A move towards centralised investment processes and model portfolios is ironically making big funds even bigger and causing funds to close – irritating those that backed the funds in the first place.
Paul Surguy, head of managed funds at Sanlam Private Investments (SPI) who was recently selected for Wealth Manager’s Top 100 of UK fund selectors, recognises this. In his view, fund groups must make sure they communicate with buyers ahead of fund closures.
While he acknowledges that Aberdeen and First State’s decisions to soft-close their respective emerging markets funds should be commended, he says the rise of models and concentration in fund buying means further closures are inevitable. More than ever, this creates a need for some form of industry guidelines on the topic.
‘I think they have done the right thing in closing the door. It is irritating but I would not say it is table-banging irritating as they have done it to protect investors, and that is what we are all here for. We are stewards of investor capital,’ Surguy says. ‘In a way, I wish there was an industry standard for closing funds.’
Unlike some of its competitors, SPI is fortunate that it does not run model portfolios internally but rather ‘suggested portfolios’, which means that a closure does not spell a forced sell for the firm.
Nonetheless, as buying becomes more concentrated across investment houses Surguy expects funds that make it onto coveted buy lists will grow more quickly in the future.
Although this may make it feel like there is less choice for selectors, he takes comfort from the sheer amount of up-to-date data that is now available.
‘There isn’t less choice out there but sometimes it feels like there is and the amount of data that is available through systems is bigger. We are a heavy user of that and we are competent at it.’
Given that Surguy graduated with a degree in computer science and initially worked in Principal’s technology team, the interest in data perhaps comes as no surprise.
Surguy made the move from the firm’s back office into investment management, following in the footsteps of his father and grandfather, who had both worked in financial services.
‘I felt I was never that good a programmer, [but] I was quite good at analysing problems… When I joined I analysed problems mainly in the back office.
‘Then in early 2002 I did a deal with the new head of managed funds, Charles Brand, that I would write the software if he could train me in analysing funds. He needed both so I spent half of my time on software, essentially dealing systems and straight through processing and I started looking at a couple of sectors. I did the computer stuff quickly and moved over to become a full time analyst,’ he recalls.
Surguy is particularly positive about the training he received, and the fact that he was able to run money at the same time as researching funds.
‘If you forget that you are stewards of people’s capital and life savings, that is when things can go wrong,’ he reflects.
He has since risen up the ranks to head fund selection at Sanlam Private Investments, the division of South African insurance giant Sanlam which has acted as consolidator in the fragmented UK wealth management sector in recent years.
In 2011 it opted to bring the companies it has acquired under one brand and centralised the investment process.
Sanlam had previously absorbed numerous investment management and advisory businesses, notably Principal Investment Management, Border Asset Management and IFA firm Buckles.
A year and a half since the restructure and decision to centralise, Sanlam now has a three-strong dedicated fund research team. Analysts no longer concurrently run private client money, although Surguy has kept the client base he spent 10 years building up.
The firm is not alone in its decision to centralise and while it represented quite a change, the fund selection head acknowledges the benefits.
‘It is an improvement. A lot of the industry has moved that way already, so I don’t think it is wrong,’ he says. ‘It gives your guys on the ground more time to meet clients and win new business. As an investment team it gives you more time to focus solely on investments, with the exception of the odd client I look after.
‘We are not rewarded on clients, we are rewarded on investment performance, so we are trying to be more of an investment and performance-led business,’ he says.
The move has already resulted in an improved output from the investment team, he says.
The company runs some £2.2 billion in assets in the UK, with around £1 billion of that invested in collectives. He says the buy list stands at around 110 funds, which are predominantly active.
‘It is probably a fraction too long. It is always easier to buy things than sell,’ he says.
‘We are working on it and would like to reduce it and managers are encouraged to buy off that list.’
The fund research team applies a screening tool to a 2,500-strong fund universe, which looks at factors such as five-year performance, Sortino ratios over three years and downside deviation over five individual years.
However, this is not completely prescriptive and exceptions can be made if managers have historic or specific reasons for underperformance.
Surguy says it is crucial to meet managers across different asset classes face-to-face and urges his team to do so. ‘I do spend about half of my week out of the office, which is important. I like to go to other groups, see the shop window, have a walk through the floor and see how it all works.’
He adds that the buy list offers a good mix of underlying approaches, and nothing goes on that he would not be happy buying himself.
‘We do rely on historic data and I guess that is why the process is so important to us because we know where they are going and how they do things irrespective of the markets.
‘If we see a process change because markets aren’t working for the manager. That can often be a sell signal for us,’ he says.
Generally the team does not invest in funds that are below £100 million or own more than 15% of a fund. Investment input is driven by Sanlam’s asset allocation committee, which Surguy sits on alongside the firm’s chief investment officer, head of equities, SPI’s South African CIO and Border’s former CIO.
As we enter 2014 and markets prepare for the US Federal Reserve to taper quantitative easing, Surguy says investors should not lose sight of the fact that it is ultimately a positive move in response to economic recovery.
‘Central banks are starting to think about the exit and that is a good thing, so we can start to value bonds on a more normalised basis,’ he says.
Over the past 18 months, the team has been adding to equities on the back of improving economic data. The managed funds balanced portfolio has just over 60% in equities, 15% in fixed income with the balance in alternatives. It is in this area that Surguy is particularly positive on absolute return holdings such as the Ignis Absolute Government Bond fund.
Surguy highlights Cazenove’s Julie Dean, who is Citywire AAA-rated, and AA-rated Nigel Thomas as key drivers of performance, alongside a decision to top up emerging markets exposure in the middle of the year.
A typical balanced portfolio posted a 15% return over the year to the end of October, slightly underperforming a 17% rise by the IMA Mixed Investment 40-85% shares sector.
As pricing negotiations take place between fund groups and firms with distribution and buying power ahead of new platform rules that come in early next year, Surguy says Sanlam will push to gain access to similar terms to some of the larger distributors. Nonetheless, he acknowledges that managers with a proven track record will be able to command a premium in the new world.
Looking ahead, Surguy believes Sanlam is well placed to capitalise on growth opportunities in the post-retail distribution review world.
The firm has a diversified business model, with a range of investment and financial advisory services on offer, alongside the backing of a large insurance company with cash on the balance sheet, which the selection head can only be a good thing.
‘It is good for the business to be able to bring in new people and systems. It has been hard work over the past year but I feel we are starting to crest the hill.
‘Things are picking up and now moving along quite nicely. We are getting quite a lot of traction in the market.’