The fallout from firms expanding into new non-core areas to grab a greater share of clients’ cash has caused the history of financial services to be littered with failures.
With this in mind, Jersey-based DPZ Capital’s founder and chief investment officer Darren Zaman argues the key to success is to stay focused on your core strengths and never willingly dilute your offering.
‘One of the things I absolutely believe in is focus. Because a lot of us have worked in the service business for 20-odd years, all you want to do is to solve everyone’s problems. You can kind of do everything. But really, what I wanted to be was absolutely focused.
‘We did not want to take portfolios with less than £500,000. We only wanted to take discretionary investment management business and we only wanted it to be in the strategies we built that fit around what we consider to be our strengths. When we started the business, the point was not to get all of somebody’s money, but to market clearly what we are good at and how we do it and if that gets 10%-15% of somebody’s investable assets, that is what we are going for.
‘We focus on quality, we are not discounting our fees or taking small amounts of money, because two years down the road you will regret it and it dilutes your quality and service,’ Zaman explains.
While other discretionary investment managers have sought to capitalise on opportunities to build assets by providing solutions through platforms for advisers looking to outsource investment, particularly as the deadline for the retail distribution review deadline nears, Zaman says this is an opportunity the firm has been hesitant to grab with both hands. Although it runs discretionary portfolios through Skandia’s platform, DPZ’s chief is concerned about giving up margin at the cost of flows that are by no means sticky.
‘There has to be fundamentally something more that we provide in terms of the relationship and values. It has to be a deeper partnership because, in my opinion, if you manage money on a platform most of what people are doing is basically “me too” stuff, which is more or less the same plus or minus 50 basis points in annualised return.
‘Frankly, if you are running £1 billion on a platform for some IFAs for 50 basis points and they say, “We want you to do it for 40 basis points or we are moving it”, you will say yes. If they say 30 basis points, you still say yes.
'How low will you be prepared to go for that? What is the point in being in a business like that? The core of our business is focused on quality, the quality of relationships with intermediaries. Churning out plain vanilla stuff on platforms? Absolutely not.’
He continues: ‘We are working on large portfolios now, looking at upscaling for larger cases. We are looking to take on charities and smaller institutional mandates and pushing our business up a line because we run our business within strict risk mandates.’
Zaman’s focused approach is clearly starting to pay off. After launching in late 2007, DPZ has grown its assets under management to around £330 million and is forecasting to net £3 million in income this year, while recurring income is around 78%.
The average portfolio size at the firm is £1.5 million, while the boutique’s 25-strong team run a multi-asset class strategy focused on capital growth, two bond-focused strategies, and a direct equity strategy, which represent core building blocks with bespoke offerings at the individual client level. The managed portfolio service comprises multi-manager portfolios in the conservative, balanced and aggressive risk profiles. Charges range from an annual management charge of 1% for the multi-asset approach to 0.75% for bond mandates and are lower for portfolios over £5 million.
The team takes a dynamic absolute return approach to asset allocation, which is not benchmark-aware, while managers are involved in the investment process and asset allocation decisions.
‘Investment for me is a team activity because of the nature of private client business and the strong feeling of ownership with the managers who look after clients. If you want to deliver an investment process with strong procedures and methodology, you have to get everyone on side and incorporated into the process, otherwise you have people doing their own thing and it dilutes your offering,’ he says.
Nonetheless, bringing experienced professional investors together to make decisions is not always straightforward, he concedes. ‘This is the business model, a management choice and a management challenge.’
Year to date the firm’s multi-asset capital growth strategy is up 2.8% and has posted a three-year annualised return of 6.4%, with volatility of 4.9% over the period. The firm’s corporate bond strategy has fared better, posting an 8.4% rise year to date and a 9.8% annualised performance over the past three years, with volatility of 4.4%.
Zaman says performance across the firm’s portfolios had largely been driven by credit and manager selection.
He is ‘cautiously positive’ on financial assets, arguing the market is aware of potential setbacks such as slowing global growth, the European financial crisis and Chinese growth fears, which means a fair amount of risk is priced in.
‘We are overweight corporate bonds and equities and are underweight government bonds. Conscious of volatility and tail risks, we have incorporated a number of hedges into our portfolio to provide some comfort against our more active positions. These include gold, the US dollar and a specialist alternative macro manager that expresses his views through the use of very long-dated option positions, providing a long volatility profile,’ he adds.
Zaman had been attracted to the world of finance since he was a teenager in the mid-1980s and started his investment career at TSB Bank Channel Islands’ treasury department, where he covered forex and money markets. It was an exciting yet terrifying area to work in when sterling dropped out of the exchange rate mechanism in 1992, he recalls – although the bank had an advantage at the time as it could work out forward forex rates on a live link spreadsheet, having been an early mover in technology investment.
‘It seems incredible that we had created a tiny advantage for ourselves. During my time there, it was our most profitable couple of days trading in Treasury,’ he says, stressing how it highlighted to him the importance of technology.
Later that year Zaman moved into investment management, joining Quilter Goodison’s Jersey operation, where he specialised in bonds. He recalls the firm’s decision to introduce management fees and begin to move away from transactional business – an almost pioneering decision at the time, but not without its challenges, he notes.
Three years later, he moved to Brewin Dolphin, where he helped to set up an offshore fund management company for the wealth manager alongside running portfolios. But after seven years at the firm an opportunity to front Le Masurier James and Chinn, an investment business backed by Bank of Bermuda, was too good to pass up.
After joining in the early 2000s, he implemented a massive change programme, involving moving all investment management clients over to fees, overhauling the investment process and separating investment management from traditional stockbroking.
By the time the business was bought by HSBC in 2004, the firm had £550 million under management, although it was the qualitative shift in the business that was more significant, Zaman says.
‘The qualitative improvement was transformational. We went from 90% transactional revenue and flipped that around so the vast majority of revenue was from fees and ongoing revenue.’
Zaman took on the role of managing director of HSBC Investment International, but following the deal Le Masurier James was merged with James Capel (which HSBC had also acquired), and he realised he missed the boutique culture.
‘That is the point in your investment career, where you ask what am I? Do I want to be a manager or a private client investment manager? I have a passion for investment management and everything I had done in my career and experiences were all geared up to delivering for the private client investment management world.
‘I did not want to be a manager in a business like that because it is so large, there is so much bureaucracy and management make decisions that impact clients and are very remote from clients. This is no comment on HSBC, which is a fantastic business.
‘Delivering what we do to fiduciaries, family offices and high net worths is better delivered out of an investment boutique with a boutique culture, where management is intimately involved in the design and delivery of service. That is what I wanted to do,’ Zaman says.
As a result, he left HSBC in early 2007 to set up DPZ with backing from a family office. He was able to attract a former colleague and opted to outsource custody and administration to UBS.
Five years on, he is now looking at how the business can evolve to take advantage of new opportunities.
As a result, a raft of key decisions were made last year driving a new three-year business plan, which included bringing the back office in-house through a partnership with Tercero and broadening the executive team, while investing in talent emerging through the ranks.
Although the company has received interest from potential buyers, Zaman believes there are significant opportunities for organic growth and he aims to double or triple assets under management by 2014.
‘We need to need to make a significant investment in technology and I need to build out the management team to delegate a large number of functions to an executive. What I felt, in discussion with our co-shareholder, is we still have loads of opportunities and have still not reached our potential.’ To this end, he hopes the hires of Tim Watts, who will join from Abacus, alongside Joseph Donoghoe, who joined from RBC, will play a key role in expanding DPZ’s proposition and sow the seeds for future growth.