Adding value the active way
Singer & Friedlander is highly conscious of the fact that has a near-100 year history of operating independently as a bank, one of the few players left in the City of London who can still make such a claim.
Over time, it has had to adapt to survive, sometimes quite dramatically, as it did two years ago by cutting from its broad base of financial services stockbroking, capital markets and international banking and concentrating on two core areas, merchant banking and investment management. It sold off its property portfolio – acquired when becoming publicly quoted through a reverse takeover of a real estate company in the 1980s.
“We are now very streamlined and focused,” says Peter Dencik, who heads up the specialist institutional investment side. “We are driven by fee-paying work, rather than commissions, which reduces the volatility of the earnings stream.” Or that was the theory until current market conditions took hold.
For the greater part of the past century, the asset management arm has been servicing private clients, apart from a brief encounter with the retail market. Then a decade ago, the firm decided to tackle the institutional marketplace. This was when Dencik came on board, an unusual appointment for a London-based manager. He joined in 1995 from PKA, one of the leading groups in Denmark running labour market pension funds. “PKA had been having discussions with S&F with a view to forming a joint company to service institutional investors, but that did not work out for a number of reasons.”
The bank then made him an offer he decided not to refuse, as it gave him the opportunity to operate more internationally. “I started working with Nick Williams and Richard Killingbeck, two very good fund managers, to build an institutional business,” he says. “At that stage, I was doing the performance measurement, the marketing, the client servicing, sales and asset allocation, along with the fund managers. Now we have a marketing and sales team, a performance group, and an RFP team. We were one of the first UK investment managers to be verified GIPS compliant back in June 2000.” The investment management side now has 111, comprising 44 fund managers (36 on the private client side).
At that point, S&F had around £150m (E240m) in institutional clients’ business, which has now grown to £1.2bn, of which £1.1bn is specialist mandates, both pooled vehicles and segregated accounts. About 37% of the funds under management are institutional, and this proportion is growing.
This has been done, Dencik maintains by having a commitment to specialist management and a disciplined investment process that is winning for the firm its position in the marketplace.
Coming from a Danish industry-wide defined contribution background, Dencik found himself at odds with the pensions establishment in the UK. He had problems with the virtually universal acceptance of pension funds having a number of balanced managers working to a peer group benchmark. “So you have two or three managers doing the same job against the same benchmark.”
This was certainly at odds with the continental tradition where, following an asset liability study, the pension fund took the asset allocation decision and then placed the assets into specialist briefs, benchmarked to market indices. “So I have always believed in the specialist approach, going back to my experience with PKA in the late 1980s.”
When he voiced such views to the pensions community, he was informed that this was not the British way: “Don’t you come from Europe and tell us what to do.”
Now, specialist management is precisely the way the pensions industry is heading in the UK and elsewhere. “We have always offered specialist products, though we did offer balanced management for smaller portfolios, which we stopped doing last year. We do provide multi-asset instead of balanced, as here we can give the client the range of building blocks they want from our specialist products, in the proportions they want, but benchmarked against market indices.”
S&F goes about this quite distinctively compared to others, maintains Dencik. “In our buy-sell disciplines, we are not style-constrained in any way. Though, in the final analysis, we probably are ‘growth at the right price’, with the emphasis on the ‘right price’. This we define as the price at which a fellow industrialist would pay for the particular company. There are a number of techniques we use to arrive at that. But if the company is trading at a 35 to 40% discount to this price, then it could be a candidate for our portfolios.” There is only one way of finding such companies and that is by research.
But this is not much use, he points out if no one else on the market has the same idea about the company. “You need more than one player to have a market. So what we do is define a catalyst – some trigger for a revaluation by the market within a period, usually the next six to nine months.” This catalyst can be many things, such as a new product, new management, projects and so on, he adds. “Our portfolios are reasonably concentrated, with just 50 to 60 stocks, normally.”
Another feature of the approach is to equally weight stocks in the portfolios. “Because we expect the same return from all companies we are investing in over the six to nine months, there is no logic in weighting one more than another. It is an ‘equal conviction’, as we are equally convinced by each stock.” The same investment approach now operates for all equity investment.
Because of the impact on the risk budget of these concentrated portfolios, S&F has introduced a very strict risk control process. “Our simulations have shown that in the UK, for example, an equally weighted portfolio when compared with a traditional one, would increase the tracking risk by 75 to 100bps. This has to be controlled.” So risk is measured as the first step, then it’s managed and the third phase is risk control. Each month Dencik is goes through each fund’s holdings with the portfolio manager and examines the data relating to the individual stocks to assess each stock’s position in the portfolio. “This is a process that makes them manage the risk in their portfolio,” he maintains.
“The flip side of the coin is to have a very strong sell discipline.” The first is where the target price is reached, and the second is where a stock increases weighting through market movements.” If the decision is that there is another 40% on our methodology, we sell the gain and go back down to the original weighting.” Otherwise, the stock is likely to be sold, even if it felt that there is still some upside. “The most important thing in outperforming is to sell too early.”
At the end of the nine-month period, where a stock has not performed, then it is revisited to see why, when the decision could be to sell, depending on conditions.
The information ratios and performance numbers across the product range over three to five years are very good, he says. “We do not believe there are any efficient markets.” The results show that good, active management does work. “There are always good companies to invest in out there. Our job is to deliver a consistent 2% outperformance of the benchmark by picking the right stocks, which is a question of research.” There may be some luck in this, Dencik concedes. “But in my experience, the harder you work, the luckier you get.”
“Our focus is to be a good manufacturer of Continental European, UK, US and Pacific Basins equity products, for both large and small caps,” says Dencik. “Why should we be good distributors? We position ourselves in the marketplace to work through well placed distributors, talking to funds of funds, multi-manager houses, third party distributors, as well as doing white labeling and sub-advisory activity.” This is in addition to promoting to pension funds, family offices and the consultants. “We have entered into a strategic alliance with Bank Corluy in Belgium, as distributors.” There is also a less comprehensive agreement with Den Danske Bank. “We are in discussion with other European houses, including universal banks and life companies, interested in open architecture.” The products can be provided through segregated mandates, or through a pooled vehicle.
The client base for institutional assets is mainly the UK, accounting for 80% of the business, rest is continental business, a share that is increasing. “Our emphasis on the continent is on the Nordic region and Benelux, due to the Bank Corluy connection.”
In five years’ time, Dencik reckons that while the product range may not have increased significantly, the UK market share will have grown substantially due to the trend to specialist mandates, and the Benelux region should be very much more developed, and the same for Nordic markets. “We are very well positioned for this growth, as we do not need to make any radical changes.” But in addition to organic growth, S&F is prepared to grow through acquisition. A specialist fixed income house, particularly in the Continent, seems to be a good fit for S&F.
Growing the assets is not just important it is essential, as S&F finds whatever its track record, its size can hold it back. “Some institutional investors tell us that their mandate size is too big relative to our assets. I understand this view, without necessarily accepting it as a valid point,” says Dencik.
But here is a conundrum, that has S&F perplexed. “However good our track record, we find we cannot win any UK local authority business, because we do not have any mandates from a UK local authority.” The firm points to its local government and government bodies’ mandates on the Continent, but Dencik acknowledges that this is not persuasive in the UK.