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Wells Capital's new CEO explains the outsourcing opportunity

Wells Capital's new CEO explains the outsourcing opportunity

In the greater scheme of things, Hackney, east London, is not geographically a million miles from Royal Tunbridge Wells. Culturally however, it may as well be in a different galaxy: despite the ongoing march of gentrification and the fact that the local Clapton Road has not seen enough homicides to justify its Murder Mile sobriquet for a decade or so, it’s still no Royal-Chartered spa town.

Hackney resident Eric Clapton (no relation) appears to be bridging the cultural divide with relative ease. Since signing up as managing director of Wells Capital, formerly Fund Intelligence, he works in the putative capital of Middle England, though the recent weather hasn’t making life ideal for commuting on motorbike.

But then he has always had a foot in both camps, growing up the son of a banker father in the east London borough of Barking – at that time still part of Essex – and a regular at Tottenham Hotspur’s White Hart Lane for long enough that he can remember when a ticket cost half a crown.

Wells Capital was formerly headed by Wealth Manager cover star Karen Vidler, who has gone upstairs to run her advisory business AV Trinity, and Clapton joined following the buyout of his business Reeves Investment from its accounting partnership owners Reeves & Co earlier this year.

The buyout yielded over £50 million in client capital, bringing the total within the discretionary outsourcer to around £140 million and creating a business with the scale and scope to take the fight to the national businesses currently salivating over the potential retail distribution review (RDR) boost of advisory assets.

Clapton says the company has a realistic expectation of doubling assets under management within the next two years.

‘We are pushing at an open door. We have 17 IFA [clients] on the books, but around five or six of them currently account for around 90% of assets,’ he says.

‘A lot of those relationships are fairly young and it takes a little while to cross the t’s and dot the i’s. But we like to build strong partnerships and will give them as much or as little engagement as they like. If they want a quarterly meeting we will see them quarterly, if monthly we will see them monthly.’

 

While the businesses only merged in May – and when Wealth Manager visits in early June, Clapton has only been in post for a few weeks – the combined group will have total revenues of around £1.2 million.

Price is a key differentiator. The company provides its model portfolio for 100 basis points and its full discretionary service, including associated custody and settlement costs, at 130bps.

‘We have spent a lot of time looking at costs because it is a very important point. All the academic research shows that if you are beating your benchmark, the chance of you continuing to beat your benchmark consistently are not that high.

‘Fortunately for us, we have been beating our benchmarks and are at least competitive on straightforward performance, but if you are clever about it you can increase that competitive edge, which is where the scale [we have gained] works well for us.

‘The market is demanding increasing transparency and we will only be considered cost-effective on the basis of returns versus cost. Although we will ultimately only stay in business if our performance remains good,’ he adds, smiling.

The company need not fear for its future on that point just yet. Since launch in February 2008, the Balanced model portfolio is up 17.4% versus the Apcims Balanced index of 17.6%, while the Growth model is up 39.5% versus 38.8%.

Performance on the Conservative and Income models has been a little bit further behind the curve, at 8.8% versus 14.1% and 19.9% versus 21.3% respectively, although both are managed with a relatively conservative capital preservation approach compared to the Apcims comparative, and have returned less volatility. The Income model also yields 3.81% versus Apcim’s 2.7%.

While asset allocation is the responsibility of the investment committee, fund selection is managed by investment director and head of fund selection Chris Mayo, with the assistance of long-time analyst Emma Clarke and Michael Hill, who joined alongside Clapton. The team is now sufficiently broad and deep enough to manage growth for the foreseeable future, he says.

The company generally runs within a 4% plus/minus tolerance to the Apcims benchmark models although with greater flexibility on the marginal allocation calls. The company is currently weighted more highly to equities – chiefly blue chip international brands – than some rivals due to the cash mountain currently being held by global corporates.

 

The Balanced model is currently allocating 67.1% to equity, split 35.9% to UK and 31.2% to international, versus 17.6% in fixed income, 4.8% in property, 8.2% in alternatives and 2.3% in property.

‘At the moment we are effectively being paid to wait [for a catalyst to recovery], and we think we will be better paid by holding quality equity. Markets are at best trending sideways for the foreseeable future.

‘Our problem is that we have seen a lot of very good corporate activity over 24 months, they have managed their liabilities very well. But if there is no return on growth, what is a finance director going to do? They have already controlled costs. It’s all about the macro and the battle royale being waged between Germany and other states who want to stimulate growth.’

Born in 1955, to a father who worked at Hanover Bank (now, via various iterations including Chemical Bank, part of JP Morgan) Clapton says there was ‘always an awareness’ of the City as a career when growing up, and after taking a degree in economics at Warwick, he trained as an accountant.

He worked within the sector until, after a short spell in management at Coca-Cola, he entered financial services as a finance director of an independent City advisory business. With the prospect of increased regulation in the late 1990s, the company threw in its lot with an accountancy business, becoming the separately incorporated advisory division of an accountancy partnership.

With the weight of regulation once again increasing, the company recognised guaranteeing its future would mean boosting its market presence and focusing on a particular specialisation.

Clapton first discussed the prospect of a merger with Vidler in 2003 but the rising markets of the time convinced both to explore growth opportunities independently.

‘It is always the same when the economy is booming,’ he says. ‘You think “why should I sell my profits away?”. But coming back almost 10 years later and looking at the list of all the things we would have to achieve [to successfully reach a point where they could be merged], it was remarkable how far we had both got toward the points we were saying we would have to reach all that time ago.’

 

While Reeves operated its own internal fund management, the company never managed third party assets, and Clapton appears to be relishing getting his teeth into the minutiae of managing a B2B service. He cheerfully spends the best part of 30 minutes talking about the fine details of adviser charging, VAT liabilities, and the relative challenges and considerations of bespoke versus model.

Despite the European Court of Justice recently ruling that third party asset management is legally definable as an ongoing VAT-liable service and therefore adding the tax rate onto the adviser charging of IFAs who use it, he says demand is not as simple as ‘discretionary bad, model good’.

Model portfolios remain legally defined as a one-off sale and are therefore VAT-free, making them 20% cheaper to the end client than fully bespoke products. ‘As far as we are concerned, we have to be flexible enough to supply our service to the intermediary however the FSA allows us.

‘Do I think the FSA has finished telling us how these things need to be arranged and managed? No, I think there will be a lot more discussion that we will have to have. The [potential] problem with models is that the FSA has begun making noises about suitability, and advisers have begun saying they believe that we, the fund manager, will have to be able to “see” the client.

‘If an adviser puts £100,000 in a discretionary service, we don’t have to see the clients. But the end advisers are now saying, based on guidance from the FSA, they cannot just put a client in a model on a platform, we have to be able to see the client to ensure we can be satisfied that it is suitable for the end user. There is a belief among some [advisory businesses] that if you have an in-house [discretionary provider] you will be able to gain exemption from VAT liabilities, but that really depends on which tax expert you talk to.

‘Personally, I don’t see how [by] just changing the corporate structure you then change how the service is provided to the end user. And it does seem as if you would be leaving the business open to a challenge by HMRC somewhere down the line,’ he says.

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