Few people in wealth management will be unaware of Nutmeg, the low cost firm that offers investment management for those with portfolios with as little as £1,000.
The company could be perceived as a thorn in the side of some of the more traditional wealth managers, highlighting the ills and errors of an industry that is undergoing profound change as it slowly adapts to the 21st century.
It is also something of a guinea pig for the post-retail distribution review (RDR) world. A predominantly online model that is powered by technology and primarily invests in lower cost exchange traded funds, Nutmeg is seeking to plug the advice gap.
It caters to Joe Public’s growing need to take control of their own savings and pensions, a market that many firms would like to enter but have not done so yet due to a fear of regulatory requirements.
Almost two years since its launch, Nutmeg has never been stronger. Over 35,000 users have signed up, while the business has attracted the attentions of a number of high profile backers. The most recent include Schroders, Carphone Warehouse founder Charles Dunstone and Icap chief executive Michael Spencer, who formed part of a group that ploughed £18.9 million into the business in June.
Sitting in Nutmeg’s offices in London’s not-quite-gentrified Vauxhall, not far from Citywire HQ, chief investment officer Shaun Port reflects on the journey since launch in September 2012.
‘It has been really exciting. We were starting with a clean sheet of paper. We had no legacy issues and could purely focus on clients and what is right in terms of the client proposition. It has been great fun getting the message out, and I have really enjoyed talking about a new way of running money for clients.’
Nonetheless, he acknowledges that providing investment management services for smaller clients means the quest for scale is key.
‘It is harder managing a £10,000 portfolio than a £10 million portfolio but it is worth it, so we have really focused on scale. The last year in particular was all about scaling this business. Every decision we make we think: is this scalable? How do we deliver this for one million customers and do this effectively? We are focused on the client but also how we do this at scale so we can offer this service to everyone,’ he says.
He says the business has not yet broken even and plans to use the cash from its recent fundraising to expand and ultimately accelerate growth.
This will be done by doubling headcount, launching a pension product and investing to better understand its clients’ needs and behaviour.
Port believes the prevailing backdrop will be supportive for Nutmeg’s business model. It seemingly has the backing of the regulator, plus the Budget’s sweeping reforms concerning Isas and pensions, which give people more control of their savings and pensions.
Arguably there has been a lack of innovation when it comes to investment management, given the technological advancements of the past 10 years. When I ask Port why that is, he suggests that it has simply not been in the industry’s interest to innovate.
‘It is partly because people have been earning high fees and clients value personal relationships. It is surprising that there hasn’t been more innovation but it is clear the regulator is supportive of new businesses, innovation and seeing anyone who puts the customer first,’ he says.
‘There is a regulatory momentum behind us as well. From day one we were about transparency and what people were paying in fees in pounds and pence.
‘Ask any wealth manager how much their clients paid in fees last year and it is a difficult question. How much did they pay in dealing commissions, FX fees and on funds?
‘How does a traditional wealth manager engage with their client digitally over the next five years? It will be materially different over the next five years than it was over the last five.’
Although Nutmeg does not interact with clients face-to-face, it offers an instant messaging ‘chat’ option, email contact or clients can call its customer service team. The company is also developing an app, which Port says will be ‘a lot more than just an app’.
‘Can you transact online, get information online and engage with your wealth manager online? For example, chat and get access to the person involved in your portfolio? This is not just passive information but engagement. For us it is more than just an app. Some people just want to know what their portfolio is worth today without downloading a PDF.’
Port highlights the data Nutmeg has already gathered from its clients and those using its website, which he sees as a big plus when it comes to suitability.
‘For us, we would say suitability is a key strength. I think we have more data concerning suitability than a traditional wealth manager and our aim is to build a rich data set to really understand clients,’ he says.
‘We work with Oxford Risk to develop our suitability to get a lot of data, which enables us to understand capacity for loss. We can then test that with more people. It is an iterative process.’
‘Add another 5,000 clients and look at the process. How can you make suitability a living thing rather than just a survey that is on file? By not doing it face-to-face there is no human behavioural bias in it.’
It is this consistent engagement with clients that Port says differentiates Nutmeg from competitors and contrasts with his experience at BDO Stoy Hayward Investment Management, where he was CIO. He says he was slightly removed from clients and had to rely on information about them coming through from relationship managers.
‘It was difficult to get a consistent picture. I feel much closer to clients than I have ever done before,’ he says.
Nutmeg’s ‘anti-complex’ ethos runs through to its investment process, where Port is positive about the firm’s decision to invest primarily in ETFs on account of their transparency, the ease of performance attribution and the granularity of understanding what they are invested in.
In contrast, he believes it is difficult to understand the aggregate risks associated with active portfolios.
Between October 2012 and the end of June, Nutmeg’s risk level six portfolio has posted a 17.4% return, while over the past 12 months the strategy is up 8.4%.
Port notes a call on ‘austerity Europe’ through exposure to Italian equities helped to power performance. The team put the trade on in November of last year when the market was trading cheaper than Thailand or Egypt, but have now started to trim the position.
He is now less negative on emerging markets compared with the beginning of the year, particularly due to a positive view on Indonesia. He believes the heady days of significant Chinese growth rates are over but says that this is almost priced in now.
Over the first half of the year, the team reduced exposure to small and mid caps in favour of large caps and Port remains positive on the FTSE 100, which he believes can continue to breach new highs. ‘There is no reason it can’t push ahead. I still think the S&P can break through the 2,000 level and I am not concerned about new highs.’
The portfolio currently has over 50% in developed market equities, which includes a significant weighting to UK equities, alongside a 3% exposure to emerging markets, 35% in fixed income and 4% in property securities.
Port says capital expenditure is on the up, as is employment growth, fuelling his expectation that interest rates could be hiked by November of this year.
Wage growth remains the missing piece, however. Next year he thinks UK economic growth could be over 3%, with sterling set to strengthen a long way from here.
Port views a slowdown in China as one of the biggest concerns.
‘The biggest risk is not Europe, it is China. China is already loosening policy and taking selective measures to stimulate parts of the economy,’ he says.
‘The simple risk is that we just don’t know what the risks are with slower Chinese growth… Chinese growth may even be on average 5% going forward and we don’t know the impact on political risk, alongside the banking and shadow banking sectors.’
While China and the global economy clearly still face some headwinds, Port says the big challenge for Nutmeg is to get the message across to the man on the street that he deserves to have a full portfolio rather than a product.
Port acknowledges trying to undo decades of marketing and a long-held reliance on financial products could take some time, but he is relishing the challenge.