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Profile: how to compete when every man and his dog runs multi-asset

Profile: how to compete when every man and his dog runs multi-asset

With more and more wealth managers launching managed portfolio services, standing out from the crowd is becoming more important than ever.

For Cornelian Asset Managers, this meant hiring David Appleton as its investment director last June to build up its suite of products and spread the word in the regions.

‘Every man and his dog is launching a multi asset fund,’ says Appleton. ‘But we have demonstrated an ability to deliver where others are a bit greyer.’

The Edinburgh-based boutique, which was predominantly a private client manager, made its first major marketing drive into the adviser market in May 2010 with the launch of its risk managed range. This includes five risk-managed funds covering the broad risk spectrum, which are built on its existing funds of funds.

‘We are one of the few firms that now have a demonstrable track record – we like to remind people that two of our multi-asset range funds were launched in 2005,’ Appleton says. ‘That is a source of differentiation, and it’s good to hear peers are keeping an eye on our funds.’

Over the last 12 months, funds under management in the firm’s multi-asset range grew 39% from £171 million to £238.5 million. By December, they were supported on a regular basis by more than 50 firms of advisers, Appleton says.

 

His investment philosophy is shared with Cornelian’s investment team. This is headed by chief investment officer and former Wealth Manager cover star Hector Kilpatrick and includes collectives expert Bill Bulloch and investment analyst trainee Richard Stark.

‘When we first met, [Hector and I] recognised similar traits in each other,’ Appleton recalls. ‘We sparked ideas off each other and we have the same intellectual curiosity. We both want to be different from the crowd.’

In the team’s view, derisking is a central pillar of the investment philosophy, and a source of diversification.

‘We find this range caters for the vast majority of clients who want access through that medium to our investment expertise. The key thing about [Cornelian’s funds] is that although they all have upper risk limits, they don’t have lower risk limits,’ he says.

‘Now that’s what differentiates our fund range from competitor funds out there in the marketplace, and the numbers [prove it].’

Of the firm’s total assets under management (AUM), the risk-managed funds make up just over 42%, while the remaining balance is predominantly held in discretionary private client and charitable accounts.

Appleton developed his cautious investment philosophy during the decade he spent at Alder Investment Management, a London-based family office established in the 1970s.

As a senior investment analyst and fund manager, he helped run the private wealth of a single extended family of more than 100 individuals with over 200 portfolios and trusts.

 

In 2006 it launched the Smithfield Income & Growth fund as the core equity investment vehicle for the family, which Appleton co-managed.

On Alder’s equities desk, he was lead analyst covering the UK market with overall responsibility for around £500 million of client assets.

He also ran client money in alternatives, primarily through externally managed vehicles, including infrastructure, commercial property, private equity, catastrophe reinsurance, leveraged loans, distressed debt, emerging market debt and mezzanine finance.

‘After 10 years at Alder and with a young daughter, my wife and I decided to have a lifestyle change and move back to Scotland,’ he says.

‘At the time, I didn’t know if I could find a firm, but Cornelian had huge similarities with my old family office in terms of investment philosophy. This is a job where I can focus day in and day out on investment.’

In a typical balanced portfolio, the Cornelian investment team is favouring developed markets over emerging, with a weighting of around 36% in the former and 30% in the latter, or in companies that derive much of their profit in the emerging world.

‘In emerging markets, the long-term drivers of growth are very compelling in terms of the themes of industrialisation and the rise of the consumer but in the short term at least some of those drivers are slowing down,’ he says.

 

‘Despite that, good companies exposed to structural growth are quite expensive versus partly state-owned companies that you don’t want to hold.’

He points to UK-listed companies such as WPP, which straddles both emerging and developed. Elsewhere within the portfolio last year, he doubled his allocation to commercial property to 4%, held through British Land, which has considerable exposure to central London offices.

‘We think the stock market is too focused on the short-term risk of interest rates rises and is misunderstanding the fact that good quality real estate is an effective inflation hedge and we’ll see rents growing.’

The team has also upped its private equity exposure and holds Pantheon, a listed fund of private equity funds. Appleton says a lot of its holdings are maturing, which could lead to a number of IPOs or trade sales, on the back of equity markets’ rise.

‘At the moment, you can buy the portfolio at a 20% discount to net asset value in a year when there should be positive realisation activity and rising valuations,’ he says.

The investment team’s view is that an attractive company has a sound business ownership philosophy, produces products or delivers services that are highly valued by its customers or has enduring franchises with some form of long-term competitive values, he adds.

Cornelian carries out its own research and it also produces its own company forecasts and stress tests.

 

‘Because we have to recognise that the world can be volatile, we look for fundamentally resilient companies that would continue paying dividends to shareholders even if the economy turns down,’ he says.

The firm’s medium balanced portfolio has returned 15.8% over the last 12 months, outperforming its WMA Balanced benchmark, which rose 11.7%. Over three years, the model returned 27.6%, compared to the index’s 23.2% rise.

Tullow Oil was one of the few holdings in the portfolio that hampered performance.

‘If you look at what actually happened, nothing really changed,’ Appleton says. ‘It continued to export oil but the business fundamentally derated. This makes it interesting for this year.’

Additionally, Ryanair – which has net cash on its balance sheet and one of the most modern fleets of aircraft in Europe, of which it owns 80% – was marked down after a modest slowdown in trading in the second half of last year.

Looking ahead, Appleton says the team is looking to mitigate a rise in interest rates to some degree by investing in companies that could benefit from this scenario. He points to life insurers L&G, Prudential and Resolution.

Stock market investors may be fickle, but fixed income investors have even more to contend with.

‘While our job is to grow wealth in real terms, this means delivering in terms of fixed income.

 

‘This means trying to find investments that generate a yield above inflation. But conventional gilts and investment grades struggle to meet the Retail Price Index mark, and we’re very nervous that as interest rates rise, a lot of conventional fixed income assets could continue to underperform.’

While he says the opportunity within fixed income remains a very specific one, he adds the team has successfully managed to deliver a positive return over the past year. The focus has been on floating rate notes with a portfolio of senior loans and a holding in the TwentyFour Income fund, which holds asset-backed securities.

Although the group’s funds have performed strongly, Appleton points to strong inflows across the business as a key factor in the company’s asset growth.

‘Markets have helped Cornelian’s AUM rise to a degree, but we also benefited from robust new business performance in 2013 with positive net flows across the intermediary, private client and charities customer segments that we serve,’ he explains.

The company has also established a business development team, which now has three managers: Andy Holmes who is based in Nottingham, Kevin Sturla covering the South East, and San Pollitt who represents the firm in Scotland and the North of England.

‘It has certainly helped our presence in the market and the funds flowing into our managed range,’ says Appleton, who has also taken some marketing responsibilities.

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