Launching a new business is never easy, but doing so into one of the worst bear markets in history takes the process to another level.
And that was not all that Senhouse Capital founders Charles Scott Plummer and Julian Pendock had to contend with.
‘We had quite a tumultuous beginning,’ says Scott Plummer. ‘Besides the rigmarole of setting up a new business, we were wrangling with our old employers and our seed capital fell through on the date of the launch.
‘Instead of launching with £25 million like we thought, we actually launched with £1.8 million, which was primarily from friends and family.’
The pair decided to set up the business after they both left Bedlam Asset Management together in June 2007, having become disillusioned with the direction the firm was taking.
Scott Plummer had been one of the founding directors of that business, but the tensions within the group persuaded him and Pendock, who had been running its European equity fund, to strike out alone.
Despite the early problems that beset the pair, they launched the boutique’s initial offering, the Senhouse European Focus fund, in March 2008.
Although the support from institutions and high net worth individuals that they thought they initially had has now started to come through, Scott Plummer admits that the process has not been easy.
‘It was probably the worst time in 76 years to launch a long-only business, but life’s a challenge,’ adds Pendock.
‘We set up the fund under the Ucits III regulatory structure, but we were only pitching a tent on these foundations. It has been a chicken and egg scenario in terms of the fund’s size and the length of the performance track record.’
The fund has tripled in size over the past eight months, however, and now sits at £24 million, just shy of the £25 million to £28 million that Scott Plummer says is Senhouse’s breakeven point.
Although the institutional clients may be a diverse bunch, one of the common themes is that the money has tended to come from their regional offices rather than from London.
‘Most of the groups in London, which is where the central lists are driven from, are too big,’ says Pendock. ‘They might have a minimum investment size of £10 million, but they cannot be more than 10% of the fund. We can understand the logic, but it can be frustrating. Most of the money we have got is from clients we know well and some of them have been spreading the word about us.’
The performance of the European Focus fund has been strong – it is up 13.2% over the 12 months to 5 April compared to 7.5% from the peer group, and up 2.6% over three years versus an average fall of -3.3%.
Scott Plummer is keen to stress this impressive track record was achieved despite the fund running with a massive 7% total expense ratio (TER) in the first six months due to its sub-scale size, and averaging 5% over the first 18 months.
‘It was like we were driving with the handbrake on at first,’ he says. ‘Now, after we changed the fund administrator to Apex and as the fund has grown, we have reduced the TER significantly and on the institutional share class it is now just over 1%.’
The lesson of the TER issue was at the forefront of the group’s mind when it launched its second fund, the Senhouse Southeast Asian Focus, last month. The group brought on board Brook Tellwright as a partner to run the fund out of Bangkok.
Like his new colleagues, Tellwright has had a long association with the continent, having set up and managed Cazenove’s Asian office back in 1991. He later headed the group’s emerging markets desk before moving across to lead its flagship US team in 1998.
After taking a break from the industry between 2000 and 2005, during which time he studied for a second degree at the University of London’s School of Oriental and African Studies, he returned to Asia, co-founding Ton Poh Capital, a Thai-focused investment boutique where he worked until last year.
‘I went out there and we got talking and it turns out we had joint investors,’ says Scott Plummer. ‘He wanted to broaden it out and run a fund investing across the whole Asean (Association of Southeast Asian Nations) region, but he didn’t want to have to do the compliance and marketing.’
The fund was launched at the start of March as an unregulated vehicle domiciled in Bermuda, which Scott Plummer says carries just a fifth of the cost of running a Ucits structure, so avoiding the high TER problem while the fund is still gaining scale.
‘We are building it up slowly because we are a bit worried about the valuations in certain sectors as money continues to flow into the region due to quantitative easing in the West,’ Scott Plummer says. ‘The fund is currently about 40% invested in eight stocks.’
This high conviction approach is the Senhouse philosophy, with Pendock joking that those fund groups that manage ‘best ideas’ portfolios separately from their core mandates are therefore implicitly saying that they are padded out with ‘bad or very mediocre ideas’.
The European Focus fund currently holds 20 stocks and will never hold more than 25.
‘We have set out our investment approach and we don’t deviate from it,’ he says. ‘If you look at most mainstream funds, whether they are called alpha or value or whatever, they are still closet trackers.
‘We hold 20 to 25 stocks and think that if you have 50 you are spreading yourself too thinly. When we set up three years ago people said that the fund would be more volatile, but we have proved that we can deliver better performance and lower volatility than the index.’
Pendock says what matters to his clients is not losing money rather than relative returns, and he is surprised that investors are still willing to pay high fees for funds that go for the index plus 2% approach.
His own high conviction mantra has seen him zero weight banks since launch, as he says they are impossible to value accurately due to the lack of transparency about what really is on their balance sheets.
He is by his own admission a lover of ‘dull’ companies that are market leaders, able to grow their margins and that have strong management. Examples of his current favourites include Piaggio, Nestlé and InBev.
All Senhouse’s research and financial modelling is carried out in-house with Pendock assisted by former Schroders analyst Andrew Sykes. Pendock says his past career as a sell-side analyst has made him wary of relying on broker research, adding that he can ‘smell a buy note a mile off’.
His previous stints at Jardine Fleming (which was later taken over by JP Morgan) saw him work across the Asean region and it was in Singapore that he first met Scott Plummer, who was working at CLSA in equity research and institutional sales.
‘Despite its size, Asia is a bit like a village and you get to know everyone, like Brook [Tellwright],’ Pendock says. ‘When it comes to Asian funds, everyone thinks about India and China, but we think the Asean story is under-represented. Brook is there on the ground and has the freedom to invest in small and medium-sized companies that the big funds cannot.
‘It is from these stocks that you will find the region’s next Tesco.’
Although clearly still passionate about Southeast Asia, Pendock does not see it as strange that he ended up running a European fund, given the number of years he spent in the likes of Singapore, Thailand and Indonesia.
Indeed, when he made the switch to fund management, joining Scott Plummer at Bedlam, it was running the European fund where he made his name.
‘People who say that they don’t like Europe are really not applying much thought,’ Pendock says. ‘If you look at it geographically, as a percentage of world GDP it is on a par with the US and it is replete with global companies.
‘It is lazy thinking that you can be zero weight Europe but not the US. It is too large to ignore and has some of the best companies in the world.’