Tom Sparke: I prefer smaller, nimbler alternatives to Smith and Train

Big names get cut when they can no longer take meaningful positions in companies

Speaking with Gibbs Denley Investment Management’s Tom Sparke over the phone sadly does not afford the luxury of escaping the daily grind of City life to visit the firm’s offices in Swavesey, a small picturesque village north of Cambridge.

But this is something Sparke was able to do 11 years ago when he left behind his role as a client services manager for Transact – and one “hell of a commute” from Cambridge to London – when a job at GDIM opened up soon after he passed his IMC exam.

“It’s nice to have a slower pace of life out here, visiting the City as and when but leaving it behind when I need to,” he says.

Sparke has been working as an investment manager at GDIM for the past decade, and became an associate director five years ago. The investment firm, which was spun out from financial planning business Gibbs Denley Financial Services, provides discretionary services to financial advisers, a burgeoning area of the market since the passing of regulatory regimes RDR and Mifid II that saddled IFAs with additional reporting and compliance duties.

The GDIM investment team, which includes Sparke, as well as investment analyst Benjamin Benson and chair and director Mark Denley, handles the entire investment function for GDFS. When I speak to Sparke mid-April the firm has roughly £474m in assets under management.

Advisers make up the very fabric of the business. The directors in the firm all have backgrounds in financial planning, including chair Denley, who continues to be an active adviser. As such, Sparke says the investment team was acutely aware of the cost consideration when designing the MPS proposition. They charge 0.15% on the assets they manage, which is considerably lower than other players.

Personal best

In an industry that has been shaken up by the rise of the low-cost robo-adviser, GDIM tries to stand out by offering what Sparke describes as a “much more friendly and personal service”.

“We like to keep in touch with people,” he says. “And though you will get that from a managed fund or a larger DFM service, you’re not going to have access to decision makers at all times, and regular contact with those individuals specifically.”

But maintaining that kind of personalised service means sacrificing scale.

“We’re not going to be a multibillion-pound business. We’re not scaling it to the moon because we want to keep that USP of having a personal touch, being able to pick up the phone. We have a nice bank of clients who are receiving a really good service that hopefully they’re happy with.”

Advisers have their choice of 15 model portfolios from five ranges. GDIM’s five whole-of-market portfolios, a blend of active and passive funds, and five passive portfolios each have an identical macro allocation across the risk buckets.

GDIM also has income and ethical portfolios in its most popular risk categories, conservative and balanced. It also has a standalone target return portfolio. Sparke says this is designed to be “a short-term home for investors” that aims to beat inflation and “is not a long-term planning solution”.

Small benefits

Sparke prefers to look beyond the giant funds of star managers like Nick Train and Terry Smith, arguing that there are smaller and nimbler alternatives that will deliver comparable returns on a lower risk base.

He has held his fair share of big names during the decade-long life of GDIM’s model portfolios, including Neil Woodford and M&G Investment’s Tom Dobell and Richard Woolnough.

But as their funds swelled to billions of pounds in assets under management, he sold out of them, concerned they could no longer take meaningful positions in many stocks or bonds due to capacity restrictions or liquidity issues.

One of Sparke’s recent favourites, the Investec Global Franchise Fund, has generated returns of 21% in the past 12 months, similar to those from bigger rivals in the global equity sector, such as Fundsmith Equity (23%) or Lindsell Train Global Equity (26%) but with significantly less volatility.

“At modestly over £100m in size, the fund can take meaningful positions in smaller companies too if desired, and the share class we use also makes it cheaper than those larger peers,” he adds.

Since the middle of last year, Sparke has been fortifying the portfolio with more defensive assets. Sovereign bond funds have come back into the portfolio in “a big way”, he says.

“We’ve got gilts, treasuries and European bonds within the portfolio to make sure we have really high-quality stuff . The volatility we saw last year will come back again at some point and we want to be ready for when it does.”

Looking back on the frequent and severe swings in market sentiment in 2018, Sparke says it is clear the withdrawal of QE had more of an effect than people thought it might.

While he believes a defensive mindset remains appropriate, Sparke plans on maintaining a decent exposure to equities, which look set to be the best-performing asset class this year.

Fixed income makes up 36% of the balanced portfolio, while equities comprise 57%, though he notes this is much lower than the average market weightings.

“We’re not in a disaster situation where there isn’t any growth. Economically the numbers look good pretty much everywhere, with the possible exception of Europe. But it doesn’t feel like a market in which to be a hero; it’s one where you’ve got to stick to quality fundamentals.”

Eye for a bargain

In Europe, which is the most underweight area of the portfolio in absolute terms, that has meant sticking to non-cyclical companies with strong balance sheets.

Although Sparke is still underweight the UK, he admits his exposure has been “creeping up” because of enticing opportunities to buy high-quality companies on cheap-looking valuations.

He has topped up his positions in Man GLG UK Income and JP Morgan UK Equity Plus, which he says has been one of his best holdings. He expects the latter fund to continue to perform well even in troubled markets, due to its short positions that make up one-third of the portfolio.

Of the developed equity markets, he is most confident about the US, which has been “ticking along well” despite a mixed earnings season. He believes the US should also be more resilient than other markets in the event of a downturn.

“Rates have gone up there more than they have anywhere else in the developed world, so they’ve got a lot more ammunition when the bad times do come.”

But he also has some riskier assets on the table, with 9% of the balanced portfolio held in Asia and EM equity. Sparke has been encouraged by better numbers in China coupled with the government’s proposed infrastructure stimulus and tax cuts, but India is the single country in the region he thinks has the best prospects.

If the country continues on its current trajectory, then Sparke “can see it being an overweight in our portfolios for potentially a decade or more”.

Rude awakening

He believes blindly heroic investors who are over-exposed to equities could be in for a rude awakening if tensions between the US and China sour once again, or the Fed decides to reverse its recent dovish stance.

“My main worry would be if we saw some kind of resurgence from the Fed, that their path of rising rates would be more data dependent again, which means the prospects of rate rises might come back on the agenda,” says Sparke.

“If that happened in the summer when trade volumes are very thin, it could have an outsized effect on the market and be a really damaging flashpoint for portfolios.”

He also remains a firm believer in the “unrivalled” diversification benefits from property investments and is a big fan of the £1.5bn Columbia Threadneedle UK Property Fund.

“You’re getting a decent yield from it and it’s not moving up or down if we see trouble in equity or bond markets. Those funds are often maligned but, for all their faults, I don’t think we’d get that diversification anywhere else.”

Biography

Tom Sparke is investment director at Gibbs Denley and also one of its five associate directors. He began his career in investment management in 2003 at Halifax Share Dealing (now Lloyds Share Dealing), working there for four years before joining Transact. He joined Gibbs Denley in 2008 as an investment analyst. He became investment manager in 2013 and associate director in 2014.

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