Pop quiz: which was the best performing listed asset manager in the UK over the last 12 months?
Those of you about to say Arbuthnot Group can put your hands down now, although with a 69% return over the period this would be a reasonable guess.Nor was it Brewin Dolphin (54.61%), Jupiter (50.14%), Close Brothers (36%) or Ashcourt Rowan (28%).
While these companies would have been worthy places for your money over the last year – versus a FTSE Financials index return of 25% – they were all beaten by AIM-listed Mattioli Woods, which has rerated by a heroic 72.06% since September 2012.
A large part of this success, according to head of wealth management Murray Smith, can be credited to a healthy and cooperative internal culture.
This is unsurprising since the business has reached its current position while retaining the respect of large numbers of both peers and professional clients. Advisers participating in the comment section of Wealth Manager sister title New Model Adviser, for example, are almost universally positive about the company, unlike some of its competitors.
The 12-month period of rerating covered the formal launch of the firm’s discretionary management business, which has so far managed to gather around £500 million in assets.
While much of this was through acquisition, £230 million came organically through the transfer of formerly advisory internal funds. Including its pension administration business – which remains the core of the company – Mattioli Woods now holds assets under influence of £3.6 billion, up 20% on the year.
The discretionary growth will inevitably slow from here, but the division has credible plans to increase assets to above £1 billion over the next few years. This is in addition to expanding its geographical footprint from its current four regional offices in addition to its Leicester HQ, to something like nationwide coverage.
Expanding on his earlier point, Smith says of Mattioli Woods’ launch in 1991: ‘It was supposed to be “lifestyle” business – both [co-founders] Ian [Mattioli] and Bob [Woods] had just come out of bigger firms.’
This was a big factor in the company attempting to manage its recruitment, inculcate talent and to seek to promote internally, he says, a philosophy it has retained today. Smith himself started out as a backroom administrator in the mid-1990s and was the first of its graduate trainees.
‘Almost all of our consultants are “home grown” talent. At the moment, we are adding something like 300 clients a year, which is getting on for a 10% rate of growth. The conduit for that is the consultants.
‘What we have found is that we offer a very good platform for people in their early 20s to go out and write [Sipp and Ssas] business; what takes a bit longer is the point where they become a trusted adviser, which is what we are developing at the moment.
‘The guys we have in the business have [largely] been here for many years – we have a real strength in staff retention.’
The strength of internal management is certainly a key factor cited by Citywire AA-rated Anthony Cross, one of the largest external investors in the company alongside co-manager Julian Fosh, through the Liontrust UK Smaller Companies fund. The managers took 5% of equity earlier this year. Directors Mattioli and Woods each maintain 17.13%.
‘It does have a very strong internal culture,’ Cross told Wealth Manager. ‘And the management are strongly tied into the company. Probably more important [to us] is the high and growing level of recurring income however, and the opportunity the company has to benefit from structural changes in the market. It has the opportunity to buy businesses as a result of the retail distribution review (RDR) changes, and increase its levels of recurring income.’
Key to the company’s strategy is the discretionary division, without which Smith says the business would find it ‘very hard to find or retain clients’ over the next few years. Building from its historical position as a Sipp, Ssas and employee benefits provider, the business expanded to meet demand from business owners and executives.
‘Because we had built a pension-centric business what arose was our ability to manage pension investments and that naturally leads into other [client] affairs and, over time, all of their affairs.
‘Ultimately our decision [to launch a discretionary business] was driven by client need and our ability to deliver. There is some polarisation among clients and some will always want to be hands-on with their affairs but the majority just want you to deliver a successful service.’
The opportunity set goes both ways however, and as much as a discretionary division was a strategic priority for the rest of the business, it is also a sector he believes is rich in its own possibilities. Cost pressures across the distribution chain mean a multi-channel business will inevitably operate from a position of greater strength than more specialist competitors.
While the business has emphasised the possibilities for consolidation in the advisory sector, two of its biggest acquisitions have been businesses with large books of discretionary business, Kudos in August 2011 and Atkinson Bolton earlier this year.
Following the latter, the company has been in talks with a number of the regional offices of the larger discretionary managers, although none have yet come to fruition, Smith says.
‘For us the RDR has been an exceptionally positive change. Costs are coming under more scrutiny and TERs [total expense ratios] are increasingly taking the limelight; RDR is the light that has been switched on.
‘There are going to be downward pressures on costs and if you are an adviser who has rebadged [as a wealth manager], if you are focused on 2%-3% in ongoing charges a year, that is going to be a very big hurdle for you to get over.’
Wealth management services contributed 27.5% of revenue in the year to end of May, up from 26.4% in the previous 12 months. Revenues rose 19% from £5.41 million to £6.44 million, contributing to the headline increase from £20.4 million to £23.4 million, while recurring revenues rose from 37.6% to 54.2%.
The company offers a 12-strong range of all-collectivised portfolio models, charging a capped total expense ratio of 2%, with bespoke management negotiable above £1 million.
Performance has got off to a good start, with its most popular Equity Income model returning 16.34% net of fees over the 12 months to 20 September, with a yield of 3.96%.
Smith, who has a history in asset management and fund selection and who sits on the investment committee, does not manage money full-time however and refers questions about asset allocation on to his investment manager colleague Ben Wattam.
‘Protecting the downside is really important to us and our portfolios generally outperform in flat or falling markets but don’t always keep up with all of the upside in strongly rising markets,’ says Wattam. ‘
This is what we’ve seen over the past year. We do monitor and actively manage relative performance risk but generating absolute positive returns is our primary goal.’
With an eye to the downside risks, a key management call over the last 12 months has been how the company treated duration risks and rapid yield appreciation, leading to an overhaul of some core positions, he adds.
‘We have sold some investment grade bond holdings that we have held for many years and done a great job for our clients, such as M&G Corporate Bond, on concerns that the mandate Richard Woolnough has for this fund is not flexible enough to protect capital from interest rate risks.