Wealth manager Brown Shipley scored a coup last summer with the hire of Santander’s head of multi-strategy solutions, Toby Vaughan. Mr Vaughan is quick to point out that although there is clear difference in the size of the businesses, Brown Shipley is far from being a minnow.
“I think people underestimate the scale of Brown Shipley on two levels. Firstly the scale of Brown Shipley and the amount of assets it manages,” Mr Vaughan enthuses.
With around £9 billion in assets under management, it is clearly a business with scale and the second level is it also has a very ‘clear and explicit growth strategy’ according to Mr Vaughan. Indeed, on joining the firm, his team numbered 11 professionals although this has grown to 17. A clear signal of intent.
The firm’s multi-asset funds range from a cautious strategy to a higher risk dynamic fund, all looking to match clients’ risk/return appetite with the correct product. The funds all use external managers which for some is a controversial way of investing.
“One of the criticisms of a multi-manager approach is are you just layering up costs?” says Mr Vaughan, acutely aware of this charge against the investment style especially in an environment of increasing downward pressure on fees. However, he argues that firms have to disclose all of their fees so it’s very transparent and that value for money is a principle core to the firm’s portfolio construction.
This value for money principle is shown by a number of the funds including SPDR’s S&P 500 ETF, a low cost passive vehicle. It’s the top holding in the firm’s growth strategy. “We’re only going to pay for active management if we think we’re going to get rewarded,” says Mr Vaughan, displaying a level of pragmatism in his investment process that is sometimes missing from those wishing to show their level of sophistication by using derivative products such as equity overlays instead.
This approach has a number of benefits although arguably the most important is being able to explain the fund to the end client. Mr Vaughan says “we don’t want to be overly complex if we don’t need to be” suggesting the firm will use more complicated financial instruments such as structured products if the investment case is there.
His reasoning for this pragmatic approach is to avoid “putting yourself in a box” and crucially he adds that those who are “overly dogmatic” are investing how they want as opposed to the clients wants.
When to call time on a manager or stock
Mr Vaughan describes the turnover rate in funds as a “hot topic” adding that it is linked to the overall strategy. “We will happily invest in strategies which have a very high turnover although equally happy to invest in those with a low turnover,” he says. For an equity strategy with a quality bias and investment horizon of five years, Mr Vaughan would expect its turnover to be no more than 15-20 percent per annum.
However, for more complex products, such as a long/short, market neutral, relative value strategy the turnover rate could be as high as 150 percent and as long as it matches the overall goal both extremes are fine. However, at a portfolio level, the desired turnover rate range is between 15 to 40 percent although this is based on a number of factors. These range from asset allocation strategy to moves by external managers and “depends on what we are dealing with at the time”.
Things that Mr Vaughan is “dealing with” is a reference to the macro-economic environment at the time. He says that this has an impact on asset allocation and the expected risk/return spectrum of funds which has an effect on portfolio construction.
“It’s a very long [market] cycle we are in at the moment, typical from a recovery after the financial crisis [of 2008],” says Mr Vaughan. Given the long and shallow recovery, he adds, it creates risks in the late stages of the recovery especially in the US. However, he goes on to say that the US is more of a domestic market and less sensitive to global cyclical pressures hence it is “more sheltered, to a degree”.
The big picture
With central banks across the globe hinting at or even engaging in looser monetary policy, many view this as a boost for risk assets such as equities. This dovish stance by central banks suggests there is still money to be made this late in the cycle and Mr Vaughan is “sympathetic to that view, to a degree”. The cash position of the funds started the year in double digits, a trait of money managers across the world to keep some dry powder ready to deploy when things become clearer. However, given that the funds he collectively looks after are multi-asset, he didn’t raise equity allocations as some would expect. Rather he deployed his cash by diversifing the holdings in the funds further by adding to positions in investment grade bonds, high yield and even hard currency emerging market debt.
In the words of Mr Vaughan, “over the year we’ve been feeling comfortable enough to raise risk levels slightly”. Given the large remit he is in charge of and his firm’s move to centralise more functions including investment decisions, some may not envy his position of keeping the firm’s clients happy in an environment which looks certain to create more volatility as time goes on. However, as Brown Shipley has invested a great deal in its capabilities including the acquisition of Cambridge-based NW Brown & Co this year coupled with the fact it is part of a larger European business KBL, suggests that Mr Vaughan has a formidable team behind him.
