Once upon a time, the distribution of asset management was relatively clear-cut and binary: fund houses offered unitised, public products while private client managers offered personal services.
Those dividing lines have become increasingly blurred over the past decade as discretionary managers took advantage of Retail Distribution Review rule changes to become service providers to financial planners, and a growing ecosystem of digital platforms transformed the economics of distribution.
There remain big differences in how the average wealth strategy is marketed and sold, of course. But the increasing overlap of Ucits products and the ability to make an apples-to-apples comparison has revealed that some traditional discretionary managers are beating fund houses at their own game.
Among the unitised funds run by UK private-client managers are some that may be underdogs in terms of assets, but have beaten tens or hundreds of rivals – including the giants of the investment world – to top the performance charts.
The Asian tiger
At the top of its league table, one much smaller wealth manager strategy stands out above the others, having returned more than triple the three-year sector average: the Cerno Pacific fund. The Asia Pacific Including Japan equity fund was initially launched in 2009 as an offshore multi-manager strategy for private clients by Cerno Capital founders Nicholas Hornby and James Spence. In 2017 it was brought onshore as a Ucits fund before being handed over to Citywire AAA-rated duo Michael Flitton and Fay Ren in early 2018.
The duo said the decision to place the fund under a Ucits umbrella was taken to build on the firm’s ‘core competencies’ in Asia. Hornby and Spence both have extensive experience in the region, having worked for sell-side banks.
‘Fay [Ren] and I have come from very different backgrounds in terms of equity stock selection,’ Flitton said. ‘Fay has a lot more touch points in terms of what is going on on the ground than I do. But I come from an institutional bent – because I used to work at a hedge fund a long time ago.’
Since the pair took over, the fund has rocketed past mandates run by the likes of Allianz and JP Morgan, returning 80.7% over the three years to the end of December 2020. However, it has only £60m in assets, though this figure is 10 times what it was prior to the change in approach.
Performance took off over the past year. The fund returned 66.4% in 2020 on the back of a 40% weighting in technology. High-tech firms also feature prominently among its large weightings in telecommunications and industrials.
Rather than technology as such, the managers argue the name of the game
in Asia at the moment is innovation. This has led to a focus on firms that are primed to gain dominant market share, or those with strong intellectual property, such as their top holdings Samsung Electronics and Tencent.
However, Flitton (pictured) and Ren agreed their best investments have been in lesser-known firms, such as Chinese enterprise software firm Kingdee, in which 4.11% of the portfolio is invested. Flitton said there was almost nothing in the way of homegrown rivals to the firm.
Ren gave the example of China’s Bilibili, which accounts for 3.12% of the fund and is ‘a mix of YouTube, Netflix and Twitch all together’, she said.
‘We picked this one because it really targets Gen Z, and it sits in the middle between the Netflixes and the TikToks – so it doesn’t try to compete directly with them, but tries to forge a community targeting China’s Gen Z.’
Several of the fund’s best-performing investments share this aspect of building and improving upon business models already established in the West. Others – such as those making up the fund’s roughly 25% allocation to Japan – are in existing areas in semiconductors, where Asian companies hold a decisive advantage.
Ren said: ‘Unlike the internet platforms where you leapfrog quite easily, that is not something you leapfrog. So it is much more stable as a market.’
Elsewhere, a cryptically named top dog is found in the balanced multi-asset sector: The Beagle. Overseen by JM Finn investment director Paul Tyndall, the portfolio has beaten 443 competitors by returning 36.5% since the start of 2018. An open-ended investment company running £22m for a single family, the fund has half its money in direct equities and half in funds.
As with the Cerno Pacific fund, the strategy – which follows a similar approach to the one Tyndall pursues for his discretionary clients – has been a beneficiary of the coronavirus crisis. It has favoured three key themes since its 2009 launch: technology, medtech and renewables.
On technology, Tyndall said: ‘I probably saw the big opportunity quite early. More than a decade ago I was an early purchaser, relative to our peers shall we say, in all the Faang stocks.’
Tesla, falling in the renewables bucket, has been a particularly strong contributor, returning 20 times since the fund first bought it four years ago. Tyndall said: ‘I do not know what Tesla is worth – and no-one knows. [However,] they have a significant technology and production lead on every incumbent auto manufacturer in the world. That is a fact.’
The strategy retains a slight UK bias, perhaps most obvious in its AIM-listed medtech investments such as protein research tool supplier Abcam, whose share price rose more than 10% last year. Another medtech winner is Guardant Health, whose shares leaped 65.5% in 2020 on the back of its development of technology to detect cancer through blood tests.
Tyndall said his study of behavioural finance helped him in guiding the fund to the top of its sector. Recommending The Little Book of Behavioural Investing by James Montier and The Art of Thinking Clearly by Rolf Dobelli, he said ‘the most expensive error we all make is selling too early’.
Another overlooked multi-asset star is Waverton Investment Management’s Multi-Asset Income fund. Headed by + rated James Mee, the strategy has returned 18.2% over three years against 8.8% by the average fund in the conservative sector, placing it fourth out of 116. Around £70m, or 61% of the fund’s assets, belong to internal clients.
The fund, which follows the same process as Waverton’s multi-asset model portfolios and segregated mandates, has benefited from a 20% exposure to alternatives – mostly in real assets – since it launched in 2014.
Reflecting on its 2020 performance, Mee (pictured) said: ‘The fund also benefited from its global diversification and a number of hedging positions [primarily a put option on the credit default swap index iTraxx Crossover], which meaningfully protected capital during the teeth of the crisis.’
In addition, the portfolio benefited from Waverton’s asset allocation committee moving to a bullish position on equities in the wake of the market meltdown last March. The fund currently has 35.9% in mega-caps such as Microsoft and Coca-Cola, which made gains last year.
This positivity has waned, however, with the multi-asset team now taking a more cautious view than the market. Mee emphasised that vaccines are not a panacea and believes the consensus position that we will be out of lockdown by summer is optimistic.
‘We are more sanguine about the prospects for escape velocity – if we are right and opening up is delayed, then cyclical asset classes are unlikely to outperform.’