Golden touch puts specialist ahead
Smith & Williamson has weathered the financial storm by having a strong presense in areas which have benefited from adversity - gold and short-dated bonds, writes Cherry Reynard.
Smith & Williamson (S&W) is a specialist fund manager that has - accidentally or otherwise - found itself in some of the hottest specialisms in town. It had the top-performing gold fund in the market, just as investors were trying to diversify away from conventional equity and bond portfolios. It also had a short-dated bond portfolio when investors were looking for a cash alternative.
This has made Nick Hodgson’s, the sales and marketing director, job somewhat easier. Formerly of Framlington, he joined S&W in 2008 to grow the external funds business. To that point, the funds had largely been a vehicle for the group’s wealth-management clients. The fund range did have some retail presence, notably through Tana Focke, a well-respected and long-standing manager of the group’s US fund.
Three years on, the wealth-management side of the business still forms the bulk of the group’s £12 billion in assets, but external funds stand at £2.2 billion, which puts it on a par with Barings or Allianz Global Investors.
Among Hodgson’s first changes to the fund range was to remove the New Star Institutional team to which the European fund had been outsourced and appoint Mark Pignatelli. Pignatelli had been one of Schroders’ top managers before leaving to run a hedge fund. Having admitted that hedge fund management did not suit his style of investing, he wanted to return to running a retail fund and joined the group in November 2008. (Focus continues below)
Hodgson also aimed to shore up the US fund with the appointment of Rob Royle from Quilter. The group also appointed Charlie Deptford, latterly of New Star, but with a lengthier track record at Barings, where he ran the Equity Income and UK Growth Trusts and was head of UK Equities. He was drafted in to run the Equity Income fund, previously managed by Simon Warren, who moved to the private client side. The final appointment was Amanda Xu, a native Mandarin speaker, to work with Jane Andrew on the Asian fund.
Although the emphasis was on shoring up funds, the group also found there was increasing demand for a low-risk alternative that went some way to resolving the problem of weak yields on corporate, government bonds and cash. The S&W Short-Dated Corporate Bond fund, launched in April 2009, is one of only a handful on the market. As its name suggests, it invests only in short-dated corporate debt with the aim of keeping risk low, but providing investors with some additional yield.
In this, the group’s wealth-management roots were an advantage, says Hodgson. Its position as the funds’ business of a wealth-management group offered a ready focus group as to where retail investors were keen to invest. The short-dated corporate bond fund was in direct response to a perceived gap in the market.
The fund has been one of the group’s success stories and has £244m under management, of which 60% is external money. Performance has been steady. The fund yields just under 4% and has had more than 10% capital appreciation in the two and a half years since inception. The Dublin-domiciled fund is not a cash alternative. It is exposed to interest rate and credit risk but interest-rate risk is kept to a minimum by the shorter duration.
However, its success is also one of Hodgson’s headaches. By its nature, the fund has a limited shelf life and will not be as effective when interest rates start to rise, although the majority of economists still consider that some way off. He says: “If interest rates pick up, this fund will look less attractive and our next product development initiative is
to look at possible alternatives. We already have the fixed-interest trust, but are working on developing other fixed-income products.”
The other strong seller for the group has been the gold fund. This is managed in Canada by Bob Lyon and Ana Markova of AGF Investments. AGF is a significant shareholder in S&W holdings, with 28% of the equity. The fund is still a minnow relative to other gold funds in the sector at £72m, but has moved up from £10m in 2010.
Mark Dampier, the head of research at Hargreaves Lansdown, says the fund is a good complement to the big beast of BlackRock Gold & General: “We have the fund in our Wealth 150. It tends to invest in smaller capitalisation gold companies, which means it sits nicely alongside the more generalist BlackRock fund.”
Hodgson suggests that being managed out of Canada is a significant advantage for the fund. As much as 60% of the world’s mining stocks are listed in the country and it helps the managers get full access to company management. This suits Lyon and Markova’s approach, which holds about one-third in larger companies to provide stability and yield, while investing in newer companies for growth.
The ideal smaller company investment for the group would be making gold discoveries and then seeing those discoveries through to production. An analysis of management’s ability to see those discoveries through to production is a vital part of the overall process. The fund is the second-best performing across all British-domiciled funds, having risen more than 200% in the three years to November 29.
The rest of the funds have had a more varied track record. Pignatelli had an extremely successful first two years at the helm, keeping the fund top quartile in 2009 and 2010. 2011 however has proved tougher and the fund is in the bottom quartile. Principally, this is a reflection of Pignatelli’s suggestion that the eurozone crisis will ultimately resolve itself and the euro will remain in place. He says that when this finally happens there will be a relief rally and he has positioned the fund accordingly.
Hodgson says: “He has taken the view that the eurozone will survive because the possibility of that not happening is too grim to contemplate. As a result, he has held European banks as these are likely to be the key beneficiaries of this relief rally.” This has hurt performance but the fund would bounce were eurozone policymakers to find a solution.
Focke has had a strong 2011, but three-year performance is weaker. The S&W North American Trust has a natural defensive bias and is generally stronger during periods of weaker markets. The portfolio posted strong relative performance in 2007, 2008 and 2011, but did not keep pace with markets in 2009. Focke tends to invest in well-established, American stalwarts. Among her top 10 holdings are Pfizer, Coca-Cola, Google and Microsoft and she still favours higher-yielding stocks as a bulwark to market volatility. The fund is £82.5m in size.
The UK Equity Income Trust remains just under £12m in size. Deptford is a traditional equity income manager, focused on larger capitalisation stocks with BP, GlaxoSmithKline, Diageo and British American Tobacco among its top holdings. Its underperformance is perhaps more surprising given its underweight position in banks and mining stocks. Hodgson says it is “work in progress”.
Elsewhere, the group has a £72m absolute return vehicle, listed offshore, managed by Rupert Fleming, with Mark Swain and Deptford as co-managers. The fund is up 44.6% over five years, substantially outperforming both the hedge fund sector average and the FTSE All-Share. 2011 has been a weaker year, however, with the fund down about 9%.
Dampier says the group generally does well in specialist areas. He says that the short-dated corporate bond fund is an interesting concept, but did not invest at the time because the fund was relatively small.
John Husselbee, the chief executive of North Investment Partners, has bought into the short-dated corporate bond fund. He says: “We use this as a near-cash substitute. There are very few funds in this space and we like manager Chris Lynas. His background is as a private client manager and he has put a lot of his clients and S&W’s clients into the fund. It is focused on capital preservation.” He suggests that the wealth-management business provides some reassurance - if the group is willing to put its own clients into the fund, they are unlikely to take significant risks.
He has also looked at both the gold and US funds, but in the case of the gold fund, chose the larger capitalisation BlackRock fund. He says: “There are a limited number of gold shares out there, unless an investor starts playing in the juniors. We wanted something big and diversified for this space.”
For Hodgson, the group is sticking with its distribution tactic of focusing on wealth managers, multi-managers and discretionary fund managers. He says these are the natural audience for the type of specialist products offered by the group. He adds: “There is a lot of momentum behind the short-dated bond fund and the gold fund, but we still need to work hard to get recognition as a credible house.”
SMITH & WILLIAMSON provides investment services for private individuals, charities and institutions. The group has over £11.5 billion of funds under management at October 31. It has offices in London, Belfast, Birmingham, Bristol, Dublin, Glasgow and Guildford.
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