Alan Sippetts, Heartwood’s head of product and management research, believes competitors are suffering from ‘heritage issues, business structure issues and investment competence issues’, as they struggle with a changing backdrop in which the retail distribution review (RDR), introduced 18 months ago, is ‘just the beginning’.
‘Being a boutique, we are a neat business,’ the investment director says. ‘Many of our peers and competitors have different business models to us. I think the challenge facing them is the RDR has changed the landscape much more than they expected.
‘Whether you are an investment management firm supporting IFAs, or an intermediary, the RDR was actually just the beginning.
‘There are numerous changes – suitability, client risk appraisal – and we are very pleased we have a neat business and a good businesses model with an excellent track record of delivering performance. This means we can do the easy bit – delivering on the challenges we have got.’
These ‘challenges’ have sprung from the wealth manager’s acquisition by Swedish bank Handelsbanken last February, a deal that came about as Heartwood looked for a way to boost assets and gain scale.
‘Heartwood has had very happy clients. However, we are a very boutique-minded organisation and to grow our business and reflect our capability we needed to do something.’
Since the acquisition, Sippetts says the firm has ‘done nothing but grow’. At the end of June, assets were just under £2.1 billion, up from £1.7 billion a year ago.
‘Heartwood as a standalone boutique was in a strong position, but we can handle a lot more clients and more asset volume,’ he says. ‘Our asset growth, despite our good performance and good reputation, will have been inferior to what we would have expected. Some of our peers are now having a very similar experience, which is forcing them to get together with other people.’
At the start of July, CEO Simon Lough announced he would step back from his role but stay at the business, with Tracey Davidson, Handelsbanken’s head of northern Great Britain, taking over. Sippetts will not be drawn on this point, save to say ‘it is the prerogative of the new owner to look at the reporting lines that were appropriate’.
Most recently, the wealth manager has been on a hiring spree as it prepares to roll out a mass-affluent proposition to the 177 UK branches of Handelsbanken.
It has been particularly busy adding to the adviser team, with 22 currently working across the private client business. Now the hiring is done, the next phase, says Sippetts, ‘is getting out there’.
But while its investment expertise will soon be commanding a wider audience, Sippetts maintains that Heartwood is keen to maintain its boutique ethos, which can offer clients the flexibility and personal service they are looking for.
‘Heartwood Investment Management, led by Noland Carter CIO, has six investment directors and two investment managers. Those key individuals make all the decisions regarding client capital and investment capital, and I do not think you would see that degree of concentration and flexibility in many other businesses. That’s why I am happy to describe us as a boutique, because we are not an empire,’ he says.
As it stands, Heartwood has more than 1,400 clients, each with an average portfolio size in excess of £1 million. While assets under management have increased of late, the business posted a £1.5 million profit from April to December 2013, with £10.9 million in revenues.
Sippetts joined the firm in 2007, in the latest chapter of a long and varied career in the City.
After studying engineering, followed by business and economics, the research head cut his teeth as an analyst for British Telecom and the Post Office pension fund, now known as Hermes.
He then spent a brief spell in Japan doing research for Sanwa International, before returning home to his two core interests: equity research and fund management.
The investment director then spent most of the 1990s working for fund manager Legal & General, ultimately becoming head of UK smaller companies before being offered a chance to set off in a different direction as head of funds research at Lloyds Private Bank.
‘Lloyds wanted to build a scalable multi-asset private client-serving business in its private banking business,’ he says. ‘That caught my attention. It was a change of career direction, plus it was down the road from where I lived.’
While he very much enjoyed his time at Lloyds, Sippetts elected to join Heartwood seven years ago, as he could see that while it really understood multi-asset investment, it was ‘finding it quite tough to evolve the business’.
‘Culturally, the business had come from a mindset that was more domestic,’ he says. ‘Twenty-five years ago what we are doing now – offering a global multi-asset fund management service – was only really done by global businesses such as JP Morgan and Goldman Sachs.
‘Today, and for the past seven years, we have been able to deliver that to clients by virtue of skills and experience, and also through the technology available.’
When it comes to the firm’s buy-list, again the boutique culture reigns supreme as the UK managers Sippetts is most pleased with come from the small investment houses JO Hambro Capital Management, Heronbridge, Majedie and Aberforth.
Heartwood is one of the largest investors in the Heronbridge UK Equity fund, investing 6.2% of the balanced portfolio in the strategy. The fund is now soft-closed to new investment, and Sippetts views it as a perfect example of how the flexibility of the firm’s research process allowed it to get on board early.
‘Some of our peers won’t invest unless a fund has £50 or £100 million, and some won’t invest if it doesn’t have five years’ track record of uninterrupted returns.
‘We like to see evidence as well, but we also like to see the history of individuals in an organisation, and the fact that we haven’t got the ideal three to five years’ uninterrupted investment returns is something we have to work around and something our investment process allows us to do.’
But the head of research has no interest in flying the flag for active management, with only 42% of Heartwood’s investments in active funds.
One of the reasons he is put off from this style of investing is the poor communication of soft closure.
‘Aberforth UK Smaller Companies is wedded to not running more than a certain proportion of UK smaller companies and will close around £2.4 billion, which is not far off where they are now. But we think this is a very healthy discipline that some active managers just don’t get,’ he explains.
‘Understanding the limits of what can be invested by a manager is critical when investing with active managers. It is why the majority of the assets we run are not invested with single asset-class managers.’
Performance-wise, the Balanced fund has returned 5.6% over the year to the end of June, slightly under the 6.4% rise posted by the ARC Sterling Balanced Asset Private Client index. In the same timeframe, the IMA Mixed Investment 40-85% shares sector average was 8.3%.
The Balanced fund has returned 18.1% over three years, outperforming the 15.5% by the ARC index and 21% for the IMA sector average.
Casting his eye over the rest of this year and the next, Sippetts says he is building risk in equity and credit as he expects to see a return to global growth after a sluggish period.