“Many of our clients are entrepreneurs who have built a business and realised a lot of cash from either a full or partial exit. It can easily feel like they have lost control of their wealth because they have gone from being an important part of the business they created to someone with a lot of cash but not necessarily as much financial experience.
Smyth adds: “This tool offers a level of immediate control.”
Wealth generator
A clear view of the client also informs Signia Wealth’s investment philosophy. As most of the firm’s clients are the aforementioned entrepreneurs who have worked very hard to generate their wealth, the first question De Merlis asks is: “What would make you lose sleep at night?”
“If you want to invest, you have to take risk, but it is important to define what risk means for each client. Once their definition of risk is established, my job is to define what that looks like in investment terms,” he says.
Each of the firm’s bespoke portfolios is built on an understanding of how much a client can afford to lose before they start sleeping badly and, to ensure it is accurate, the firm has tightened up its risk controls during the past 18 months.
This has been especially important during recent months as the firm, like most others, was surprised by the speed and the magnitude of the drawdown seen in January and February.
However, De Merlis is quick to add: “If you look at our portfolios, compared with some of the big banks, we are still down but we have outperformed by three or four basis points.”
In terms of the investment process, he says the firm has moved away from using single stocks and instead opts for active third-party funds as even with a big team, “I cannot pretend to be able to cover every single stock from an asset and liability point of view.” The only exception to use of third-party funds is in the government bond space, where the team invests direct.
If the firm cannot find an active fund that meets its criteria, it uses trackers. And, at present, Signia Wealth has a good chunk in trackers, particularly in the US.
De Merlis adds: “Rationally, one would think that with more volatility comes more opportunity for active managers, but in the long-only environment this has been difficult. Look at the US last year. If you had invested in a tracker you would have been up by about 1.5% – and down about 1.5% if dividends were excluded – and if you had not invested in the five main stocks you would be down around 8%.
“Unless you were running a concentrated fund made up of Amazon and Google, you were going to underperform the S&P 500. That is what happened last year, and we keep seeing that.”
The firm has, however, also removed a few European and Asian and emerging markets funds for the same reason. That is not to say it has no active funds. De Merlis adds that there are still some very good active funds, such as Majedie and Odey Europe.
The other big change to the way in which the funds are run under De Merlis is that there is now also a greater use of derivative strategies. This is for two reasons: to protect on the downside, and to get asymmetrical, non-correlated returns.
Using listed options allows the firm to participate in 100% of the upside and protect as much as 10% or 20% on the downside. As a result, while the firm’s physical exposure to equities is about 30%, the actual portfolio sensitivity to equities is around 45%. This also means the firm is holding significantly more cash as collateral for those positions, 18%, than it would otherwise.
“Having that 18% in cash also gives us the flexibility to go into the market and buy assets we like without disrupting the other investments,” says De Merlis.
The third differentiating factor to Signia’s investment proposition is the work Rosenthal does on hedge funds.
“Our world of long-only investments benefits a lot from what Michael does,” De Merlis says, “In January and February, knowing what people were doing on the hedge fund side helped us a lot.”
Clients have the option to select a hedge-fund-only portfolio if they wish, or a combination of both, or even two distinct portfolios should they wish to have exposure to hedge funds. “This is a big differentiator,” according to Smyth. “It has allowed us to offer clients something different.”
De Merlis also makes use of Rosenthal’s expertise within the multi-asset funds but with a difference, as all the hedge funds used are Ucits instruments, whereas Rosenthal’s funds do not have that limitation.
