Principal Investment Management is a very professional company. Its website describes itself thus: “Principal is a private client investment management company with an established reputation for professionalism and providing a personal, down-to-earth service.”
Indeed, when I asked chief investment officer Stephen Jones what made his company unique when compared to others, the very first thing he said to me was: “We are very professional.”
Being professional is hardly a USP as every wealth manager in the UK should have being professional as an absolute minimum when it comes to dealing with clients and their money.
But what does stand them apart from some is their fund management background.
Jones joined in 2010 having spent 15 years at Gartmore and the previous ten at Prudential.
His investment team includes people like Charles Brand, managed funds director, who used to work at Morley Fund Management and Sun Life of Canada Asset Management; Iain Scotland is Brand’s deputy who has experience at Gartmore, HBOS and Insight.
Others in the company’s senior investment team have fund management roles at UBS, Aberdeen, Baillie Gifford and Aegon among others on their CV.
Areas of expertise
One exception, perhaps as you would expect, is Matthew Groom, a director and head of the client facing team – but then he did join Principal in 1989. By way of background, other investment managers feature a smattering of various wealth managers including the likes of Granville, Heartwood Wealth Management, Brown Shipley and Nat West Stockbrokers.
The backgrounds of the investment team lends itself very well to, if not quite USPs, then two particular areas of expertise.
In the team, there is plenty of experience of working on fund house equity desks (Richard Champion, Scott Robertson, Iain Scotland included) so it is no surprise one of the firm’s services is to offer clients portfolios of direct UK equities and bonds.
The second service is a portfolio of funds, specifically third-party funds.
“We are typically looking at clients with more than £50,000 investable and the portfolio of funds can go up to £10m if they want it to,” says Jones. “The directly invested approach will be for upwards of £250,000 of assets.”
Either way, the portfolios are designed using in-house asset allocation expertise – a “core competence” of Principal’s – as asset allocation, according to Jones, provides two-thirds of the value added, the rest coming from fund and stock selection.
Returns and policies
Jones is responsible for the investment returns and policies for Principal Investment Management and is a member of the asset allocation committee. The allocation is set across a number of model portfolios that include a fixed income service, defensive, cautious and income.
Now here is a second area of expertise as the firm offers income and fixed income propositions.
“The fixed income service,” according to Jones, “is because some people want income, and some want low volatility. This is attractive to people if they are getting 1% in their current account.”
However, Jones describes it as “an all-seasons service” as even when interest rates are higher, clients will still want an income, so this is not just relevant to low interest rate environments.
The income proposition is a multi-asset approach using the IMA’s various Mixed Investments categories as a benchmark and then taking bets against it rather than following it strictly.
Chris Ganney works on the managed funds team and is the author of Principal’s well-respected income study that is happy to name names on separate, self-explanatory white, grey and black lists.
Valuation impact
The overall asset allocation approach is very top-down, at least to start with, looking at where economic momentum is, asking if it is improving or deteriorating, and how Jones and his 13 analysts think all this is impacting on valuations.
He does try to quantify this but the whole process is also very pragmatic, relying on the experience of him, Brand, Michael Stanley (who started at Lazard’s private client team in 1987) and other members of the team to add common sense to it. It is more than taking a blended number from all the various inputs.
“We are possibly more positive about European equities than some because something is often more attractive when other people do not like it. Everyone hates Europe so it must be attractive to us,” explains Jones.
Not going gung-ho
Principal Investment Management is a conservative house, so this view is not going to lead it to going gung-ho and investing vast quantities of its £1.7bn of client assets – two-thirds of which comes via IFAs and their 4,500 high-net-worth individual clients – in European equities. Its balanced portfolio has 8.7% compared to a 7% benchmark.
In fact, its last major asset allocation call, in April, was to sell equities, UK and overseas, funds and securities, and replace them with corporate bond funds “because we felt the eurozone crisis was going to accelerate”.
He explains further: “We are conservative and proud to be conservative. The issue is our clients have spent a lot of time building up their wealth and we will not be shovelling it into Arch Cru, for example. We need to understand what we are investing in, and we need to think about wealth preservation as well as growing our clients’ income and their assets over time.”
House view
Principal, in its house view, is underweight gilts and overweight corporate bonds; underweight equities and overweight fixed interest, with very little in property and a slight overweight to alternatives.
The alternatives exposure is entirely run through absolute return Oeics, the BlackRock UK Absolute Alpha, Jupiter Absolute Return and Standard Life GARS funds.
“We used to run our own in-house hedge fund of funds. It was closed-ended and had three and six-month liquidity periods. Clients did not like the fact it did not have the same tax treatment as an Oeic, so for liquidity and tax reasons we closed it.
“The advantage of the Oeics is you can sell them the next day and our preference now is to go with managers who have experience of running long/short funds, but then launched an Oeic to diversify their client base [Philip Gibbs, manager of the Jupiter Absolute Return Fund].”
It is no surprise the words and phrases that resonate when discussing Principal’s investment approach – conservative, core competencies, wealth preservation, professional approach – lead to funds it invests in being run by the bigger houses and not boutiques.
Diversification is key, with diversification in its fund choices very much safety first – which is what its clients want.
