Guinness powers up for sales push

Fund Strategy - 25 Jun 2012 | By Cherry Reynard

Tim Guinness is both a new and old name in fund management. He will be familiar to retail investors from his days at Guinness Flight and then as manager of the Investec Global Energy fund, but he is once again at the helm of a boutique business, aiming to build its presence with wealth managers.

Guinness Asset Management was established in 2003, but only started building its retail investment business after it relinquished the management of the Investec Global Energy fund in 2008. It has subsequently launched seven funds covering Guinness’s traditional stomping ground of energy, plus Asian and Global Equity Income.

Guinness has form in building a business of this kind. Guinness Flight was one of the top boutiques of its day before it was bought in 1998 by the giant South African Investec Bank, which was keen to establish an asset management presence in Britain. Guinness ended up running the Global Energy fund, more by accident than design. Investec had planned to close the fund.

Guinness says: “I didn’t think it was the right time to close the fund and thought that we would be doing the investors a great disservice by liquidating their investments when the oil price was so low. I believed that the fund could have a much brighter future. As there was no-one to run it, I said that I would run it.” (Focus continues below)

Energy has since become a more fashionable investment, but at the time it was deeply out of favour as everyone tried to scoop up dotcoms. Guinness says that after a few years, other fund managers cottoned on to the potential of energy investment, but by then he had a significant head-start. The energy fund established itself as one of the dominant energy commodities funds in the market alongside behemoths such as JP Morgan and BlackRock.

But Guinness already had a lengthy history in investment before his days on the Investec Global Energy fund. He honed his skills with Guinness Mahan merchant bank, where he was ultimately head of asset management. Guinness Flight Global Asset Management spun out of Guinness Mahon after a management buyout and Guinness became chairman of the new group.

Many of the personnel from those early days remain in place. For example, Edmund Harriss, who manages Guinness’s Asian Focus and China & Hong Kong funds, has been part of the team since 1993 when he joined Guinness Flight. Jim Atkinson still runs the American subsidiary, which was established in Pasadena in 1993.

Within Guinness Asset Management, energy is the best-known of the funds. The Alternative Energy and Global Energy funds were the first to launch, in 2008. Global Energy is the largest of the group’s range, at £185.5m, with many of the assets held in the move from Investec. A further five funds were added to the range in December 2010 - China & Hong Kong, Asia Focus, Global Equity Income, Global Money Managers and Global Thematic Equity - to broaden the offering. The group targeted areas in which it already had intellectual capacity, rather than necessarily to fulfil a certain model fund range. It is unashamedly specialist, with no desire to be “all things to all men”.

The process used on the energy funds has provided the template for the wider process at the group. Guinness has built the process to reflect both top-down and bottom-up inputs. He says: “Investment is difficult enough. We have to use every tool available to us. It is sensible to pay attention to the big picture as well as the stock selection. To be completely bottom-up is to miss out on a trick. Companies don’t operate in a vacuum.”

This approach also played to Guinness’s strengths as a manager. “Energy lends itself to the top-down - you need to look at where the oil or gas or uranium prices are going. This is determined by supply and demand and sentiment. There is a lot of politics invested in commodities supply.”

On the stock selection side, the group has a screening tool, based on the Credit Suisse Holt database, that is used across all the funds. This strives to treat the returns of a company as if it were a bond, looking at cashflow return on investment. It looks at adjusted return on assets, comparable between companies and time periods globally.

The system aims to isolate companies with certain elements: a strong inflation-adjusted return on assets, for example, and a return on capital above the discount rate with the aim of establishing the economic value a company is generating. The process also takes account of analysts’ views - particularly important in identifying turning points in the market - and looks at technical momentum to see how a company is trading. From these elements a company is given an overall score out of 40. Guinness says this is the prism through which the managers view the world. It is not “black box” but points where the managers should spend time.

To date, the group’s clients have been drawn largely from private banks and family offices, but it is trying to create a broader distribution.

In this, Deborah Kay, the head of marketing and business development at the group, reckons that the retail distribution review (RDR) may play into Guinness’s hands. More power will be vested in specialist fund selectors, who are less likely to be swayed by brand. Kay says the group has the ambitious target of trying to shift the way many investors think about asset allocation and how they use specialist funds. “We would like ­people to re-think their growth strategy,” she says. “Invest­ors are increasingly using passive funds, but are they doing themselves a disservice?” She sees a danger that compliance and management of business risk is governing investment selection to investors’ disadvantage.

