In an area so historically rich with financial institutions, the City of London is arguably the toughest of environments to nurture a new advisory business, but it is also home to great opportunity. Associating itself with the capital’s very oldest foundations, London Wall Partners is certainly positioning itself for longevity.
“We think in similar terms to the professional practices that have been birthed in the UK, like the big four accountancy firms or the ‘magic circle’ law firms; they are professional practices that have grown globally,” says CEO Nick Fletcher.
“I don’t necessarily think we will see global expansion in the next ten years, but certainly from a long-term perspective we would expect in 100 years’ time for our successors to look back and see this as the seed of a very well-established business.”
Good pedigree
Fletcher, formerly of Saunderson House, co-founded the business with ex-Kleinwort Benson CIO Jeremy Beckwith late last year. Another partner, Mark Johnston, joined from KPMG as chief financial officer and chief operating officer, while the firm has two senior advisers – Iain Brown and Mark Bogard. The investment committee, which meets on a monthly basis, includes Ingrid Kirby, formally of Hermes Fund Managers, while Albemarle Street Partners, a new venture formed by Dan Kemp, Clive Hale and Sam Liddle, helps with fund selection.
While still small in scale, London Wall Partners offers a full financial planning service and is set up for independent rather than restricted status with access to all available investment products. Fletcher was behind the implementation of an hourly rate fee basis at Saunderson more than 15 years ago and, like the law and accountancy firms that he admires, believes his new business is perfectly positioned for the post-RDR landscape. Despite the heading of this profile, he’s not so keen to fall under the ‘wealth manager’ label.
“IFAs have attracted a certain negative tone in the marketplace, but I have stuck with the title thinking that one day people will respect IFAs, as they should, particularly those who are offering truly independent financial advice,” he asserts.
“We don’t want to hide behind the term ‘wealth manager’ just because there is a perception that IFAs sell products for commission and might do so inappropriately. Just because the RDR has come in, it doesn’t mean certain people are not going to sell inappropriate products if they are that way inclined; what good financial advice actually comes down to is listening to your client and understanding your trade.”
Calculating risk
The firm’s investment proposition is built around five models, though these can easily be flexed to suit individual client needs.
Each model is differentiated by relative volatility, as CIO Beckwith explains: “Getting the idea of risk across to clients is something that has always been challenging – if you give them a number then it doesn’t mean anything to many people, but the FSA is very keen that you help clients to understand what risk actually means.
“We’ve taken the approach that people have an intuitive grasp of equity volatility and, therefore, if you target your models to a percentage of the stock market’s volatility you can differentiate where on the risk spectrum you want to be.”
The models are: highly conservative at one-sixth of the FTSE 100 market volatility; conservative at one-third; balanced at half; adventurous at two-thirds; while the highly adventurous model is 100% of market volatility.
Twin pillars
Beckwith outlines two key pillars of asset allocation: secular themes and cyclical positioning. The long-term themes he describes are common ones – that the Asian consumer will drive global growth and that the Western world has to deleverage, both privately and publically.
Given this conviction, it is no surprise that he advocates an overweighting to emerging markets, in both bonds and equities. In particular, he believes now is the right time to be overweight in Asian equities in part because of a “bottoming out” of the Chinese economy.
“Chinese policy makers have been quite aggressively restraining fiscal policy and pushing up interest rates and reserve requirements from mid-2010 until the first half of last year,” he explains.
“The economic policy has been to tighten and therefore it’s not really a big surprise that the Chinese economy has been slowing down. That policy reversed last year and they are now beginning to gently ease policy again, and you are seeing now the economy beginning to bottom out.”
Equity fund picks include funds from Aberdeen and First State for their consistent alpha and low volatility, while ETFs are the preferred route within emerging market debt.
Indeed, London Wall Partners are big users of ETFs, especially in markets where it is hard for fund managers to add value.
“The numbers seem to suggest that large-cap UK and US names are very difficult to outperform on a consistent basis, so in those areas we think ETFs are the best way forward,” says Beckwith.
“In Europe and Japan it is completely different, and there are funds there that have delivered consistent good performance. They are less efficient markets in terms of all the analysis that is done by the brokerage community.”
ETFs are also used to get exposure to corporate bond markets, though Beckwith is wary of this asset class becoming home to the “next big risks” for investors.
He adds: “There has been a huge swathe of money gone into bond funds, which has pushed those prices up and yields down, so we are now at a point where investment grade corporate bonds yield you about 3% and the risk/return is all wrong. You are going to struggle for a return and there’s a lot of potential risks if interest rates rise or inflation picks up – you could lose a lot of real money if not nominal money.”
The bigger picture
In managing volatility, Beckwith says he is prepared to consider absolute return funds, though he divides these offerings into conservative – aiming for low volatility and cash-plus returns – and more adventurous vehicles, which take higher-risk bets and employ more leverage.
He says he is inclined to avoid the latter, particularly given the track record of more aggressive hedge funds over the past few years.
owever, he does see a number of quality market neutral strategies available to retail investors where he sees good stockpicking managers delivering consistent returns. He cites Absolute Insight UK Equity Market Neutral Fund as one which he owns.
“Those funds are trying to deliver a steady, consistent, positive performance, which is what most people want,” he says.
“If we could deliver 7% consistently every year, all of our clients would be fantastically happy, but markets don’t permit us to do that.
There is a place for these absolute return funds as they have the mindset to deliver what clients actually want.”
Fletcher and Beckwith certainly believe they are ideally positioned to give clients exactly what they want post-RDR, particularly given that London Wall Partners offers financial planning and investment advice together.
“One needs to, for example, understand inheritance tax planning and cash flow planning – whether to draw from pensions or not – and whether to use capital gains tax allowances or ISAs,” lists Fletcher.
“There are a few micro considerations in that respect, but it’s the big picture that counts and it is only when you really understand the big picture that you can give sensible advice, and investment is a major part of that.”
