this risks buying yesterday’s funds for today’s clients,” he warns. “Of course you should be buying tomorrow’s funds today. To do that you have to recognise changing trends – for example, a new way of accessing the market or a new market that did not exist five years ago – and then embrace those ideas. It may be hard to believe now but Neil Woodford was once a young fund manager developing his career.

“You must then judge change with the knowledge you have accumulated and, once you have made a decision, back it with conviction. We do not believe in ‘core-satellite’ portfolios because putting most of your money in the core and leaving only a little round the edges to generate returns is a good way to produce pretty average performance. We think about things the other way round.”

As further evidence of its willingness to think differently, Potter highlights the multi-manager team’s holding in TwentyFour Income. “It was only launched in March last year so of course some people will say they could not possibly touch it until it has a three-year track record or has ticked their other boxes,” he says. “But box-tickers beware – in a little over a year the fund has outperformed the Sterling Strategic Bond sector by 20 percentage points. You are going to be hearing more about TwentyFour in the future and no doubt a lot of model portfolios will be buying its funds in three or four years’ time. That might be too late.”

Another fund where the F&C multi-manager team were in early – and with conviction – is BlackRock Asian Growth Leaders. “When it comes to Asian equities, all the model portfolios will be buying the household names – and I do have tremendous respect for those groups and their capabilities,” says Potter.

“For its part, BlackRock has not had a track record in Asia for as long as I can remember but that is changing. I was in Asia in 2012 and met Andrew Swan, who had joined BlackRock from J. P. Morgan Asset Management to build its Asian business. We were the first investors into Asian Growth Leaders and own $45m [£26.4m] of this $100m or so fund. Since its launch in October 2012, it is the top-ranked Asia Pacific excluding Japan fund – outperforming by some 18 percentage points the sector average, around which, incidentally, you will find most of the big household name funds.”

With all this change, Potter reasons investors will be grateful for a few constants and so swiftly points out that he and Burdett have worked together since 1995 while, in Bank of Montreal, F&C has a new owner that was established in 1817. “For the record, I am glad F&C is off the market,” he adds. “Rob and I have spent the last three years dealing with questions about what might happen to the company and to the team but all that is over.

“Our new owner is the eighth largest North American financial group, with $600bn of assets, 46,000 employees, 184 years of unbroken dividend history and a big chequebook. Our team is as happy as it has ever been at F&C and we are not going anywhere.”

Knowing the score

When considering change at a fund level, Gary Potter and the rest of the F&C multi-manager team set great store by qualitative research, scoring 16 different factors – grouped under the headings of business, fund, process and team – to arrive at an overall ‘IQ’ rating. “Of course we also do the quantitative work but 75% of our research into a fund is on qualitative factors,” says Potter.

Using the accompanying illustration of the team’s findings for an unnamed fund holding, Potter explains: “The pale blue line shows the business element and you can see where the firm’s CIO resigned. The CIO had given the young manager his break running a good fund so how do you think he would feel with his mentor gone?

“Later, as you can see from the yellow ‘team’ line, the fund’s number-two resigned because he missed out on the top job and then the new CIO promoted another member of the team into a different role because they were particularly good at risk assessment. Ultimately a fund that had been hoovering up inflows saw its assets under management fall off a cliff – although we had sold out well before that happened because our qualitative research told us we should.”

 

 

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