After nearly a decade at Berry Asset Management, watching it grow from a fledgling asset manager into an established name, Colin McInnes decided it was time he took the helm of his own business, launching Quartet Capital Partners.
‘I’d become a bit disillusioned with the investment model being adopted at the firm where I worked – that’s not an explicit criticism of them, more a criticism of the industry itself,’ he confesses.
‘When I looked at it, without exception, the majority of portfolio returns were derived from asset allocation. I found it shocking that no one did active asset allocation. They may have said they did, but where one really saw it was making changes at the margins.
McInnes admits it sounds ‘corny’ to say he was disenchanted with the wealth management industry. ‘People say “disillusioned” as though they have grand ideals, but I really did feel that way,’ he says.
‘Truth be told, I was also in a position where I may or may not have been pencilled in as a potential future chief executive [at Berry’s]. But the firm was largely owned by a Swiss bank and it was their baby.
‘I looked at things and thought, I don’t really agree with certain investment style issues. Plus, I wanted my own sort of ship, my own baby to run.’
At the same time as feeling disillusioned and unfulfilled he was in discussions with close friend Niels Jensen, a director of Trafalgar House Trustees and chief executive partner of Absolute Return Partners, about founding a new business.
‘I was receiving their [Absolute Return Partners] asset allocation newsletters and without a doubt these were the best around, yet they didn’t have a product I could buy,’ McInnes says.
‘They had the asset allocation skills and I had the skills to run a private client business. As it turned out, we were both thinking along similar lines at around the same time. I can’t remember who suggested it to whom but somewhere along the line, we developed it.
We developed our working name as well, Quartet Capital Partners, and the name just stuck.’
After forming the partnership, McInnes says it was important that the people behind the business, based in Richmond, Surrey, defined what the firm was unlikely, and likely, to do.
Part of the firm’s distinct offering is the positioning of client assets, as Quartet believes strategic asset allocation calls should rarely change and macro views should never be diluted as a result of how portfolios are run.
McInnes said that to this end, about half of private client portfolios are invested in passive investments such as exchange traded funds (ETFs) and index trackers.
‘We do this for a number of reasons. First and most importantly these are an accurate reflection of our investment views. If we want large cap US equities, the S&P 500 is a very accurate reflection of that asset allocation stance. We will not allocate to a manager who might take a contra position and go into mid caps, working to contra out this large cap view. Second, these are very cheap, and third, they offer performance, as 75% of active managers under-perform an index.
‘About another 30% is allocated to active managers and where we are very different from most is we are not trying to be very active with them. Our view is, let’s find some guys who are good managers, give them money and literally leave them to it.
Quartet typically allocates its final pool of capital to special situations, investments where it sees clients’ assets remaining for no more than two years and which offer them an asymmetric risk stance.
‘This doesn’t mean no risk, but lower risk – offering aggressive clients large potential upside that is lesser than the potential downside,’ McInnes explains.
Since Quartet started trading last year it has moved to take on its first set of external clients, an ambition achieved during the opening months of this year. It now has 40 or so high net worth individuals on its client book, with the capacity for this figure to swell organically to the low hundreds.
The business has built up in the region of £27 million in assets under management over the year to date, with a further five agreements still in the pipeline.
‘So far, we are very pleased with how things are going, as we had targeted roughly £25 million for the end of this year and we are already at approximately £27 million around 10 months in.
‘In terms of clients, we have slightly more than 40, so the course we have taken has been good. We don’t have targets in mind for future years or plans to aggressively grow. It’s quite satisfying to have taken that leap, to move from saying “I think I have what is a good theory that makes sense and seems empirically sound” to see it actually borne out.
‘I have seen a number of our competitors go down a purely passive or purely active route. Quartet is a form of hybrid and I’m pleased this theory has worked.’