They say that necessity is the mother of invention, which was certainly the case with Saltus Partners. Jon Macintosh and Simon Armstrong founded the wealth management firm in 2004 because they could not access the sophisticated investments that they worked with on a daily basis.
Dan Kemp joined as the third partner in 2008 and the multi-asset absolute return boutique has since branched out into the retail market with the launch of the Saltus Multi-Asset Class fund, known internally as the ‘33’ portfolio, last May. A second launch is being lined up for later this year.
Saltus runs three in-house funds, derived from its core multi-asset strategy. The ‘33’ portfolio is designed to deliver cash plus returns with one third of the volatility of the stock market, while its ‘50’ and ‘67’ sister funds are managed with a higher risk budget.
The latter is the latest being rolled out and investors will effectively be able to create the ‘50’ fund by blending the two funds themselves.
Kemp says that although their risk profiles are quoted against the volatility of the stock market, the funds are unconstrained and not run against any benchmark. ‘We will happily lag the equity index if we have the right level of risk and are making good money for our clients,’ he says.
Kemp’s passion for investment is both evident and infectious. He sheepishly admits to having wanted to pursue a career in fund management since he was a young boy but concedes that he could have taken an easier route to get there.
After two years spent studying economics at A level, he changed tack, completing a degree in theology at King’s College London8. ‘Perhaps where I was a little naïve was in not realising that the big investment houses and fund management groups are not exactly falling over each other to hire a theology graduate,’ he says.
The pensions industry was a little more welcoming to budding theologians so Kemp started out as an administrator. He spent several years as a financial adviser and was latterly head of fund research at Williams de Broë.
His transition to the world of multi-asset investing was seamless and aided by his colleagues’ vast experience of running alternatives.
Kemp says the approach at Saltus is team-based with the three partners forming the firm’s investment committee, which meets quarterly.
Informally their interaction is far more regular and the team is nimble enough to make short-term opportunistic trades whenever opportunities arise, alongside their long-term core holdings.
Kemp says they invest in both active and passive funds, favouring the latter in markets or asset classes where there is little evidence that a manager can add value. The manager selection process is rigorous, as one would expect, and essentially designed to tip the risks in favour of the client, he adds.
Where possible, Kemp analyses managers’ alpha generation over the past 10 years using daily fund prices to maximise the data set. This is then overlaid with the fund’s standard deviation.
‘We spend a lot of time looking at how they are producing their returns and are ideally looking for a probability of positive alpha of at least 70% to 80%. It is all about skewing the risk in our favour and knowing what our expected upside and downside is.
‘It is crucial to understand where a manager is generating most of his alpha. You also need to understand the drawbacks of their style so you know how to hedge against them.’
Kemp describes Saltus’s investment approach as a seesaw rather than a traditional barbell. At the fulcrum are the group’s core positions, typically low-risk holdings that generate steady returns – mainly hedge funds.
At the opposite ends of the scale are a small number of diverse, high-conviction and higher risk exposures at one end with government bonds, money market instruments and shorts at the other.
Gold is the only asset class that he invests in directly through a physical exchange traded fund.
‘We use exposure to gold as a negative view on currency rather than a positive view on bullion,’ he says. ‘We have actually been cutting it back because of its creeping positive correlation with the equity markets.’
The breakdown of gold’s traditional correlation to other asset classes is further evidence that the markets are never static. Kemp stresses this is why Saltus is constantly developing both its investment philosophy and internal systems.
‘Stock market volatility tends to be inversely correlated with returns,’ he says. ‘If you have a fixed risk budget it encourages you to take more risk when the markets are doing well and less risk when prices have fallen, as we saw with LTCM [failed hedge fund Long-Term Capital Management] in an extreme case.
‘The market is evolving so quickly that you have got to have the right risk models to cope with it. The sophistication of our risk models has to keep going up and we spend a lot of time improving our models. It is a constant evolution,’ he adds.
The results of this hard work are there to see, however. The Saltus Multi-Asset Class fund is up by over 13% since launch, double the sector average return of around 6.5%.
Kemp expects absolute returns to grow into a massive part of the retail market over the next decade and as it develops, comparisons will be far easier to make between different funds.
‘People think of absolute returns in very different ways but for us it is about making money consistently for our clients,’ he says.