Tom Becket: How is having 75% in equities a balanced portfolio?

Psigma made a conscious decision 15 years ago to have lower weightings in stocks

While investors everywhere are reaching for the panic button, Psigma Investment Management’s CIO Tom Becket says he is the most “genuinely excited” he has been about markets in years.

He believes 2019 could provide a “once-in-a-generation opportunity” to buy deeply unloved assets like UK equities. “If I’ve had any investment success in the past 15 years, it has been about taking the opposite side of the argument of most people and what consensus tells you,” he says.

At the beginning of last year, he also found himself on the opposite side of peers who were chasing returns from the equity bull market, which seemed like it wouldn’t quit. “What’s been consistent in the past three years is how wrong people have been. At the start of 2016 you had people all around the world telling you how the bull market was coming to an end, the global economy was going to crash, China was going to crash.

“You had the head of credit at RBS telling all his clients to sell everything that wasn’t nailed down, that this was your last chance to get out. Actually, it was the best time to buy investment opportunities going back all the way to 2009.”

Valuable lessons

Becket says his contrarian spirit comes in part from doing a master’s degree in classics at Trinity College, Dublin. Charting the rise and fall of the ancient Roman empire and other powerful nations taught him that “not everything lasts in its current state forever”, a lesson that has proved valuable during his career in the investment industry.

And yet Becket is one of a small handful of investors who has remained at one firm, Psigma Investment Management, for his entire 15-year career. He has been the firm’s CIO for more than a decade. After five years working on individual portfolios in the private client team and then becoming a part of the investment team, Becket says Psigma CEO John Howard Smith took “a big leap of faith” and promoted him to the head investment position.

Despite being offered positions at bigger companies after he joined Psigma, Becket says he was excited by the prospect of working for what was then a tiny firm with very few clients. “I saw it as being something akin to frontier country and felt that it was a business where I thought I could make a difference in the medium to long term,” he says.

Psigma has also resisted offers to be absorbed by larger firms. In 2019, the wealth management group now manages close to £3bn of assets for some 5,300 clients. “We continue to want to be able to grow, and meet our clients’ aims and aspirations in the way that we have done,” he explains. “Personally, I like working for a business of our size rather than one that is structurally much bigger, as it allows us that opportunity to be nimble and opportunistic.”

Appetite and sentiment

Psigma offers both bespoke and managed portfolios, as well as specialist portfolio services that focus on fixed interest, UK equities and Aim-listed stocks. And Becket reveals that the firm is also in the process launching unitised funds modeled after its MPS portfolios later this year. The MPS service comprising six strategies including a cautious, cautious income, balanced, balanced income, growth and aggressive growth, is by far the fastest-growing segment of the business, he says.

“I think that’s a reflection of the way the investment industry has changed and the way advisers are increasingly using DFMs. IFAs want cost-efficient, predictable solutions, and MPS services do provide that for advisers and their end clients.”

Psigma was an early adopter of the MPS model, launching its core balanced strategy two years after opening its doors in 2002. Becket was part of the team that helped create the product and still runs the portfolios. Modelled after the big US-style endowment policies, the investment team wanted to create a product for retail clients that emphasised asset allocation and fund selection with an inflation plus benchmark.

Becket says: “We looked at what was happening in markets, and what client appetite and sentiment would be like in the years after the great financial crisis, and we believed our sort of multi-asset, multi-manager approach was really what people, both clients and advisers, would want on a structural basis going forward.”

Although the marketplace is inundated with MPS products from other providers, according to Becket, many that purport to be ‘cautious’ or ‘balanced’ are really “quasi equity” strategies. “Our analysis suggests that a standard balanced portfolio in the wealth management industry still has around 75% in equities. Personally, I cannot see how that is in any way balanced.”

By contrast, Psigma MPS Balanced has 40-50% of the portfolio invested in equities, though Becket says this is currently toward the lower end of the spectrum. While the Asset Risk Consultants (ARC) Balanced Private Client Indices finished down 2.6% last year, the Psigma Balanced MPS was less badly bruised but still in negative territory at -1.54%.

“We made a conscious decision to have lower weightings in equities and follow a more institutional approach 15 years ago, and that doesn’t seem to be something that other people have adopted.”

The portfolios can invest across 11 core asset classes and more than 30 sub-asset classes, which includes more niche areas like asset- backed and mortgage-backed securities.

Partnered approach

The Psigma investment team also has a unique approach to its fixed income exposure, choosing to partner with credit boutiques to come up with credit mandates for its portfolios. “We didn’t want to pick individual credits ourselves because, frankly, that’s not a skill we have.”

Becket says the decision to work with TwentyFour Asset Management in 2012 was one of the “best investment decisions we have made”. More recently, Psigma has partnered with Semper, which specialises in mortgage-backed securities and small-cap, high-yield credit. He says this differs from many DFMs who outsource money to mega-strategic bond funds, leaving investors susceptible to “unpredictable” factors like a manager’s risk appetite and liquidity issues stemming from client flows coming into and out of the fund.

“This gives us predictability over where we’re investing, it gives us predictability over liquidity, and it allows us to be really flexible and nimble with investment opportunities that we can identify. “More recently, we have been using that flexibility to take advantage of the panic that some people are now suffering in fixed interest investments, where they’re selling a number of the bonds that they might not want to sell to meet redemptions, and that’s allowing us to pick up very cheap bank bonds, for example.”

Psigma also boasts a concentrated buy list of just 32 funds, which, according to Becket, is probably one of the smallest buy lists in the industry. The MPS portfolios also have “unashamedly high turnover” with the asset allocation team on average adding and subtracting eight funds a year. Funds will typically stay in the portfolio around four years.

“My personal view is that is the way you should operate the investment process,” he explains. “Your thinking needs to be very open-minded and malleable, and in particular you need to be able to admit your own mistakes, and I do, as quickly as possible.”

The Psigma investment team also has the flexibility to be able to take a chance on fledgling funds. Two new additions to the portfolio, the Lazard Commodities Fund and Semper Total Return, which invests in US mortgage- backed securities, were seeded by Psigma in 2018.

“I find it nonsensical when I read that people have to wait for a three-year track record or for assets in a strategy to be a certain size. That makes absolutely no sense to me whatsoever in a world where liquidity of markets is now much tighter than it has been for a very long time.”

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