Meeting a CIO who is dismissive of the need for a three-year track record before investing in a fund is not too commonplace, yet on a recent trip to Edinburgh that is exactly who I found.
Haig Bathgate, responsible for leading and developing the investment strategy at Turcan Connell Asset Management, says he believes if you wait for three years of top-quartile performance before taking the plunge you may well have missed out on the best the manager can do.
So instead he favours finding new talent or even seeding funds. Robin Parbrook’s Schroder Asian Total Return Fund, which was launched in November 2007, is one example of a fund he invested in from launch, while Bathgate says he will be an early investor in ex-SWIP fund manager James Clunie’s new fund when he starts at Jupiter.
He explains: “We used to have a rule where we didn’t invest in a fund unless it was over £50m, but we don’t have that any more. We want to own the manager in the first three years, as that is where you get all of the performance. Distribution is one thing but performance is everything.”
Familiarisation process
Turcan Connell never invests in a manager unless there have been several meetings to get to know them better.
Bathgate adds: “We want to see how they react to information and what they are doing with their portfolio. If we are going to take the plunge, we want to know them properly. We want to have some demonstrable track record but we will use the old track record of the manager if we are comfortable with what they are saying they will do.”
Upon selection he will often hold a fund for six to seven years and the only reason it would change would be if the manager left or made a fundamental change to their asset allocation perspective.
Founded in 1997, the same year Bathgate joined, the idea behind Turcan Connell Group was to be a company that could provide a client with all the professional advice they might need under one roof. It offers legal, wealth and investment management, and tax advice and now has offices in Glasgow, London and Guernsey, as well as its native Edinburgh.
Of its £1bn in funds under custody, £700m is under Bathgate and his team’s discretionary management.
Bathgate uses equities, fixed income, property, private equity, hedge funds and derivatives in portfolios put together to try and fulfil twin objectives of preserving and growing long-term wealth for clients. The main way the team accesses each asset class is through collectives, leaving individual company research to specialist managers and using its “considerable bargaining power” to gain access to such managers at substantial discount.
This is another positive gained from investing in funds at an early stage, as asset managers will often give lower charges to primary investors, Bathgate says.
“Since we were originally a legal firm and the asset management group was born out of that, we are very conscious of risk and the articulation of risk. It is all about managing expectations of clients, so we use psychometric risk profiling then look at the client’s position, profit and loss appetite, as well as what they earn now and what they want to earn in the future. We work back from that and find out what they are comfortable with.”
Mismatch
He continues: “If they are only comfortable with a certain level of risk but would need to take a higher one to reach their goals, then there is a mismatch and it becomes a deeper conversation. Either they have to moderate their return expectations or go up the risk scale.”
While the team is very process-driven, Bathgate says it is important to have enough flexibility to cater for individual clients. A trio of quant analysts help the ten investment managers identify new investments and five financial planners also work in the team to give it a holistic capability.
“Where we think we can add most value is in asset allocation and we screen 160,000 funds worldwide, irrespective of size or where the fund is domiciled. If we find a manager we like abroad and they do not have a UK version of their fund, we could encourage them to create one if it is coming through in our filters.”
Nothing sinister
His current outlook is pretty positive and the team has been increasing allocations to equity markets, viewing the recent setback as more of a consolidation phase rather than something more sinister.
The big call at the moment, he says, is whether we will see an equity market slowdown during the remainder of this summer, as we have seen seasonally in the past three years, or whether it will become something more fundamental and entrenched.
“We think we will continue to see the US recovery and we have kept our position in Japan on despite the fact the market has moved a lot in a short period.
“This is the first round of quantitative easing in Japan and we have had two rounds in the UK and US. Money printing does not just stop. We would say the Bank of Japan is aiming for 110 against the dollar and it is not there yet, so there is still a lot to play for.”
He has altered his Japanese allocation slightly from general exposure to the market as a whole to focusing more on higher quality companies. The first phase of the rally had everything going up together, but Bathgate believes a lot of people returning to Japanese equities will go for low price-to-book parts of the market and so blue chips could be underinvested. Companies such as power drill manufacturer Makita and Shimano, the international distributor of bicycle and fishing gear, are the types of firms he will be looking for his Japan equity managers to hold.
Bubble territory
Meanwhile, one of the unintended consequences of Japanese QE could be the flow of money into Asian income assets, which Bathgate believes to be in bubble territory. For this reason he is avoiding yield and income producing assets in the region.
Closer to home, his outlook on the UK is grim relative to the US, not because he thinks the economy will collapse but because it is likely to underperform for structural reasons. While Europe will also continue to suffer a period of sub-par growth, a lot of bad news that has already been priced into the continent has not been priced into the UK, he adds.
Although Turcan Connell still remains underweight conventional bonds, Bathgate does not subscribe to the great rotation theory.
The US will be the first to increase interest rates, and although Ben Bernanke will do his best to try and condition the market, at some point it will be shocked, he predicts.
As in 1993-94, there will be a short sharp correction in both equities and bonds, Bathgate says.
“Central bankers tend to wait for confirmation on the way out of a crisis. The recovery will have to become very entrenched in the US before the Federal Reserve will contemplate increasing interest rates, but we are expecting a sell-off when it happens. Things will have to get materially better before that though, which will work for equities in the meantime.”
Heavily indebted companies that have been overly geared but have not been foreclosed on over the past four to five years will also find themselves in deep water as the cost of debt rises.
It is in this kind of market active managers will be able to shine, as correlation between markets and sectors finally starts to decrease, and Bathgate for one is looking forward to ferreting out such talent.
