One would imagine that developing the investment proposition for a private investment office that has amassed £4.7 billion in assets since its launch in 2004 is no easy feat.
While Stanhope Capital’s chief investment officer Jonathan Bell acknowledges the early years of the private investment office’s life were marked by hard graft, it has been a challenge he has relished.
‘Anyone who has started a business will tell you the problems about the hours you have to work to get things done. There was also the problem that until you got a proven track record, other people don’t want to come and join you. That was a period that was great to have had, but not something I want to repeat.’
In 2004, when Stanhope was created, Bell took a gamble in leaving his role as CIO at Newton to help develop the private investment office alongside Daniel Pinto and Julien Sevaux.
‘Being able to start anything is great because you start with a clean sheet and you say: “In an ideal world what would I like?”
‘We had to decide whether to do equity selection ourselves or outsource. If you outsource, how are you going to outsource? The solution of using funds pretty quickly became our preferred route and then over time we decided it was the right route for us.’
While designing a research process for the company, Bell decided to apply similar principles to those he had used at Newton: primarily using a range of sector specialists each with depth of knowledge in their own field.
In Stanhope’s case the concept has been applied to funds. This has helped to give the firm an edge, he says.
Eight years on from launch, the business runs around £4.7 billion, with assets growing at an annualised rate of around 20%. More than 90% of income is recurring.
Having completed the acquisition of charity specialist Jewson Associates in 2011, the firm’s client base is roughly split 50/50 between private clients and institutions, while Bell associates much of the asset growth with success in winning trust assets.
He says: ‘With beauty parades, people are convinced by us having the right level of research and alignment of interest,’ alongside a demonstrable and repeatable track record.
The alignment of interest is demonstrated by Stanhope’s policy of setting up investment committees with its clients and their other external advisers.
‘It means no matter how independent you are or how much your interests are aligned, you need someone to sit alongside the family who receives nothing more than a payment for turning up to a meeting twice a year, so they have no conflicts of interest.
‘I think that is very important to the family, who should not have to rely on trust. They should have someone verifying,’ he says.
The team also seeks to go beyond pure portfolio management and is able to refer on clients to philanthropic advisers, assist investments in private equity vehicles, and help clients if they wish to sell or buy their own companies, or invest in other companies.
Management fees start at 1% and are tiered thereafter for larger clients, while Bell anticipates an average portfolio at the firm typically has a total expense ratio of around 1.3%, including Stanhope’s management fees.
Although the retail distribution review (RDR) is likely to shake up some segments of the financial services industry, Bell anticipates it will change little for Stanhope, which already buys institutional share classes where it can, and rebates commission.
‘We have someone who spends their whole life working out what is owed to clients and paying them back. The advantage of the RDR is it encourages firms to have different share classes so we don’t have to pay retrocessions back, which is already starting to reduce our workload,’ he says.
Bell has a passion for investment and market analysis, having published an investment idea book during his time at Newton entitled Start with the Map the Right Way Up.
Unlike a number of his peers who might have merely fallen into the profession, Bell had planned to go into investment management from the age of 14. After completing an economics and politics degree, he joined BZW Portfolio as a trainee analyst and later moved into investment management which he said met his expectations.
‘When I was 30 I took an MBA and the reason I did that was because I was slightly concerned that apart from my interest in the macro, I did not understand enough about the micro and that an MBA focusing on issues like operations management would help me learn a bit more.
‘I worked hard and thoroughly enjoyed it and then went back to the job I was doing before [at BZW]. It taught me that perhaps I knew more than I realised,’ he recalls.
He went on to join Principal Investment Management (formerly a subsidiary of PPP Healthcare), as a senior investment manager, and after 18 months joined Newton, It was a business he had wanted to join for some time because of its emphasis on individual sector expertise above generalists.
At Stanhope he has sought to bring together the strength of service offered at BZW’s more traditional stockbroking relationship-led model and the investment rigour of Newton.
‘One of the things I really tried to do at Stanhope was to combine the right level of service and the in-depth research. It is getting those two right that is the key,’ he explains.
The service aspect has been helped by having an alignment of interests as partners in the firm invest alongside their clients. As around half of Stanhope’s clients are based outside of the UK, the team tends to be more international in its investment outlook. For a typical balanced portfolio, investment managers at the company are currently allocating around 38.5% to equities, with around 9% in the UK.
While equities are normally split equally between US, Europe, and Asia and the emerging markets, Bell notes a recent shift out of US equities in favour of European equities, on valuation grounds.
In fact, the US weighting has been halved. Global large caps remain at the core of equity exposure but Bell recognises a slight shift into more cyclical areas, for example through the purchase of an exchange traded fund that gives exposure to US banks.
Cash in a balanced portfolio is running at 9.5%, alongside 19% in bonds – which is biased towards inflation-linked bonds, investment grade and high yield. Around 16% of assets are in hedge funds, and a further 5% in property, which the firm can access through private equity vehicles, dependent on client preference and time horizon.
Between January and August, a typical balanced portfolio returned around 4.9%, and has posted an annualised return of 6.7% since 2005 with annualised volatility of 7%, versus an annualised rise by the MSCI World index of 5.5% on volatility of 15.2%.
Bell says performance has been boosted by having a bias towards quality equities and high yield over the past 12 months. Looking ahead, following European Central Bank president Mario Draghi’s outright monetary transactions (OMT) scheme (which has helped to provide some support to eurozone debt and equity markets) and QE3 in the US, Bell is more positive on the economic outlook for the US than for Europe, where austerity measures continue to weigh on growth prospects.
‘Our view throughout the crisis is that the conclusion will undoubtedly be greater co-operation and a centralisation of power. That will probably include the larger economies.
‘Whether Portugal and Greece can stay in is questionable, but is almost irrelevant as if they have to leave, it will precipitate a far closer union forced on the core because if they don’t agree to it, it will open the floodgate.
‘If they are not kicked out, they will have to have further bailouts, [but] the cost isn’t significant in terms of the overall EU budget and you still have this slow move to federal Europe. That is our core view. There is of course a risk that a political decision by voters to oust a pro-euro party could unwind that,’ he says.
Fortunately Stanhope faces less significant headwinds, with its upward trajectory likely to continue, particularly as the private investment office continues to pick up clients from private banks.
‘I would expect us to continue to grow at a similar pace to the last few years. We have a number of client partners and most have capacity to add two or even three more clients over the next year.
‘In addition I suspect we will attract more people keen to look after their clients using our investment platform. In the last few years we have grown our institutional and charity business, this will continue to grow as part of our overall growth,’ Bell adds.