The lion that’s finding its courage
The nightmare for any fund management firm is losing key managers whose clients follow them out of the door. It can tear apart a firm’s credibility, leading to further fund outflows and a further loss of credibility - a ‘death spiral’ that can demolish once mighty firms.
On 13 January 2009, Jeremy Lang and William Pattisson, who between them ran 90% of the assets at London-based fund manager Liontrust, resigned. The firm’s share price fell 33% in a single day. Its assets - which had peaked at £5bn (€5.7bn) in 2005 with 60 institutional clients alongside a thriving but much smaller retail business - are now closer to £1.2bn, 70% of which is now retail. In September 2010, the market capitalisation of the firm was just £30m which, if the £20m of cash is excluded from its balance sheet, puts a valuation of the fund management business at less than 1% of assets under management - very much at the low end of the spectrum for the industry.
Can Liontrust defy the death spiral that began in 2009? Adrian Collins, now the executive chairman after moving from a non-executive position earlier this year, has certainly led the firm forward in a manner that inspires confidence, although only time will tell if the strategy will succeed. The fact that inflows are now exceeding outflows suggests that his confidence might not be misplaced.
To understand Liontrust’s strategy requires an appreciation of both the strengths and the weaknesses of boutiques. They are invariably set up by a small number of managers who strike out on their own after building a track record at a larger institution. As a result the new firm, at least initially, is very much dominated by the founders (those present at the inception of the business, but also those who joined soon after and prior to the growth phase). That was certainly the case with Liontrust. Although Lang and Pattisson were not with the firm when it was founded by Nigel Legge in 1994, they joined soon after (Lang in 1996 and Pattisson in 1999) to manage UK income and growth funds. Their performance was the impetus behind the firm’s growth.
While their departure was unexpected, there were certainly tensions within the firm on its future strategy as UK pension funds, a mainstay of their business, reduced their exposures to UK equities in favour of going global and allocating more to hedge funds and private equity. This, combined with a period of declining markets and poorer performance, meant that by the time the pair left, assets had fallen from their peak figures to closer to £3bn, of which around £2bn was institutional and £1bn retail, according to CFO Vinay Abrol. After sticking with poor performance for a couple of years, the departures proved too much for all but a few of the 30 or so institutional clients that pulled out their assets.
For Liontrust, it is clear that a number of harsh lessons were quickly learned: the need to lock-in fund managers to align their interests with those of the firm and its clients; the necessity to diversify sources of business; and the importance of ensuring that the firm is well positioned for tomorrow’s market trends - rather than yesterday’s.
Once the founder and CEO, Nigel Legge, resigned in May 2010, the head of retail, John Ions, was appointed as the new CEO, and together with Adrian Collins, he has been articulating their future strategy for rebuilding AUM. This strategy has included seeking to re-energise clients and promote the profit and performance of the firm’s fund management teams through new advertising, rebranding and beefed-up sales and marketing campaigns. A new head of retail distribution, Mark Allpress, was recently appointed.
An environment with little turnover by pension schemes, and hence few mandates coming up, means that any strategy has to be long term and cognisant of the firm’s capabilities. The first major step by the new CEO was to close down a global equity team that had been acquired six months previously; attracting new investors was impossible without a pre-existing client base. More success has been achieved with a European credit team acquired in March 2009 backed by Simon Thorp, which sits alongside the core businesses of mid- and large-cap UK equity, headed by Anthony Cross and Julian Fosh (the Economic Advantage team), and UK and European Income, headed by Gary West and James Ingis-Jones (the cash flow solution team). While the latter are responsible for over 70% of existing assets, they have an equity stake in the firm and a significant part of their wealth tied up in their own funds.
The direction Liontrust should now move is a question on which both shareholders and management are now focused. Liontrust is no longer a start-up, and that means historical baggage but also a number of competitive strengths. In particular, as Ions argues, the firm has an established brand in the UK, both institutional and retail, with a presence on many retail platforms that start-up firms would find difficult to achieve today. It has a distribution network among retail IFAs in particular, but also an established institutional relationship management team, and it has the infrastructure in place to be able to absorb new fund management teams in terms of compliance and regulatory infrastructure, enabling the firm easily to take on new fund management teams should it wish to.
Moreover, while a war chest of £20m might not sound like much for the mega firms, it does at least act as a catalyst for acquisitions.
But why should a group of managers spinning-off from a large firm want to join Liontrust? “We provide an environment where a team can develop their own autonomous investment process in an intellectual environment without constraints, while providing the infrastructure and distribution to allow fund managers to focus totally on managing money,” says Ions. But any team thinking of joining Liontrust needs to have the capability of running straight way, which inevitably means bringing some assets with it.
For Collins, the strategy is predicated on playing to Liontrust’s historical strengths. It has been a fund manager that was essentially totally focused on the UK institutional and retail marketplace. “Our clients can recognise that, with us, the UK is not just a sideshow for some global conglomerate,” he says, adding that for Liontrust to have any future, it has to demonstrate a core competency in its home market before venturing further afield. But Collins does not see this as unduly restrictive. “The key future trend for us to ride is going to be the growth of the SIPPS market in the UK,” he says.
Gurjit Kambo and Rupak Ghose of Credit Suisse in a recent note forecast that the UK SIPP market will grow from the current £55-65bn to around £235bn by 2015, representing 13% of total UK pension assets and 23% of UK DC assets. Collins argues that UK pensioners ultimately need sterling-denominated assets to produce retirement income. Having already moved from its home market into continental equities and credit, the firm says it would like to add emerging markets and multi-asset capabilities as well.
Perhaps Liontrust has not lost its roaring spirit, after all.