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Wealth Manager: establishing the roots of growth at OakTree

Wealth Manager: establishing the roots of growth at OakTree
Setting up a wealth management business in the midst of the 2008 credit crisis could be considered bordering on reckless. However, OakTree Wealth Management founders Ian Brady and Jeremy Arthur say it has proved a risk worth taking.

‘[OakTree] was entirely the brainchild of Jeremy,’ says Brady, OakTree’s chief investment officer. ‘He had been a director at Towry and was in business development at Anderson Charnley.

‘He also lives in Henley and had used the Invesco Perpetual fund of funds that I used to run, and our wives were on the board of governors at our children’s school. Jeremy had been on at me for a couple of years, saying “the industry is changing and there are very few companies that can marry all-of-life holistic planning with an institutional fund management capability”.

‘Eventually the time was right and we thought we could bolster the fund management capability by having some external consultants who had vast experience that could help. We were setting up in the throes of Bear Stearns, Madoff and Lehmans, so we had to have some firm foundations.’

The consultants came in the form of Ian Cooke, head of North American equities at Kames Capital, and Steve Renton, formerly of Morgan Stanley, who both continue to sit on OakTree’s investment committee. Renton is keen to explain why 2008 could be seen as a good time to set up shop.

‘I thought it was an interesting time to start. People were saying, “You are starting a fund management business in 2008 when the world is ending”. I think it was a good time because a lot of people had seen assets evaporate that hadn’t been managed properly. There was potential to do something different,’ he says.

Brady adds that fully funding the business for three years gave the company and potential staff the stability they were looking for.

‘We think this was the best thing we did, prefunding the business. We were fortunate that we were in a position to do so. It allowed us to bring on more clients quickly and attract some high quality staff.’

Three years on, the Henley-based operation has attracted £52 million in assets, and 77% of revenue, which last year was around £550,000, is recurring. While the firm has a £250,000 minimum asset level for potential clients, the average size of a client portfolio is nearer to £650,000 and it has stayed true to its mission to provide a fully integrated offering to clients.

‘Our view is you cannot do portfolio management out of context,’ says Arthur, who is responsible for the firm’s financial planning operation. Having a comprehensive understanding of the client is central to OakTree’s approach.

‘When we get a prospective client we really talk to them about their long-term aspirations and intergenerational issues. It is what we have done historically and we do that to really build a clear picture of the individual.

‘How their money is invested comes last. It is important but you need context,’ he says.

He believes the business is well positioned for the retail distribution review, as it has a financial planning overlay to the way client money is run and a transparent charging structure with trail commission rebated and institutional units purchased where possible.

A client with £650,000 in assets would have a total expense ratio of between 2% for the firm’s growth and income and growth models, down to 1.37% for an exchange traded fund (ETF) only model, run off a similar asset allocation as active portfolios. The figures include dealing and administration charges and ongoing advice fees. OakTree applies tiered charging, so for portfolios over £1 million the ongoing fee drops to 0.85%, over £2 million to 0.6% and over £5 million to 0.5% .

The firm offers five model portfolio options for underlying clients, including an ethical and socially responsible investment option, which are all managed by Brady. Clients can be invested in different strategies, depending on what the pot of money is for.

While the team uses Finametrica for client risk assessments and to establish their willingness to accept losses, they also outsource back office functions to Raymond James, which Arthur says allows the team to focus on the client relationship and portfolio management.

‘Clients can have four to five different tax structures and you can link the structures together and run as one portfolio, which is very cost effective for the client and it has the added benefit of online valuations,’ Arthur says.

Having studied agriculture and subsequently worked as a commodities trader for 10 years, Arthur’s move into wealth management was by no means an obvious one, although he is keen to stress it was a straightforward decision.

‘I was fascinated by financial services and had studied economics. I joined Towry Law in the early 1990s and ended up as a regional director and managing director of the employee benefits company.


'When they were taken over by private equity guys, I felt it was a great opportunity to do something completely different,’ he says.

Brady, meanwhile, started his career at FS Assurance (now Ignis) on the North American equities desk in the mid-1980s. He moved to Legal & General in the early 1990s, where he met Kames’ Cooke, and later joined their asset allocation committee. In 1997, he joined Invesco Perpetual and ended up heading their fund of funds team from 2004-08.

‘I really enjoyed it, speaking to different fund managers about what they were doing and why they were doing it. Sometimes you can see the stars aligning if, for example, five people who have been negative on something for five years all of a sudden turn positive. That is interesting not only for their funds but for a whole asset class,’ he says.

Research and valuations represent the cornerstones of OakTree’s investment process, which applies an asset allocation overlay decided by the firm’s five-strong investment committee to the selection of underlying collectives.

‘Research and valuation are key. It doesn’t mean you get it right all of the time, but ultimately fundamentals and valuation come to the fore. We don’t try to chase quarterly performance. A lot of people must have piled into fixed income in December to see the biggest switch in 25 years in the first three weeks in January,’ Brady adds.

When selecting funds, the CIO says consistency, a comprehensive understanding of a fund manager’s style and performance over different time periods are key, alongside a thorough review of underlying holdings.

‘What is important is for us to make sure we do our research and know what types of stocks are in portfolios and what our geographical and sector exposures are, to ensure the collection of managers or instruments – albeit investment trusts or ETFs - reflect our macro view,’ Brady says.

Over the past year, key asset allocation calls included raising cash to 10% and shifting to an underweight in Western banks and commodities, a move he says helped to protect performance in challenging markets. Over the 12 months to the end of January, OakTree’s Income & Growth strategy posted a 0.5% loss net of fees, compared to a 1.7% fall by the IMA mixed 40%-85% equity sector. Over the past three years, the same strategy is up 41.3%, while the IMA sector rose 35.6%.


Although the decision to not hold conventional gilts during the second half of last year may have proved a dampener on performance, Brady says increasing Japanese equity exposure after the earthquake last year proved a wise move. ‘We had seen what had happened during the prior two earthquakes. Then we sold the initial lot six weeks later at a good double-digit profit.’

The team is now allocating 12% of the income & growth portfolio towards Japanese equities, alongside 36% to the UK, and 19% to Asia. These compare to just 3% in European equities and 4% in US equities, two areas the team reduced exposure to over the past year, moving money over to UK equity income funds. On the fixed income side the strategy has a 13% exposure to strategic bond funds.

Looking ahead, Brady highlights European equities as an area on the radar, as he is particularly positive about the European Central Bank’s Long Term Refinancing Operation (LTRO), which has temporarily backstopped Europe’s banking system.

‘We think the impact of the LTRO has been underestimated by the market. It has caused a big market move, but the reason we think it has been underestimated is because if the rumours of a €1 trillion option next month are correct, that in effect takes care of Italy, Spain and the banks’ refinancing needs for the next 18 months to two years. It may be kicking the can down the road, but it does buy time,’ he says.

‘If Spain and Italy are making structural reforms, the market will give the benefit of the doubt. If they have got liquidity and they are making some attempts at structural reforms, then down the road that could lead to meaningful changes. It is going to be stop-start with many bumps on the way, but we are positioned for positive progress – but progress on a bumpy road,’ he says.

Fortunately, Brady’s optimism for OakTree’s growth prospects in the years ahead is far stronger.

‘I think we can grow quite quickly now. From continued organic growth and also from taking on IFAs who are of a similar mind-set to us, who maybe want to retire in a couple of years. We think we can do one to two of those deals per year,’ he says.

‘We would ideally like to get to £500 million over the next five to seven years. We have achieved the targets we set ourselves so far,’ Arthur adds.

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