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Wealth Manager: smaller is better for post-RDR investment outsourcing says Tacit

Wealth Manager: smaller is better for post-RDR investment outsourcing says Tacit

Being small and nimble is a much touted benefit for a firm in the current regulatory climate and it lies at the very heart of Tacit Investment Management’s offering.

Founding partners Raj Basra and Roy Swain effectively launched the business with a blank sheet of paper last October after the pair left Deutsche Bank Private Wealth Management in early 2010. Basra had been head of portfolio management at the German-owned banking giant, while Swain formerly ran its London intermediary group.

Both have certainly spent plenty of time on the big company side of the fence, with Basra having also worked at Gerrard, which was bought out by Barclays, and Swain having started out at Legal & General before later moving on to Société Générale.

But now having run Tacit for just over a year – during which it has amassed £120 million in assets under management – both are firmly of the conviction that smaller firms are better positioned to take advantage of the retail distribution review (RDR) and the changing nature of the wealth management sector.

‘It seemed like every time we built up our intermediated service offering in the UK, either regulation or IFAs then moved on,’ Basra says. ‘So we felt that we just needed to be able to be more flexible and the only way to really do that is to be a small firm with very experienced people.

‘We started with a blank sheet of paper and looked at what the market needed.’

Discretionary fund management lies at the heart of Tacit’s proposition, but Swain says the firm aims to provide much more than that.

‘We have got a number of strings to our bow,’ Swain says.

 

‘We are not saying “this is our offering and this is what you get”, it is more a question of talking to IFAs and seeing what fits their business. It is a changing marketplace and IFAs are fragmented and run their businesses in a range of ways.

‘You have the investment management side, but you also need a service proposition and the IT infrastructure in place.’

Tacit’s IFA clients range from smaller firms with between two and 10 registered individuals to larger national firms with each intermediary partner having different requirements. While some have long been outsourcing their investment management, others have been slower to outsource this function and require more hand holding.

Tacit will work with the advisory group to design and manage their investment proposition and, having partnered with Raymond James, Basra stresses the group is free to invest across all asset classes.

The group predominantly invests in third party funds but will also buy direct equities and bonds and create structured notes when it spots opportunities.

Basra spearheads the six-strong investment committee, which meets formally every month, and the group also employs Peter Bickley, the former chief strategist at Deutsche Bank and a member of its global investment committee, as a consultant economist.

‘We have two main client types: those who really just want to preserve their capital and are concerned about inflation and others who are typically younger and want to maximise their wealth,’ says Basra. ‘Then there is a band that sits in between, but the process is really based on those two main camps.’

The group has a global focus and Basra says it ‘takes research from absolutely everywhere’ to help shape its world view. He adds that the advantage of having Bickley on board as an external consultant is that he can act as a springboard to bounce ideas off rather than being the hub of the investment process, given that even the best economists will not be right all of the time.

 

The nitty gritty is really focused on broad-ranging and in-depth number crunching, though, with Basra admitting that a lot of this, such as cash flow modelling and analysing companies’ price/earnings ratios and dividend cover, is a fairly straightforward approach, but is still all too often overlooked or just paid lip service.

Given the starting point is capital preservation, inflation-linked bonds and gold are the basic hurdle rate for any alternative assets being chosen.

‘We have a top-down approach and then use a multi-factor model that was devised in the US in the 1990s,’ Basra says. ‘Most strategies can be regressed back to two or three factors – for example, a tilt to BBB-rated bonds over AAA-rated credit or small caps over large caps.

‘As long as you have the same manager or team running a fund, we know how they will perform in different parts of the market cycle and we will tilt the portfolio accordingly.’

Their approach can lead them to opt for out of favour fund managers who will bounce back following an inflection point or change in the market backdrop. Certain picks, such as Lindsell Train’s Nick Train and Newton’s James Harries, are a case in point.

‘At times we will be exposed more to beta and at others more to alpha,’ Basra says. ‘Over the past 12 months we have favoured active managers and most of these funds had a bad 2009-10, but have since bounced back strongly.

‘The common theme of their strategies is that they look for sustainable cash flows and year to date they have all added significant alpha compared to the benchmark.’

Swain also sits on the investment committee as he believes it is crucial for him, as someone on the client side, to be able to explain both how and why their portfolios are positioned as they are.

 

‘We spend a lot of time ensuring that advisers understand the proposition,’ he says. ‘We also need to be sure that we can explain it to clients.’

He admits it can be difficult to boil down an investment thesis and avoid producing a large, dry tome, but says Tacit has been very proactive in sending out brief summaries for clients during the recent market turbulence.

‘This might be just saying “Will France lose its AA-rating after the Dexia episode? Yes, probably, but don’t get too bogged down by this because it is probably priced in”,’ Basra adds.

The group is currently investing significantly in its IT infrastructure and website to offer more than just the portfolio holdings and valuation that many wealth managers offer.

‘We want to add in research on individual portfolios and holdings,’ Swain says. ‘Periodically, there are holdings that do badly and the idea is to put clients at ease and not just focus on the wonderful ideas. It will also show where they are exposed and to what currencies and they will be able to ask us questions which will make them feel much more involved.’

This transparency on the investment side is carried over into the group’s charging structure, which Swain says is another benefit of heading into the RDR without any legacy business.

Tacit charges a flat 1% fee, with institutional shares bought where possible, and where not, commission is rebated to the client’s portfolio.

‘The flat fee structure is very transparent and it is something every wealth management firm will need to deal with at some point,’ Swain says. ‘The biggest issue that everyone will have to deal with in five years is the legacy of business they have. In a low returns environment, everyone has to be able to justify their fees.’

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