Kenny is a firm believer that if one gets the incentives right, everything else follows. “From ownership structure flows the ability to be bespoke, from which flows investment philosophy, and finally outcomes for clients,” he says.
But, even with the best incentives, ensuring that 175 investment managers dotted all over the country are all singing from the same hymn sheet is a tricky business. Of those, 76 are involved in what Kenny describes as a collective and collegiate investment process.
Each of these investment managers looks after clients and must be a general practitioner of sorts in order to talk to clients. Each also has a specialism that he or she is asked to feed back into the whole process from a bottom-up standpoint. This is then combined with a top-down view from the firm’s strategy and economics teams. There is not, however, a chief investment officer.
“CIOs tend to grab the levers and head everyone in one direction,” says Kenny. “That could be wonderful or it could be driving off a cliff. Rather, we use the macroeconomic framework, which is supported by everyone looking at the various asset classes to come up with a view that we feed up into an asset allocation framework.”
There is also no compulsion for the investment managers to follow the asset allocation framework, but there is both a stick and a carrot to ensure that the partners can sleep at night without worrying that everyone is running off in a different direction. The carrot is that there is a private client practitioner involved at each level of the framework creation process, which helps to get a buy-in from the collective.
“It is a recipe for everyone to look at and follow, and our outcomes are better, more consistent returns, than we could get individually,” Kenny says. “As a result, you tend to get everyone moving toward the central views because they have a voice and they can see the validity of the process. ”The stick is a peer review system; each investment manager must sit down each quarter with another, randomly assigned manager and review all portfolios that are one standard deviation above or below benchmark and a random sample of the rest. Then the reviews are themselves reviewed.
That is not to say that a portfolio that behaves differently is wrong, but rather that there is a consistency of approach, Kenny says. And, it would seem clients are finding this consistency attractive: the firm has around £16bn in assets under management, £12.5bn of which is run in bespoke discretionary portfolios. The remainder is run in the firm’s model portfolios that are informed by the same investment approach.
In terms of that approach, Kenny says the firm believes markets have four broad drivers: liquidity, valuation, earnings and sentiment. Liquidity is pretty good, the European Central Bank and the Bank of Japan are printing money and a lot of developed market corporates have a lot of cash on their balance sheets, Kenny says. On the valuation front, the firm was concerned coming in to the year but, he says, the summer shake out has given it encouragement.
“There is a bit of movement on valuations. Earnings in the US have probably peaked, the UK is somewhere behind, but you are somewhere near trough earnings in Asia and Japan. Overall, I think there is a neutral picture globally for earnings,” he says. On sentiment, Kenny says it is often the firm’s job to take the opposite position to clients, being positive when they are not and cautious when they are irrationally ebullient.
“We don’t think we are nearing the end of the world. Yes, there is a slowdown in China but the transmission mechanisms between China and the rest of the world are fairly muted. “We are encouraged by US and UK domestic consumption and the oil price fall is going to be a net benefit for those markets,” he says. As a result the firm currently prefers domestically focused companies and sectors in the US and UK. Indeed, in its latest investment review, Smith & Williamson points out: “Market sentiment appears skewed towards negative news flow, but we believe markets could well be jumping at shadows. “Although volatility is likely to persist, the latest market concerns appear relatively confined to commodity exposed markets and companies, and we continue to believe these are areas to avoid.
