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Wealth Manager: ACPI CIO Pabst - 'the European holiday is over'

Wealth Manager: ACPI CIO Pabst - 'the European holiday is over'

On the fairly limited evidence available, winning a stock selection competition in the papers might not be regarded as the most intellectually rigorous launch pad for a career in asset management.

For good or bad, the poster child for the strategy remains Jayesh Manek, whose spectacularly volatile and momentum-driven Manek Growth has shed around three quarters of assets in the past 10 years, sliding from a pre-tech bubble peak of £300 million down to a current figure of £24 million.

Marco Pabst, chief investment officer at boutique ACPI, also found his interest in investment piqued by winning a newspaper competition in the early 1990s, within a year of Manek’s fateful triumph in the Sunday Times league. His investment style has evolved more obviously since then, however.

‘I won without any real idea of what I was doing,’ Pabst says now. ‘I had seen it in the paper and selected about 50 stocks, mostly on brand name recognition – mobile phone companies, consumer products, fast cars, the things I was buying or would have liked to buy at the time.

‘It wasn’t really based on company fundamentals,’ he adds drily.

He similarly followed Manek’s route of opening his own asset management business, although in place of $10 million of seed capital provided by an unusually star-struck Sir John Templeton, picture instead a small pile of petty cash scraped together from Dresden’s student population.

That initial – short-lived and unregulated  – experiment, was followed by a series of jobs on the sell and buy sides of the market up to the position he holds today, having been appointed to his current role in 2010, after joining to head European equity in 2005.

Assets under management at ACPI offer an inverse mirror image of Manek’s slide over the past 10 years, from an initial figure of $463 million in 2001 to a recent figure of $3.2 billion, with steady and incremental gains in every calendar year, including the difficult period of 2007 and 2008.

 

Launched after the Goldman IPO by two cash-rich former partners, Alok Oberoi and Joseph Sassoon, the group has developed over time from a quasi-family office to a significant institutional and private client manager, with a family of retail funds attached.

About €1.5 billion is held within the private wealth management team versus another $1.5 billion in funds and the remainder transactional business. The business’s 50 staff, 25 of whom are investment professionals and another eight relationship managers, look after 231 clients.

Fees are levied from about a minimum of 50 basis points. This fairly simplistic snapshot of the company is somewhat complicated by ACPI’s takeover of Stonehage’s TriAlpha investment division in 2007, a deal that saw Stonehage deliver 148 relatively small client accounts and access to an international asset management infrastructure, taking 50% of equity in return.

The 148 former Stonehage clients, with current assets of $250 million, are held in what Pabst describes as ‘retail accounts’ and remain on a historical charging structure. The anomaly drags down the average client profile from assets of $15.1 million a head within the core ACPI portfolios to $6.5 million overall.

Born in Dresden, Pabst was set on the path to the equivalent of an MBA at the local university. Eager to put his training into practice and with the German investment market remaining unregulated at the time, he launched his own asset management firm running some friends’ savings.

‘I suppose it’s one of those things you do when you are young,’ he says, ‘although in retrospect it was quite adventurous. I wanted to learn the business and I knew it wouldn’t be forever – we had fairly high costs for instance, and rental costs at the time were high. But we survived a good few years.’

The business remained active from 1992 to 1997 when, with his studies over, he joined bank Sal Oppenheim as a small cap analyst.

 

He moved to UBS Warburg in 1999 and then onto the buy side with Wiener Privatbank as head of asset management in 2002, before his British wife persuaded him to take a job in London.

The ACPI investment process was already well established by the time he stepped into the chief investment officer role he says, but as the company actively stepped up a scale, he drew all the threads together into more of a coherent whole.

‘The idea has been to institutionalise the processes we had in place, but that had always [previously] been decentralised. If we wanted to grow the wealth management business – and we had started to hire additional relationship managers – we needed to institutionalise to ensure consistency across the underlying funds. It was mostly about an additional layer of organisation.’

That said, the company, alongside many investors, has been forced to downplay much of the fundamentals focus built into the process pre-2007 in favour of a macro-driven investment approach capable of factoring in contingent political risks.

‘The starting point now has to be macro, because that is what is driving returns. Investing is fundamentally different from when I started my career or even just a few years ago, when it was possible to invest on the fundamentals.

‘Ten years ago, if you wanted to de-risk you moved from equity to fixed income. Now you are as likely to add risks, if you do that.’

From September 2009 to the end of April 2012, the ACPI Balanced fund is flat versus a 0.36% loss on the Lipper cautious index.

‘Last year [in August] we moved to a 40% position in cash – we are happy to do that if it is the only way to safeguard client money.’

While that figure came right back before rising again incrementally to a current figure of around 10%, Pabst says there is no room for complacency and that Europe is once again facing a significant ‘inflection point’.

 

‘The holiday period [following the European Central Bank’s liquidity operation] is now over and concerns have returned to the structure of the eurozone. It is very difficult to predict where we go from here.

‘Obviously we are optimistic – you have to be – and we believe that there is enough political will to keep it together. We don’t believe that we are heading into another 2011, but do think we are heading into another period of risk aversion.

‘We are still seeing record outflows from equity and record inflows into fixed income funds. That is not sustainable, and that money is no longer showing up in risk tightening. Banks are reducing their exposure to fixed income: their inventories have fallen by something like 90%.

‘It already makes it hard to find liquidity, which is presumably why BlackRock has opened up its book to trade as a counterparty. At some point, this is going to show up violently in prices – those tight spreads are hiding quite a bit of risk, especially in non-tier one,’ he says.

Over the course of March alone, some $8 billion was withdrawn from equity mutual funds the company points out, according to data from the Investment Company Institute. Over the same period, more than $30 billion flowed into fixed income funds, as the huge first quarter yield compression began to arrive at its historical normal risk rating.

Pabst says equity markets appeared to have overshot themselves slightly on the run-up over the first quarter of the year and to have extended their gains on fairly thin participation.

As a result, they no longer faced a period of consolidation. Once equity markets had established a new grounding and investors began to feel some more confidence, he says, there was potential for another up-leg.

While style-agnostic, the company has remained cautiously positioned in international blue chips, such as Procter & Gamble and GlaxoSmithKline, on the need for downside protection.

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