It may not have been quite an Annie Get Your Gun moment, but after spending several years as an investment consultant, IPS Capital’s Jonathan Blain believed he was much more in tune with the needs of high net worth clients than the managers he was selecting.
At the height of the bear market in 2002, he decided to act on his instincts and made the switch to offering a discretionary asset management service.
He says: ‘When the business was an investment consultancy, we carried out manager selection and due diligence for clients. At the end of the 1990s, the brief was typically to outperform the FTSE All-Share by 2% a year. But we felt that a better approach was needed.
‘We recognised that with most trust funds, especially where the wealth had been around a long time, the number one priority was capital preservation, and then returns above the risk-free rate. We took this mantra from the hedge funds and were early adopters of this mentality.’
Blain, who is both chief executive and joint chief investment officer, says that back then, private client portfolios typically comprised the traditional mix of equities, bonds and cash, but he was adamant that IPS would take a much broader approach to investing and make use of a much wider range of assets, including hedge funds and commodities.
After running a ghost portfolio for 12 months, the firm went live with its first few clients on 1 January 2003 – ‘friendly ones’ it had known for some time. It opted for
a clean charging structure of 1% a year, although with commission rebates this averages 0.8%.
‘The first couple of years were a major struggle,’ Blain admits. ‘When you turn up for a pitch and you say you only have £20 million under management, people will tell you to come back when you have £100 million.
‘We now have £250 million under management and are looking to raise our profile, which we feel is appropriate for the next stage of our development.’
As part of this development, last year the firm rebranded into IPS Capital from IPS Consulting – a legacy of its past guise – and the business was restructured into a limited liability partnership.
At the same time, Blain has grown the team from five to 15, including hiring in a joint chief investment officer, who has already started with the business on a part-time basis and will formally join full time in July.
The two things that have remained constant are the firm’s attitude to client relationships and its investment process. The partners deal directly with clients. Blain is a straight-talker and does not believe in relationship managers, which he says are likely to be tempted away to a rival for an extra £10,000 at any time, leaving both the firm – and more importantly, the client – back at square one.
Similarly, he is equally up front about the firm’s aims when running money, which are based on the premise that capital preservation is key and if you can capture 70%-80% of the upside but only 20%-30% of the downside, you are generally doing a good job.
He says: ‘When markets are racing up, admittedly we do not look that sexy, but with private clients, if you give them 12% when cash is yielding 4% they will be happy, although it will not change their lives. If you lose them 10% they will want to sack you. If you return 3%-4% in excess of the risk-free rate on a compound basis over the cycle, you will have happy clients.’
Blain admits that IPS’s funds were down 5% last year and you can see that it pains him – total returns, not relative outperformance – are the name of the game, he says. That said, IPS has never lost a client and several committed new funds last year and, in all fairness, most of his peers would kill for those numbers, slight loss or not.
With capital preservation the starting point, Blain and his team take a macro-led, multi-strategy and multi-asset approach to investing. Although they will buy gilts and investment grade corporate bonds directly, they use funds and ETFs for everything else.
He says: ‘We are not micro-managing; it is more a case of massaging the portfolio through the asset classes, much like a macro hedge fund manager, but not as aggressively.’
Rather than hiring an economist to shape their macro view, IPS decided early on that its resources would be better spent buying external research.
Blain says the main two firms it uses provide an interesting contrast. GaveKal’s Anatole Kaletsky, he says, tends to be more upbeat and looks for the silver linings in bad news.
On the flipside, Roger Bootle at Capital Economics is consistently bearish. Although they do not always agree with what either says, they help shape the team’s views on what is going on in the world.
Blain stresses that risk management is a key part of the investment process. To help with this, the group employs Peter Speak, an independent risk management consultant, on a day and a half a week basis. He has already paid dividends for the firm.
‘At the beginning of 2008, BNP Paribas and Lehmans were offering the most competitive pricing on structured products,’ Blain recalls. ‘He said "not Lehmans" because the French will never allow one of their major banks to go belly up. Risk is so key to everything we do, we spend more time laying awake at night worrying about risk than we do salivating over returns.’
This attitude to risk has been reflected in the fund’s asset allocation over the past two years in particular.
Until the middle of 2007, IPS was about one-third weighted apiece across UK commercial property, equities and hedge funds. In May of that year, wary of the increasing heat in the property market, Blain moved quickly to exit the sector.
However, he admits 5% of the portfolio got caught by funds imposing redemption freezes and that position is still being exited now.
On the equity side, Blain was equally direct in his actions, selling all of his equity exposure on 5 January 2008. He says: ‘We had been expecting a market rally
at the end of 2007, which did not happen. We could see the credit markets going wrong we felt the upside was limited and the downside enormous. We will be very aggressive to protect but not to buy.’
This money was rotated into cash and gilts, which served the fund well. Blain exited the gilts position in the third quarter after the Bank of England announced its quantitative easing programme.
Within the firm’s hedge fund holdings there were some massive successes. Blain favours single manager fund to funds of hedge funds, and points to Crispin Odey’s eponymous Odey Macro fund as the star performer. It was up 70% over the year and Polar Paragon also posted strong gains.
Blain says IPS limits fund exposure to 5% so any gains will have a meaningful impact on returns but any disasters will not wipe out the portfolio. This discipline was vindicated in the third quarter amid the fallout from the collapse of Lehman Brothers.
He says: ‘We got beaten up on three funds in credit by being in the wrong place at the wrong time. One was the Thames River Capital Emerging Markets Debt fund, which was off 30%. We did end up positive in the last quarter though, with good performance from our long US dollar and euro positions. It would have been nice
to have been more aggressive with these trades, but our risk controls would not allow us to.’
Blain remains cautious on the short-term outlook
for equities but says he ‘stuck a toe’ in the market
when the FTSE dropped to 3,250, buying an ETF
to capture the beta. He also took out a 12-month structured note on the FTSE that pays a semi-annual coupon of cash plus 9.5% as long as the market
does not halve from 3,800.
Blain says: ‘I normally hate structured notes because they are loaded with costs, but we realised that with volatility so high when we could get fantastic terms.’
IPS is also running a short sterling/long euro trade and although Blain feels it is still too early, he is monitoring the leveraged loan, high yield and distressed debt markets, where he feels interesting opportunities will emerge, perhaps later this year.
On the business front, Blain believes the damage to the reputation of the banks augurs well for boutiques that can provide a more personalised service. The fallout from the Bernard Madoff fraud is also likely
to result in investors favouring segregated accounts,
which the banks will not be able to offer to clients with anything less than £10 million.
He says: ‘We can offer segregated accounts and demonstrate that unlike Madoff, who had custody of his own assets, we distance ourselves and have our money with Bank of New York Mellon.
‘Madoff used a tin-pot accountancy firm – some old dear in Florida – but we use a medium-sized firm where we account for less than 0.1% of their revenue, so you can imagine how much influence we have there.’
The rise of the boutiques will clearly suit Blain. As an ex-currency trader, he has experienced life at big institutions and it is not something he wished to return to. The only downside is that might have to spend less time in the gym and on the golf course, which are both passions of his.