The need to remain competitive in an ever more saturated investment management industry has meant countless new service launches by firms small and large.
Close Brothers Asset Management, with its nine offices nationwide and £8.3 billion in assets under management, is no different in its desire to scale up its product offering. Earlier this year it launched a tailored portfolio service (TPS), catering for clients with between £250,000 and £1 million, aiming to fill a gap in its coverage.
The man picked to lead the service is Deryck Noble-Nesbitt, best known for his fund management, after taking the Close Special Situations fund from a death-like state and delivering a 209.42% return from the market bottom in 2009. His other fund, Close Beacon Investment, had a similarly spectacular 2009, with a 151.7% return for the year as a whole.
Softly spoken and Durham-born, Noble-Nesbitt is terse throughout the interview and it’s hard to tell whether he is nervous, shy or simply guarded.
He says he ‘jumped at the chance’ to take on the TPS as a natural extension of what I’ve been doing at Close for the last seven and a half years’.
The service has taken on around £30 million in new money over the summer, bringing total assets to £240 million across 600 clients.
He says he is ‘vaguely optimistic’ about the prospects for the service but ruefully smiles that he is superstitious, and making assertions about asset growth could possibly jinx him.
While polite, Noble-Nesbitt speaks in a slow, deliberate manner and is reluctant to give much away. He rejects the suggestion that he is an expert, or even has a special interest in smaller companies, despite formally serving as Close’s managing director of investments and smaller companies.
‘I’m interested in investment management,’ he states bluntly. ‘I’m interested in identifying securities, whether they’re large cap, whether they’re small cap… that create value for clients. I don’t think the techniques and the process you use are very different between the asset classes.’
Noble-Nesbitt is a man who has resolutely given himself to things that interest him, beginning after graduating in biological anthropology at Cambridge University. He viewed the time as a period of freedom to ‘indulge himself’ reading a topic of interest rather than seeing it as a springboard into a particular career.
‘I was just young and wanted to enjoy myself and do something interesting,’ he said. ‘I think in the UK we are really lucky, we can indulge ourselves.’
With no particular plans after university, Noble-Nesbitt decided to put his maths brain into good use training to become a chartered accountant at Deloitte & Touche. He enjoys learning, and again counts himself lucky for the opportunity to learn more or less solidly during his three years studying for his accountancy exams.
The firm sent him to work in New York, which built a feeling of real loyalty towards the business and made the young Noble-Nesbitt feel like he had to ‘work my socks off… and repay the debt I owed them’.
‘I’m quite a loyal person and when I got back I felt like they had given me a lot and I hadn’t given them much back in terms of revenue,’ he says.
‘Then a lot of the more interesting work dried up so it almost felt that if I stayed there it would be going backwards,’ he said, before adding that after considering his options fund management seemed the most appealing.
He joined Govett Investments as an analyst, and after its buyout took a pay cut to join Close Brothers.
He began at Close as a ‘roving analyst’ but was soon given the ‘kind of opportunity that doesn’t come along very often in fund management’ – the chance to run his own funds.
Noble-Nesbitt was reluctant to talk about his two funds, possibly because performance has not been as eye-catching of late. Over the last three years, the Close Beacon Investment fund has marginally outperformed its benchmark, generating a return of 13.26% compared to a 12.14% rise in the AIM index, and is ranked 51 out of 57 in the UK Smaller Companies sector.
His Special Situations fund has struggled, returning 10.33% against a 34.65% return in the benchmark Numis Smaller Companies plus AIM (InvTrust) index, but Noble-Nesbitt is protective of his strategy and says there is no other comparable fund in the UK.
‘I’m not sure there is another small companies special situations fund in the UK with such a focused approach. All I’d say is that in the last year or two I’ve been concentrating right at the bottom end of the market,’ he says.
‘Most of the companies I hold the vast majority of smaller companies fund managers would not purchase because the companies are too small or they are actually true special situations.’
His strategy is more ‘buy and hold’ and while he acknowledges his funds are ‘going through a quiet period’, he believes there will be a turnaround in performance. ‘Although quality has performed well and the top end of small cap has performed well, these sorts of companies are going through a quiet period and these things have a habit of reversing. What you can’t guess is when that might be,’ he says.
Some of the better performing positions over the last year include money transfer provider Optimal Payments which he has held for several years.
The stock fell out of favour following a change in US gambling laws and ‘bumbled along the bottom’, he says in his characteristically sober way. But a management change and rebrand, coupled with a venture into new revenue streams has meant better financial and stock market performance.
‘Equally important for me, the company got a new financial director,’ he says. ‘I saw him as a safe pair of hands who manages expectations quite well. The business has transformed. That one’s done quite well recently.’
Technology group Emblaze is probably a classic example of an unloved stock in which Noble-Nesbitt has retained conviction for a considerable amount of time, despite the odds.
‘It’s a stock that I haven’t found anyone else interested in and that in itself is interesting,’ he says, adding the company is also suing both Apple and Microsoft, claiming the US giants copied its technology.
Nevertheless, Noble-Nesbitt points out the firm has more than £6 million cash on its balance sheet, a comparatively low market cap and a division that has become profitable.
‘There are risks – obviously there’s a stigma there for a reason and I accept that, but it’s a reasonable investment.’
Perhaps one of the reasons Noble-Nesbitt shies away from being pigeonholed as a small cap manager – aside from his new, broader remit – is that he’s actually been ‘pretty cautious’ on small caps as an equity class over the last 18 months. As such, private clients in his Tailored Portfolio Service have no exposure to the smaller end of the spectrum.
‘In terms of how I view smaller companies for private clients in managing their entire wealth, I don’t have a position – and I stress that – but I’m a firm believer in the long-term outperformance of smaller companies and I would like to give them some exposure. It might be out of favour for six months, one year, two years – but eventually as long as the value is there the market suddenly becomes interested and you get some quite interesting returns.’
The trigger for him to re-enter small caps would be if the Chicago Board of Options Volatility index, the Vix, rose to 40.
‘Once that happens, and it will, you might get really quite an interesting opportunity to buy smaller companies,’ he said.
The average balanced portfolio in the TPS service would have between 45% and 85% invested in equities, and buying signals he looks for include stocks being on below average price/earnings ratios of 10 or 11 and a yield of around 4%.
He holds no oil or gas companies and is cautious on the US since he believes markets are failing to fully recognise the impact of the upcoming fiscal cliff.
‘Although everybody knows there is a fiscal cliff coming, one gets the feeling that a lot of people believe that just like last year there will be a fudge and it will be fine,’ he says. ‘That headwind, I’m not sure it’s being priced in.’