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Profile: unbuttoning Thomas Miller’s investment process

Profile: unbuttoning Thomas Miller’s investment process

It has been an interesting few years at Thomas Miller Investment (TMI).

The company has recently undergone a restructure of its £3 billion wealth division, necessitated by the acquisition in late 2014 of Broadstone’s £400 million wealth arm.

This was a major overhaul, in which TMI combined its private client and discretionary management, leading to the closure of its Scottish wealth office and the loss of valuable investment expertise in the departures of former director Paula Eddery and senior portfolio manager Scott Baikie.

In its last set of published results, for the year to December 2015 – before the restructure was complete – TMI posted a pre-tax loss of £337,400 on turnover of £4.3 million.

Last time Wealth Manager grilled TMI - in an interview last summer with Andrew Herberts, at the time recently installed in the newly created role of head of private client investment management – the company said the restructure was all about ‘getting that top down strategic allocation right’.

The man responsible for TMI’s multi-asset investment process is Abi Oladimeji, who was promoted from head of research to chief investment officer in July 2016, around the same time TMI completed its overhaul.

With a background in financial and macroeconomic research, Oladimeji is all about going against the tide – not being swayed by what his peers are doing, but instead being guided by the numbers.

 

The ‘great rotation’ from bonds into equities? GDP growth of 4% in the US? Oladimeji is not buying it, and that is because the data is not either.

In his eyes, his job is about understanding the underlying structure of a market, rather than seeking cyclical upswings to exploit. Combining the economic backdrop and outlook variations with metrics to gauge investor sentiment, fund flows and positioning, Oladimeji creates a heat map to assess which asset classes are hot or cold, and crucially, where to find value.

‘Markets can remain irrational for longer than you can remain solvent,’ he says, quoting John Maynard Keynes. ‘We don’t want to simply do an assessment of the economic outlook and say that’s it – because of course the economic outlook may be strong, but if valuations are already fully pricing the expectations then there is not much more value there.

‘It brings you to the distinction between a good company and a good stock, because the company may be great but if the stock is already fully pricing in the expected future greatness of this company then it may not be a great stock anymore.’

Oladimeji organises his team into asset class groups, which meet a few times every month. Each group will look at an asset class, conduct ‘a lot’ of research and then come up with research ideas, the output of which will be recommended lists across the various asset classes.

 

Conducting such a level of research is what leads Oladimeji almost into a stream of consciousness when asked a relatively simple question about his asset allocation calls. Summarising his thoughts, he says, ‘I’m trying to distinguish between a cyclical call and a structural call. The reason it’s important to distinguish is when one looks at the way the market is behaving.’

He says that growth is expected to be strong across the developed markets for the next six-to-nine months, as flagged to him by lead indicators.

For a lot of investment managers, that seems to be good enough – not for Oladimeji though.

‘A lot of people may be mixing up what is a clear cyclical upswing and almost extrapolating that into a structural upswing. There is at yet no indication that we are seeing a structural upswing in growth.’

For that to happen, Oladimeji says there needs to be a serious boost in productivity growth as well as a ‘remarkable change in demographics’, something which is unlikely to happen anytime soon. ‘We’ve been in a structural decline in the pace of growth across developed markets for some time.’

And despite a tax-cutting president promising economic growth now in charge of the United States, unlike some others Oladimeji does not seem to be relying on a US equity rally and remains unconvinced on Trump’s GDP promises.

 

‘When people say we’re going to get 4-5% real GDP growth in the US, for that to happen on a sustained basis we need clear change in the structural pattern of growth, but there is no clear evidence that that will happen.

‘All of the data we are currently seeing points to one thing, and that is that we are in the middle of a clear cyclical upswing in growth, which should persist for the next three-to-six-months as well. But the indictors are not saying that three years down the line growth is going to be at 4%, that’s not what it’s saying at all.’

TMI has four private client multi-asset model portfolios – Cautious, Conservative, Balanced and Growth – as well as a fixed-income portfolio and an equity portfolio.

The Balanced portfolio has 50% exposure to equities, 35% fixed interest, 10% alternatives and 5% cash.

Over the three years to December 2016, a typical Balanced portfolio at TMI has returned 20.36% compared to the ARC
UK Sterling Balanced Asset sector average of 15.6%. Over one year it is up 11.96% versus 8.6%.

Oladimeji says all of his clients are ‘objective’ and ‘goal-driven’. It is exactly how he comes across when describing his thoughts towards passive investment. 

‘I certainly do not, and as a house we certainly do not, have a great philosophical opposition to using passives at all.

 

There is a place in the process for a wide range of instruments, and the approach we take is to find the best way to implement an idea.’

In some cases, that means using an ETF, which Oladimeji says TMI use ‘a lot’. But he also uses third party funds, and sometimes just buys securities direct. Basically, whatever holds costs down while optimising returns on risk.

‘Sometimes that is through using passive instruments to gain direct pure exposure at very low cost. Sometimes you have to accept that the part of the asset class universe you are trying to access is best accessed via a third party specialist fund and we will do that. And sometimes it is quite convenient and cost-effective to simply buy direct, and we will do that.’

That agnosticism is also expressed via the unitised portfolio the company runs, the Thomas Miller Diversified Assets fund, co-managed by Oladimeji and Mark McKenzie, TMI’s head of alternatives research and senior portfolio manager.

Essentially an alternative investment vehicle, when it comes to the asset class Oladimeji says he thinks differently from his peers – the fund is not designed simply to provide some diversification and be something different to bonds and equities.

He says, ‘Going back a few years, if we asked any investment manager to define what they understood to be alternatives – the answer would be property and some commodities. It has been driven by the nature of the asset class itself.

 

‘What should matter is a security’s risk/return profile and how that security interacts with the risk return profile of a traditional balanced portfolio.

‘It’s not enough to be something that is different from equities, it has to alter in a favourable way the risk return profile of a traditional balanced portfolio. Essentially you want it to improve the risk-adjusted return of a balanced portfolio.’

To achieve just that, Oladimeji looked across a vast range of assets. One which he says he identified a long time ago, and which is now very popular among other investment managers, is infrastructure.

The Diversified fund has 18.4% allocated to infrastructure, with 3i Infrastructure and HICL Infrastructure among its top 10 holdings. ‘That part of our portfolio has performed exceptionally well. It’s been a key value driver for us.’

With 2017 having the potential to be even more tumultuous than last year, and uncertainty across the US and Europe with Brexit and several national elections, for a man who feels lucky that his passion for money and macroeconomics doubles as a job, does any of this macroeconomic turmoil keep him up at night?

‘No, other things do that. I’ve got two kids, one is six and the other has just turned one. If there’s anything that keeps me up at night, it’s them!’  

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