Londoners cannot have failed to see the adverts for Nutmeg peppering Tube carriages, and the new online discretionary manager’s profile received an unexpected boost from Barclays earlier this month when one of its analysts accidentally sent an email praising its website to the firm rather than to a colleague.
It certainly seems to be working. Co-founder and chief executive Nick Hungerford says it is early days, but Nutmeg, which only received its authorisation last October and began marketing in January, has already signed up over 11,000 clients with ‘loads’ transferring over funds.
The former stockbroker and banker’s mission is simple. He wants to break down the barriers to investment management and offer low cost diversified endowment-style portfolios to the masses.
The idea was born in Silicon Valley during the credit crunch when Hungerford was studying for an MBA at Stanford University. He had originally spent the summer of his gap year in California at the height of the dotcom boom in 1999, where he says he fell in love with the tech scene.
After completing his undergrad, he admits he got ‘sucked into banking’, spending six years at Barclays, latterly as a private client manager, before a stint at Brewin Dolphin, where he was a divisional director.
He speaks highly of his formative working years where he developed a passion for investment, but knew that ultimately, Silicon Valley was beckoning. ‘I was determined to get back to California, it is an amazing place. I went to Stanford University to study business and try to make some money,’ he says.
‘I had two fantastic years learning under some of the best professors you can ever meet, people who were advising the White House and IMF on how to deal with the falling markets.’
Despite the gloom of the financial crisis, the tech sector was enjoying a revival with the first iPhone being launched during his first year of study, sparking a frenzy to launch new apps.
‘As my classmates started building their businesses, I wondered what I should do,’ Hungerford recalls. ‘At the time, with the markets, I was getting more questions from friends about how they should be investing their money. For years beforehand, the answer then was that they were too poor for me to deal with professionally.
‘Stanford was different. The questions were from very smart people that were learning this stuff but didn’t have the time or inclination to do it themselves. On the face of it you can see why discretionary fund management works well, but a lot didn’t want some asset manager who wouldn’t take them on if they had less than £10 million.
‘I realised that in almost every industry, technology has been breaking things up – for example, what Amazon did to Waterstones and Google to libraries. I thought “why hasn’t this happened in financial services where there is such an obvious problem?”’
He says the reality is, of course, that the incumbent discretionary managers were already making healthy profits and were deterred by factors such as regulatory costs and the sheer scale of the infrastructure that needed to be put in place, not to mention inertia.
But for Hungerford, launching a low cost discretionary asset management business was a ‘no-brainer in terms of market demand and size’.
He secured investment from legendary venture capitalist Tim Draper, who previously backed Hotmail and Skype, among others, as start-ups, along with Pentech. The firm was also supported by the government after its global entrepreneurs group (part of minister of state for trade and investment Lord Green’s department) asked them to launch in the UK.
‘They go around the world looking for promising teams to attract to the UK,’ Hungerford explains. ‘They said London is the centre of finance and we should go and build our proposition there. Strategically, we looked at it and thought London potentially had the biggest audience – lawyers, corporate financiers, bankers – people who want control but don’t want to be doing it day to day.’
UK investors are also among the most internet savvy, he says, with research showing that 75% of British consumers now bank online, twice as many as in the US. Even in the over 55 age category more people would rather bank online than go into a branch.
He says it only takes eight minutes on average to invest with Nutmeg and although it is primarily an online service, it builds one-on-one relationships with clients who can visit the office for face-to-face meetings, ring up or use instant messenger to chat online with the team. Video conferencing is also in the pipeline.
The company has invested considerably in research to develop its approach to running money and how clients think about their wealth.
‘We have done deep ethnographic research, spending four to five hours with people to really get to know them. People think of money in different pots, savings for this or that, and very few see it as one whole pot. The whole of Nutmeg is built around that,’ he says.
‘You can have as many funds as you like – for example, for a new car or school fees – and you can target the amount and timeline, specifying the level of risk you want to take. This is not just offering high, medium or low risk models, but looking at it more deeply, such as where the money came from. People might be less risk averse with, say, an unexpected inheritance.
‘They can go in at any time and change the risk profiles on any of their funds.’
New clients are required to sell down their existing portfolios, as Nutmeg does not take on legacy assets, but Hungerford says for doing this, they will be rewarded with a properly diversified multi-asset portfolio tailored to their needs.
Its charges are as low as 0.3% for those with £500,000, tiered up to a maximum of 1% for smaller investors, plus an average 0.3% underlying fund cost, which is kept low by predominantly using passive funds. However, this reduces over time with clients receiving loyalty rewards for staying with the firm at various intervals and further discounts are available for recommending the service to friends.
‘We have eliminated transaction costs and for £1,000, investors get access to nine different asset classes, 40 countries and 20 sectors, rebalanced every month according to their risk profile,’ he says.
‘A year’s worth of Nutmeg costs you the same as what you pay for your popcorn and drink at the cinema. We think we will consistently outperform. No-one else has the flexibility to trade for zero costs and deliver a comprehensive endowment style portfolio. They can’t or won’t compete with us on fees.’
He says all client assets are held with Pershing and the company has a three-tier investment process with the team headed by former BDO Investment Management chief investment officer Shaun Port.
The asset allocation committee sits around him and includes Hungerford, the group’s team of analysts and its chairman, KGR Capital founder Nicholas George.
Above that, Nutmeg has an external investment advisory group, which Hungerford says offers a general sense of direction and gives the firm three layers of governance. The advisory group is packed full of heavyweights, including John Beshears, assistant professor of finance at Stanford Graduate School of Business, Andrew Clare, who is a former Bank of England Monetary Policy Committee member and Todd Ruppert, the former president of T. Rowe Price International.
Nutmeg also has an external management advisory team, which is no less impressive, containing luminaries from a range of sectors.
These include John Thirlwell, the former chairman of the UK Financial Services and Insurance Committee of the International Chamber of Commerce, Maria Molland, a past CEO of Lipper and Jane Fuller, the co-director of the Centre for the Study of Financial Innovation and a former editor at the Financial Times.
Considering the financial backers Nutmeg also enjoys, it all adds up to a very serious set of players putting their weight behind the outfit. Their credibility is matched by Hungerford’s desire and commitment. Although clearly fiercely ambitious, he cannot be described as an online zealot, and is considered and intelligent in conversation.
He adds that further product wrappers will be added over the next year and a launch into Europe is likely in a few years.
With its charging structure, Nutmeg clearly needs scale to be profitable, but Hungerford is sanguine about this pointing out that Amazon took eight years to break even, although he would like to do so sooner.
‘The reality is we will always delay breakeven if we continue to grow at the pace we are doing and put more into advertising,’ he says –so expect to keep seeing those Tube adverts for the foreseeable future.