In a Q&A interview, Richard Buxton (pictured) star equities manager and chief executive of Old Mutual Global Investors spin-out Merian Global Investors discusses why having no CIO is good for business, how the firm is preparing for Brexit and how it is resisting competition from low-cost passive products.
Merian has no CIO. Will that ever change?
I worked at firms with CIOs years ago. The CIO would say, ‘Now is the time to be more defensive’, or ‘more cyclical’ and that had to be reflected in the company’s products. That’s potentially very dangerous. There’s a concentration risk if you get all the products performing that same dance. The onus is on the CIO to get the call right.
We have a range of different desks – systematic, fundamental, small/mid cap, etc and we have a strong risk control environment that ensures every desk continues to manage money in the way it says it manages money, not drifting in style or approach. Not having a house view is far better for business. Creating an environment where investors can flourish, with a diversity of views and disagreement, makes for a much more robust business. I can’t ever see us employing an economist or CIO!
Is Merian feeling fee pressure?
We’re not immune to it. We set out to be a high active share, alpha generating boutique and that provides a degree of resistance to fee pressure. Even if more money continues going into ETFs and passives, investors will still put capital into high alpha, high active share [strategies]. The industry dynamic is what it is. But we’re not in a position like the firms doing both active and passive.
How have investors responded to your products that use performance fees?
We’ve found it’s been very well received by clients. Products focused on North American are in a very competitive market. With our [North American equity fund], we give our clients a share class almost comparable with passive in terms of base fee, but with a performance fee. Of course, you have to manage the book and business so you’re not overly dependent [on performance fees], but I have no concerns about it. The industry will move toward performance fees. I think it’s inevitable. Get managers to back their own conviction. It makes sense.
At what point does Merian become too big to be called a boutique?
We have just under 250 people in the business and the executive committee has seven. We’ve set a loose KPI to employ not more than 300. We think our culture is a function of our size and we don’t want it to change. In London, we all sit on one floor. There are no glass offices. The atmosphere is collegiate and collaborative. There is no primacy between the investment team and distribution. I’m sure we’ll be a refuge for managers from very large firms who increasingly find [a big firm] dispiriting. Were driven to run money and plug into a great distribution platform. We’re not very big in terms of the number of people, but we’re very powerful. That will appeal to a lot of fund managers.
Will industry consolidation continue?
Yes. It is a result of fee pressure and the use of technology. You can buy beta now for nothing. So active management has got to build a wide ledge around whatever alpha-generating capacity it has. It doesn’t worry me if more money is going into passive because the opportunity to generate alpha increases. There are scale benefits in ETFs and fixed income. But no one is convinced there are scale benefits in active equity management. I could argue there is dyssynergy in economies of scale.
Will Brexit have any meaningful impact on Merian?
Our offshore range of products is based in Dublin. Our non-UK client base tends to buy our Dublin range of funds. We are in the process of setting up an Irish management company to continue to service our non-UK client base from Dublin. So we can’t see that there is any material negative impact on our business from Brexit. I actually think we will achieve a [Brexit] deal, with a reasonable transition period to work out details.
There is a danger to UK equities. I recently talked to a stockbroker chum I’ve known for 20 years. He said a global fund in New York just sold their last UK equity. Not a single listed UK company they feel is worth investing in. But at some point global investors will come back to a very cheap UK market.
The other thing people don’t recognize about the UK is that we’ve got a huge entrepreneurial dynamic. Net new business formation is running at double-digit rates, disruptive technology is being built in London. We’re in the process of launching an investment trust to invest in these companies and tap this UK entrepreneurial dynamic, which is completely at odds with headlines that say the UK is condemned to 1.5% GDP growth. I don’t think it’s quite that bad.
What is your biggest concern?
We’ve just borrowed a lot of money to buy an asset management business nine years into a bull market. What could possibly go wrong!
Our AUM is skewed to 2-3 desks. We have nascent desks that will be terrific in the future, but over the next five years we need to get to a position where we have 8-20 desks nicely profitable and contributing. Even if one is out of favour, you’ve still got others driving the engine.
From an investors view, I’ve long maintained that post-financial crisis, there is not a normal economic cycle. We’ve had 7 -8 years since the crisis and it could be 15-20 years before we get back to normal, if you define `normal’ as bonds yielding nominal GDP plus inflation.
Everyone is obsessively twitching about an inevitable US recession, coming in 2020. Half a dozen economists will tell you that today. Actually the US is on fire right now. Interest rates have only just gone positive in real terms, so I don’t think there will be a slowing US economy. This has been a very nice seasonal [correction] – it is October. It’s reintroduced some fear. If we have a down year in equities, it will be part of the process of normalizing.
Equities do not go up nine years in a row. That is entirely central bank manipulation. Unwinding that extraordinary stimulus was never going to be easy. It’s inevitable there will be much more volatility in the next 3-5 years, but I think we’ve got several more years of the post-crisis economic expansion. I don’t think it’s the end of the cycle. That’s too simplistic.