In particular, model portfolios are too cautious, in her view, and too focused on big brands that can tick all their due diligence boxes. She says rather than being simply “satellite” funds, specialist funds can mitigate specific risks, super-charge a growth strategy or fulfill a variety of other functions. Homogenised port- folios based on past performance and historic correlation may be insufficiently nuanced to cope with current market complexities.

The message is finding some resonance. John Chatfeild-Roberts and his Jupiter fund of funds team hold a 2% weighting in the Global Energy fund in their Jupiter Merlin Worldwide portfolio. Tim Gardner and Alan Thein at Legal & General have also used the fund in their portfolios. In general, multi-managers are increasingly sold on an alternative approach to asset allocation.

For example, the Rathbones multi-asset team uses commodities funds both strategically and tactically, but deploys different types in different ways.

Elizabeth Savage, a research director at the group, says: “If we believed that there was like­ly to be a significant recovery, we would use more market-directional funds. However, for a longer-term allocation we are more likely to use market neutral funds.”

The Rathbones team is at present focusing only on market neutral funds in the commodities arena, but has looked at the Guinness energy funds in the past. Savage says the way Rathbones’ process works means the team prefer funds that do not aggregate their commodities exposure. They would rather see agriculture or gold, for example, separated from energy because of their different correlation characteristics.

Performance comparisons for the type of funds run by Guinness are difficult. For example, the Global Energy fund sits in the IMA Global sector and therefore tends to look relatively good in energy bull markets and relatively weak in bear markets. Recent performance looks poor, but this is largely attributable to the current “risk off” markets, which have sold off most commodity-related companies. The fund has historically performed better in growth markets, even compared to its energy fund peers. It will outperform a rising market and underperform a falling market.

Darius McDermott, the managing director of Chelsea Financial Services, says: “Tim Guinness is clearly an extremely experienced energy manager and his fund has performed better than the Investec one since his departure. The group’s Asian funds only have a relatively short track record but are below the big Asian funds from First State and Schroders over the past 15 months.

“The one area that stands out as having done well is the Global Equity Income fund. This is ahead of the M&G Global Dividend fund over the same period.”

”We would like ­people to re-think their growth strategy. Investors are increasingly using passive funds, but are they doing themselves a disservice?”

The Global Equity Income fund is the one non-specialist fund that should have an audience beyond Guinness’s traditional markets. It has built some momentum and the fund is the group’s second largest with £15m under management. It is run by Ian Mortimer and Matthew Page and takes a ­concentrated stockpicking approach, targeting companies with consistently high returns on capital.

However, as yet the group has a relatively limited sales force and the funds have still to find traction with the wider IFA market.

Patrick Connolly, the communications director at AWD Chase de Vere, says the Guinness funds “are typically more specialist than we would use in client portfolios”.

Connolly is not keen on designated commodity funds in general, but admits that the present climate, when this type of stock has been sold down, may offer some opportunities. “Most people will already have adequate exposure to commodities through broad-based equity funds and so don’t need an additional weighting,” he says. “However, for those willing to take the risk, commodity funds could now represent very good value.”

He is more likely to use Asian-specialist funds, however, reckoning that Asia is becoming an increasingly important part of the world’s economy and is home to many dynamic companies with good long-term growth potential. But he adds: “While Asian nations aren’t burdened with the same huge levels of debt as western economies, they still have their own problems, including high levels of inflation, potential political risks and the knock-on effect of a slowdown in other parts of the world. We think Asian stocks should outperform over the medium to long term and have an allocation in most client portfolios.”

For the future, Kay says Guinness’s focus is on building momentum in the established funds and taking its message out to a wider audience. The group is expanding its marketing and distribution presence and is on several of the open architecture platforms. Its priority is to build its presence in model portfolios and generate traction with wealth managers.

For the time being, the funds are relatively small, but Kay predicts that, as RDR approaches, the group will increasingly be pushing on an open door.

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^{Guinness Asset Management was founded by Tim Guinness in 2003. It has about £200m in assets under management across its seven retail funds. Its fund range is focused on Asia and energy, but the group has also launched a Global Equity Income fund.}

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