Since Brooks Macdonald first graced our profile pages, the company’s discretionary assets under management have surged fivefold to just shy of £6 billion. And while outwardly this growth has appeared seamless, that belies the incredible amount of work that has been done behind the scenes to oversee this.
Brooks, launched in 1991 as a fee-based discretionary asset manager, has regularly been ahead of the curve. Co-founder Jonathan Gumpel admits he is surprised it has taken this long, particularly with the onset of the retail distribution review (RDR), for many of his peers to catch up.
Similarly with suitability and the centralisation of investment processes – two key tenets of the Financial Conduct Authority’s greater scrutiny of the sector – Brooks has already been through this process without regulatory prompting.
‘We’ve grown a lot over the last few years. In 2008-09 after we did a review of our investment management approach, we realised there were lessons we could learn and we updated a lot of things,’ Gumpel says.
‘One factor was that as the amount of money we were seeing coming from professional advisers increased, and with multiple offices, we had to make sure a Brooks Macdonald portfolio was recognisable whichever office you go to.
‘We always tend to be introspective and focus on what we are doing and how we can do it better.’
To help achieve the desired commonality of performance and ensure suitability, Brooks brought in a portfolio monitoring system in what proved to be a multi-year project.
This entailed using a version of third-party firm Bita Risk’s software and adapting it to provide a proprietary system that better suited Brooks’ needs.
Like many in the industry, Brooks had previously used a sampling methodology when it came to portfolio monitoring but wanted to move to a more iron-clad approach. ‘We started working on this four years ago and it was fully completed two months ago,’ Gumpel says, underlining the complexity of the process.
‘Three years ago we got in Bita. There was then 18 months of system design, but now we know our portfolio compliance is fully in shape.’
While this may appear to have been a somewhat protracted process that swallowed up countless hours of management’s time, the size of the fines that have been meted out in the industry for suitability failings has served to underscore the importance of getting it right.
Besides the standard features of the system, such as the ability to zoom in on any client portfolio, office or individual manager, Gumpel says its introduction has also resulted in a number of unexpected benefits.
‘It’s now something we almost can’t do without and there have also been some interesting spin-offs from it.
‘With the portfolio monitoring and quants risk management system we can look at all portfolios’ correlations, volatility and give them a quants risk score,’ he says.
‘We get an X-ray approach and it is very, very helpful. Besides making me, the CIO [Richard Spencer] and other investment directors feel more relaxed, it has improved our portfolios dramatically and we are all seeing the benefits.
‘People have said our performance has noticeably improved over the past three years and we put that down to improving our investment and risk management systems.’
The company runs what Gumpel describes as a ‘central guidance model’ with its investment managers having the flexibility to tailor individual portfolios within predetermined tolerances.
‘We work on the principle of comply or explain why not,’ he adds. He points out that all of the company’s investment managers are involved in sector research and contribute to the overall investment process, so it is inclusive rather than a ‘straitjacket’.
Similarly the asset allocation committee on which Gumpel sits also features senior managers from a whole host of regional branches, including Edinburgh, Jersey, Hampshire, Manchester and London. ‘Some offices follow our guidelines quite tightly, others have their own style, but they can be accepted as long as they are within the permitted tolerance levels,’ he says.
Besides his commitments on the private client side, Gumpel is also co-manager of the group’s Defensive Capital and Defensive Capital and Income portfolios. This forms part of the burgeoning range of products under Brooks Macdonald Funds’ banner.
Defensive Capital moved across from NCL Smith & Williamson back in 2006. It was then just a £16 million tiddler, but has since grown to £163 million with Defensive Capital and Income, which was launched in 2012, now up to £40 million.
Although they have slightly different mandates, as their names suggest, both are run as absolute return-focused low volatility multi-asset funds.
‘It has gone very well. 2008 was an interesting time for everyone and looking back we learnt a few lessons,’ says Gumpel.
‘We fell in love with our assets and were comfortable that they would survive the crisis but we probably didn’t appreciate how much they might sell off.
‘In the market reversals since then we have shown that we have put those lessons into practice and volatility has been very low.’
This improved capital protection was in evidence between April 2012 and April 2013, when Defensive Capital returned 7.61% while its IMA Mixed Investment 20-60% Shares sector fell by 0.41% on average. Over five years, the fund is up 66.2% versus the peer group’s 48.91%.
‘At £160 million we are a very small fund and only need a small amount of flows from the likes of Newton, SLI or Ruffer to make a big difference to us. We are really pleased with our ongoing Sharpe ratios and are really beginning to put some good numbers together,’ he says. ‘We are starting to see really good external flows. Some discretionaries won’t put Brooks Macdonald on their buy lists, but we are getting good support from the adviser community, hopefully there is decent scope for the fund.’
Gumpel and co-manager Robin Eggar use a quant process as a starting point for asset allocation within the Defensive Capital fund.
They have a number of screens in place tracking various asset classes on a number of metrics, such as their return profile on a three to four-year view with likely performance if the market were to stay flat or rise or fall by 30%. This provides a risk management framework based on assets’ potential excess return versus the downside risk.
Gumpel highlights Nokia convertible bonds as a recent holding he has exited. He says they were able to get in when they were trading near their bond floor, effectively providing an almost free warrant.
After Nokia announced an asset sale to Microsoft, its shares rose by 60% with the convertibles close behind, gaining 50%.
‘We sold at 35% up because we felt they were maxing out of our risk profile. Some things are fantastic assets but don’t meet our risk/return profile,’ he says.
‘You cannot fall in love with the assets you hold. You have to ask if you have made enough of a return out of it and if the risk/reward profile is still attractive, but you need to take a cold-eyed view.’
Another key theme in the fund is the disintermediation of banks, which is being played through CLOs and P2P lending among other ways.
Overall, the fund has a defensive tilt with significant exposure to convertibles and preference shares, which are typically yielding 4-6%. ‘It is difficult for retail clients and advisers to access these strategies and that upside,’ he adds.
Indeed, Brooks Macdonald Funds has very much focused on carving its own niche, providing exposure to less covered asset classes rather than churning out ‘me too’ products.
‘Brooks Macdonald Funds is a small fund management firm with c£500 million of the group’s total £5.92 billion under management. We have grown rapidly over the last two to three years but are a minnow surrounded by some whales that have a much higher profile and large sales teams,’ Gumpel says.
If asset flows continue to gather momentum, the company’s fund arm will become an even bigger contributor to group profitability and another thoroughbred in the Brooks Macdonald stable.