Cazenove makes an about turn
New blood can be just the transfusion for a troubled business. When Cazenove, a London City name going back to 1823, pulled on board an outsider as a chief executive in late 2001, it believes it got the right man and the right time in the person of Andrew Ross, who joined from HSBC Asset Management. And it hasn’t stopped there.
“It was the first time that Cazenove had recruited from outside at such a level,” says Anne West, Chief Investment Officer of the bank’s fund management arm. “He has been instrumental in all the changes we have gone through.”
At the time, the bear market was exposing some severe weaknesses in the structure of the fund management business, she says. “We had too high a cost structure for the environment and we were very equity dependent.”
Following a full review, there were significant changes on the investment floor of this blue chip name living within a stone-throw of the Bank of England. “For example, the performance of our pan Europe product then was not really good enough for a company that has such a strong UK base.”
More fundamentally, she says the business was trying to be “all things to all men” and to have a product range to meet the needs of every type of client and covering every geographic region. “That issue had to be tackled as well.”
So the emerging markets team was closed down, as were all the overseas regional funds, apart from Europe. “A global team was formed with global sector expertise.”
Cazenove recruited Tim Russell and four other managers from HSBC Asset Management to cover UK and European equities. “We launched a range of funds using their skills in 2003.”
That marked the turning point in West’s view. “We then moved ahead as a specialist fund manager. Our aim is to excel in those areas we have decided to pursue.” To keep the momentum, the firm launched two equity long short hedge funds managed by these teams last year.
Another feather in Cazenove’s cap is its latest major signing of Neil Pegrum, who is joining from Insight and brings with him a considerable track record; Cazenove will be launching long only and long short funds for him to manage later this year.
West, who has been with Cazenove since 1989 as a fund manager and became CIO early in 2003, says that looking back if anyone had told her two years ago that Cazenove would be launching hedge funds, she would not have believed them. Her role since then has been to implement the new strategy.
She concedes that these changes were of course very much reflecting what was happening in the institutional marketplace with the move from the peer-group benchmark-driven balanced mandates to a specialist model.
The upshot is that “our pension fund business is now very much smaller than it was.” The institutional business now accounts for 28% of the £7.5bn (e11.2bn)assets under management.
The private client side of the business, which amounts to 45% of assets, saw the business develop its role into one of “a trusted adviser”, says West. “So that any client knows that they are obtaining the best possible advice about their portfolio.” This meant going outside to bring in the products that will best meet their requirements. So on the hedge fund side, in addition to its own funds, Cazenove has launched a fund of hedge funds (FOFH). “We also introduced the ‘Absolute Return Fund for Charities’, which is the first FOFH authorised by the Charities Commission.” Charities account for over a quarter of assets.
“For private clients, once we have taken full consideration of each client’s tax situation, the approach we take is to establish a strategic asset allocation on an individual basis. We have an economic and strategy unit that has done a lot of work in this area. Therefore, we provide a suitable framework within an individual’s risk profile and we do the asset allocation around that profile, according to valuation and opportunities in the marketplace.”
In the institutional business, where the mutual fund business also resides, the aim is to go the specialist route. Previously these had been separate areas operationally but have been merged as retail clients now want to have their assets managed in the same way as institutional investors. “As the fund of funds managers have become more sophisticated in what they demand from fund managers, the requirements have become the same.”
Within the sizeable fixed income operations amounting to a quarter of assets, there has been the same specialisation and move to deliver products in the way that best suits clients. “The team runs both government and corporate bond funds, and also runs suitable models for private client portfolios to achieve their income objectives.”
But pride of place goes to pan-European equities. “Well over half of our assets are here, with another £700,000 in global equities. The alternatives are around £300m and are growing very fast, particularly our own two hedge funds.”
On the institutional side, the corporate bond area has proved successful. “And our “high performance” UK fund has just won a new mandate.” Due to the tax advantages of investing through funds, this part of the business is growing quickly. Between them, the range of onshore and offshore funds saw inflows of over £260m in the first five months of 2004.
The move to DC business in the UK has resulted in an increased number of pitches. But also on the continent, Cazenove is finding itself on the radar. “Now that we are close to completing the registration of our Dublin Ucits funds for marketing in various European countries, we are seeing a very sharp increase in interest, in particular for our Pan European Fund.” An offshore version excluding the UK has been introduced recently.
It has taken quite some time she says to register this range of funds in the main European countries. “Then our institutional salespeople make sure we are marketing into the right areas in each market.” The funds are being distributed to banks, private banks, funds of funds, IFAs and pension fund consultants. “We do not have the resources or the desire to go directly to the end-user.”
“We think Europe is an attractive marketplace and the growth we have obtained is very encouraging, especially since we only started the registration process a year ago. Much of this progress is thanks to the reputation of the managers we have. But also our sales team has done very well, as we are not one of the biggest groups in European terms.” The Cazenove name is known in certain markets already, such as Italy, which definitely helps, says West.
The investment process overall is a business cycle approach. “This is a pragmatic approach which looks at the impact of the economic cycle on the stock market. We split stocks into seven different styles which define share price behaviour at different points in the business cycle.”
So when markets bottomed in March last year, portfolios were tilted towards recovery stocks, such as consumption and commodity cyclicals, and less defensives. “At that time, since everything about those stocks is depressed, when the turn comes you get a double hit, both profit and multiple increase.”
This pragmatic approach came to Cazenove with the HSBC team and is now being promulgated to other areas, such as the global equity and fixed interest teams, including corporate bonds. “In fact this team has become a large part of the input to this process, making forecasts for interest rates and inflation and analysing yield curves.”
West says that some analysis is being undertaken to see if the movements of corporate bond spreads can act as a signal for equities or vice versa. “We are trying to make sure that the corporate bond team understands what the equity view is on a particular stock and, conversely, that the equity team understands the corporate bond view.”
The bottom line is that Cazenove’s competitive position has improved in terms of portfolio performance. Last year, for example, the performance of the UK and European funds was top quartile. “We are now getting more interest from the main consultants. But it will take time to get the story across.”
The rate of growth on the fund side has been something of a surprise, says West. Including market uplift, assets managed rose by 19% last year. The UK Growth and Income fund managed by Tim Russell pulled in £500m alone in its first year since launch, which shows that the policy of bringing in new blood has paid off. “This year the pan European and Europe ex UK funds are growing almost as quickly.”
So Cazenove seems to be getting it right, which is an about turn for a group that never marketed its funds outside its own doors previously. The group had performance before, but no one to sell externally. “So it is all from a standing start.”
The trick will be to keep the momentum growing. “Our approach will be opportunistic. We are prepared to invest in people and to acquire teams where there are openings in the market. Our change is going to be continuous – we have not finished by any means yet. We will introduce new products and specialisations where we feel we have something to offer.”