‘Impressive isn’t it?’ asks Richard Charnock, looking out at the enormous swathe of south and east London laid out beneath the picture windows of Standard Life Wealth’s (SLW) office. ‘I signed the lease on it,’ he adds with something like proprietorial pride.
SLW’s executive director is, of course, referring to the 34th floor of 30 St Mary Axe – the Gherkin to you and me – rather than the billions of pounds of real estate that are visible on a clear day, out to Canary Wharf, the Olympic site, and all the way to the Kent and Essex borders.
The impression one gets from a meeting with the company is that its ambition is scarcely contained by a single floor of one of the City’s most prestigious addresses, however.
And indeed the company has already taken receipt of a second floor several stories down for everyday work; the upper floor is now the showpiece address for client meetings. If it’s intended to impress then it works, at least on Wealth Manager.
So rapid has been its success and so seductively simple is its premise that one can only wonder why more life companies haven’t attempted to carve themselves a big slice of the adviser outsourcing market that is SLW’s bread and butter.
Standard Life, of course, already has a national network of around 95 broker consultants providing distribution, a database of information on the vast majority of the IFA sector providing market intelligence, and a record of taking adviser business that goes back generations.
What other life companies have not historically scored so highly on is the actual delivery of an end product. Only perhaps Legal & General has a multi-asset brand to rival SLI’s Global Absolute Return Strategies (Gars), the team that acts as backstop to the 30-something complementary strategies balanced and applied by chief investment officer Eddy Reynolds and his team of portfolio managers.
‘It’s a very dangerous quote because inevitably someone out there will complain, but I am fairly confident we are the fastest growing discretionary fund manager in the UK,’ says Charnock.
‘It’s all organic. No seeding. Of course, we are coming off a base of zero from two and half years ago, so in percentage terms it is bound to be pretty explosive. We are still at the sharpest point of the curve.’
Since launch in 2009, the company has gathered some £750 million in assets managed on behalf of approximately 1,000 clients (or at least it had by late autumn 2011 – the company is currently in a closed period and unable to discuss more recent figures in depth).
The vast majority of assets – approximately three quarters – are run on behalf of advisory clients, with the remainder largely charities. Effectively outsourcing much of the investment function and distribution to the parent group makes this highly scalable, with just 13 investment managers working directly for SLW, at the core of a staff of 48.
The combination of scalability and the company’s traditional mass-market advisory focus has also helped it to consolidate a mass-affluent mid-tier clientele holding between £500,000 and £800,000, which has proved a tougher nut to crack for discretionary fund managers than traditional high net wealth.
The close integration of a comprehensive suite of life company tax wrappers has helped, of course.
‘Every IFA will have contracted with Standard Life for something in the past,’ says Charnock.
‘This is a very crowded space but we have gained traction as quickly as possible. If you launch a private client boutique you will have to spend time chewing sawdust, but that is the power of distribution – we straight away had the expertise and had the brand status.
‘The challenge is then to never start taking it for granted and to show that our proposition is clearly differentiated. We are still in a purple patch for investment outsourcing but we estimate that around 80% of advisers will eventually outsource at least part of their investment management.’
This fairly hard-headed pragmatism is matched with the diplomacy of a man who is very aware of who pays his pay cheque. ‘We are very big buyers of the IFA brand.
‘We get quite hacked off with a lot of badly informed commentary saying that the retail distribution review (RDR) is there to fix the failings of the sector. We are there to help them apply their hard-won experience where they believe it is most needed.
‘While we believe that most will become RDR-compliant to QCF level 4, and that a lot are already there, the requirements of saying they are independent will mean that they demonstrate they are researching the whole of the market, and that many will decide their time is better spent elsewhere.’
All of this may be useful for capturing an audience, but offers little hope for retaining it. This is the point where Charnock passes the conversation over to his colleague Reynolds, who heads investment management.
While the architecture of a national IFA distribution chain can be impressive without ever really capturing the imagination or threatening to make the heart soar, the SLW investment proposition is genuinely remarkable.
At its core, the business runs a portfolio of Gars best idea strategies together with input from Bambos Hambi’s multi-manager team and research from across SLI, using a risk-weighted model to balance portfolios of between 25 and 30 multi-asset strategies.
Alongside the quantitative risk weighting, the portfolios are also balanced against pension fund-style long-term liabilities and lifestyle planning objectives, blended to deliver between 3% and 4% above Libor with approximately a third of the volatility of a pure equity index.
Over the last year a core balanced portfolio has delivered a 3.4% gain versus a 6% loss on the average equivalent Arc index, with between a third and half of the volatility of global equity.
‘The DNA of our investment process has always been corporate pension management,’ says Reynolds. ‘We have almost as many people [in SLW] working on risk management as we do on investment.
‘We have a slightly different perspective than your traditional stockbroker investment manager. We don’t primarily invest to an asset allocation, we invest to risk. There is no point in having a portfolio balanced to a particular balance of asset classes if three of them dwarf the risk allowance of the rest of them put together.’
The approach – only really possible with the backing of a major investment group and life company – delivers a portfolio very different from the same old blue chip equities that have been the primary talking points of UK private client managers in recent years.
On the example of a sample medium risk portfolio with £1 million to invest, £349,000 would be placed in the Gars feeder fund, with £85,000 in the SLI Global Index-linked bond fund and £15,000 in the SLI UK Smaller Companies fund.
Among the larger allocations to external funds are £75,000 in the Schroder Institutional Global Equity fund, £60,000 in the Aegon UK Equity fund, and £50,000 apiece in the M&G Strategic Bond and Invesco Perpetual Strategic Bond funds.
‘In terms of traditional long-only, we are holders of US equity – the economy has become something of a beacon of light in the last few months, and they are historically not expensive, with good profit growth.
‘They have essentially been derated and in terms of our thinking, appeal to one of our key beliefs of sustainable profit growth.’
A similar rationale has led to large holdings in high yield debt, particularly in the financial sector, Reynolds says.
‘They are yielding almost 9% over government debt; they are priced for a very serious recession and the likelihood that several banks will go bust.
‘In sovereign debt we have taken a view on the German yield curve. The spread between the five and 10 years is substantial so we are taking a relative value view, selling the five-year to take the 10-year.’
European equity was also one of 2011’s more successful strategies, offering a relative value trade on the premium valuation offered for the banking sector versus the rest of the market in the lead up to the summer’s outburst of sustained volatility.
‘A view on the relative weakness of the dollar versus the euro also paid off over the year as it strengthened over the 12 months as did a Russia position, which despite the negativity has provided cheap exposure to energy, and over the long term provides a play on the increasing efficiency and competitiveness of local companies.’