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Profile: £4bn Tatton AIMs for success

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Profile: £4bn Tatton AIMs for success

Enhanced disclosure and giant institutional investors keeping their eye on you is not for everyone, but Tatton Asset Management chief executive Paul Hogarth both welcomes and embraces it.

A 30-year veteran of the independent financial advice (IFA) market, the company is now set on catching up with the listed big guns of discretionary fund management (DFM).

To get a leg up on rivals, last year Hogarth decided to take Tatton, the DFM arm of IFA support services provider Paradigm, to market through an initial public offering (IPO).

‘The main purpose for listing was to raise the profile of the business,’ says Hogarth.

‘When you look at the listed IFA businesses and the listed fund managers, they have got a much greater and stronger profile than any of the independents.

‘You are not just another DFM. You are a DFM that obviously has a good asset base, but also you’re now listed and that puts us above the crowd really.’

Tatton Asset Management’s profile was not all the IPO raised, it also raised £87.2 million, including £10 million of new money, at its debut on the Alternative Investment Market (AIM) on 23 June, with 55.9 million listed ordinary shares at 156p each.

Aside from the exposure, the increased rigour of enhanced disclosure, as well having institutional investors as shareholders, rather than individuals, were also factors that appealed to Hogarth.

‘Effectively, as a listed company, when it comes to due diligence, a lot of your information is already in the market You can get that info to the IFAs so they can obviously do all of the due diligence that they need to do before they choose their discretionary fund manager. That was another big reason.’

Hogarth says that prior to the IPO, potential IFA clients would constantly ask the firm’s sales team who is actually behind the business and who the shareholders are.

He says it reads a lot better when your shareholders are well-known institutions, with BlackRock, Liontrust Asset Management and Miton among the companies that backed Tatton at the IPO.

‘Our shareholding base is very strong. I am very proud of the investors who have invested in the business right from day one. Our shareholder list is like a who’s who really,’ Hogarth says.

‘When our sales team or development consultants are talking to IFAs out there, they can see we are in this business with tremendously strong financial backing and therefore they can invest their clients’ portfolios with that feeling of extra security.’

Running a business in the public eye is a very different ballgame to managing a private company and Hogarth says that it took a year for Tatton’s staff of 24 to prepare for the float.

‘It’s not an easy process, it is an all-encompassing one and a lot of hard work. Nevertheless, it was a hugely rewarding process, as well, I think everybody who was involved in it from the start stepped up and literally performed to a greater extent than they did previously.’

In keeping with the newfound disclosure requirements, the firm announced its interim half-year results in December, reporting that assets under management (AUM) had risen from £3.85 billion to £4.44 billion over the six months to the end of September.

Revenue rose 31% to £7.3 million, although pre-tax profits fell from £1.86 million to £540,000 after absorbing £1.6 million of IPO costs and additional £900,000 to pay for share options.

Hogarth said that the firm’s AUM have continued to grow in line with market expectations, at net inflows of around £80 million a month.

After the announcement, Hogarth expressed his wish to double inflows in the months ahead, but he admits that although Tatton is building towards that target, there is still more to be done.

One way he plans to hit this goal is through developing a number of strategic partnerships. He says that he is already in discussions with a number of potential professional services firms.

Although not revealing who he is in talks with, Hogarth stated he is looking to work with other companies that need assistance putting together a fund management capability.

Hogarth accepts that the Financial Conduct Authority’s (FCA) asset management study will only add to the downward pressure on pricing, and that is filtering down to DFMs.

‘There is a direction in regards to reducing the total cost of investing,’ he says.

‘What we have done at Tatton is created the new price for discretionary fund management and certainly discretionary fund management around portfolios.’

This ‘new price’ for DFM portfolios is 15 basis points including VAT, a model adopted at float.

‘We called it the “challenger model”. We feel that the price will enable us to fulfil the requirements that the regulator is putting on IFAs to reduce the cost of investing and also for the clients to have that stewardship and guardianship, which we can give them around the portfolios.’

He expects that down the line his competitors’ prices will begin to drop, both due to regulatory pressures and increased competition. 

‘The others will want to compete with us at some point in time, but we are the leaders. We are the ones that have the first-mover advantage and the first to see where the price needed to come down to.

‘So we put our money where our mouth is, if you like, by saying this is the price, this is where we think it needs to be and, fortunately, we got the support from the IFAs.’

Even above going public, Hogarth ranks pricing the funds at just 15 basis points as probably the single biggest decision that his firm made.

He says the price is significantly below that of the traditional fund manager, as Tatton’s objective is to make its investment management available to those individuals who have never had access to a discretionary offering before, because they did not have sufficient assets to justify the fees.

Looking at Tatton’s £4.44 billion AUM, when divided between its 48,000 clients, this roughly works out at just shy of a £100,000 average portfolio size.

‘What we have done is listen to the marketplace and to what the IFA wanted. I am not too sure that other fund managers out there really do listen.’

The lower fees clearly mean Tatton has to be run as a lean operation or needs scale, but Hogarth says the firm has recurring revenue north of 70% and a 45% margin.

‘It is not just about price,’ he admits. ‘The investment returns and the performance have been excellent over the last five and a half years. We have delivered consistent outperformance over that period. We are not looking to shoot the lights out, we are looking for nice steady performance.’

Tatton offers 24 portfolios, ranging from pure passive to active and hybrid models. The company has also recently launched a suite of ethical portfolios, in response to increased demand for socially responsible investments.

‘I am sure we will get other business from these clients that does not necessarily always go into ethical portfolios, but it opens up the whole marketplace to us.’

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