Which particular asset classes and strategies do you anticipate your intermediary clients focusing on in 2024?

In 2024, we anticipate our intermediary clients will focus on a range of asset classes and strategies that offer diversification, stability, and sustainability. Asset-backed securities are likely to be of significant interest, providing more stable returns and diversification benefits amidst uncertain market conditions. Additionally, private markets with strong sustainable angles will also be appealing. For example, two of our affiliate managers include Proterra Asia, a private equity firm that focuses exclusively on investing in the Asian food sector, and Resonance Asset Management, an infrastructure focused private markets investor, investing in sustainable infrastructure and energy transition businesses that are enabling the energy transition through resource recovery and renewable energy generation and management.

Should end-investors – and, by association, asset managers – be thinking beyond equity and bond investments? Towards what?

End-investors and asset managers should certainly be thinking beyond traditional equity and bond investments as we approach the back end of 2024. The heightened geopolitical risks, especially around food and energy security, mean that those associated sectors will continue to undergo significant innovation, offering both opportunities and risks. Private markets, in particular, are at the forefront of bringing these developments to the market.

See also: Track to the Future – with Federated Hermes’ Clive Selman

The rise in securitisation also provides opportunities, particularly for institutional investors. The rehabilitation of the asset class post-GFC is being driven by institutional investors because securitized credit can offer higher returns than traditional fixed income, with similar credit charges. The asset class can also provide liquidity, which can be useful in times of need. Securitized credit can help diversify collateral pools and also offer flexibility to move across credit opportunities and capitalize on its floating rate nature.  We anticipate this will filter down to intermediary clients soon. Securitized products are experiencing growing demand, making them an increasingly positive option for investors looking for alternatives beyond equities and bonds. We believe it is a materially under owned asset class.

To what extent do private assets and markets fit into your thinking? What are the currents pros and cons for investors?

Fidante, as a multi-affiliate manager, partners with investment managers across both public and private market investment strategies.

With rising interest rates and higher correlations between traditional asset classes, private assets and markets can bring immense diversification benefits into investment strategies, which can act as shock absorbers in a diversified portfolio. Private markets also offer an illiquidity premium, providing the potential for enhanced returns for investors willing to lock up their capital for a certain period. As a business, we are particularly focussed on working with some of the early movers in the LTAF space to help provide specialist manager capabilities to the broader market.

Given client and regulatory pressure on charges, how is your business delivering value for money to intermediaries and end-clients?

Our business delivers value for money by focusing on bringing specialist managers to the market, rather than commoditising products. This approach allows us to offer diversification and unique investment opportunities, ensuring that clients get real value without compromising on quality. While we are not engaged in a race to the bottom on fees, our charges remain competitive compared to peers because of the distinctive expertise and performance our managers bring. This gives us some pricing power, as clients recognize the value we offer.

How much of your distribution is currently oriented towards climate change, net zero, biodiversity and other segments of sustainable investing? How do you see this approach to investing evolving?

Our objective as a business is not to suddenly become a multi-affiliate model only focused on ESG or impact managers, even though many of our affiliate partner managers have the credentials to be labelled as such. However, that’s ultimately because of the investment imperative, not because we’re distribution led.

See also: Track to the Future – with BlackRock’s Heather Christie

For example, one of our affiliates, Resonance, does not position themselves as an ESG manager, yet they were one of the first backers of onshore wind back in 2010. Fidante’s entire focus is to develop a platform across public and private markets, across asset classes, that’s diversified and populated with managers that have an identifiable edge, whatever that may be.

How are you now balancing face-to-face and virtual distribution? In a similar vein, how are you balancing working from home and in the office?

The transition to a more hybrid model of working has suited us well. As an Australian-based business, it softened one of our greatest challenges: distribution to areas outside of Australia where many of our managers still reside. In that way, it has levelled the playing field, allowing us to improve efficiency for both our affiliate managers and clients through arranging virtual conversations in the early stages of investment discussions.

What do you do outside of work?

As a new dad, the answer to this question has changed a lot in the last year. I did like to get stuck into endurance style events, but that’s been put firmly on the backburner whilst I focus on trying to get a baseline level of sleep! I remain a loyal Saracens supporter, although I haven’t laced up my boots in well over a decade. Skiing is probably when I’m at my happiest.

What is the most extraordinary thing you’ve seen in your life?

Being charged by an African Bull elephant in Kruger National Park is up there, a sharp contrast to a typical day in the city. The Ford KA I was in at the time didn’t provide an illusion of safety and I burnt the clutch as I hastened my getaway! For such a big animal they can really shift!!

Looking a little further ahead, in what ways do you see the asset management sector evolving over the next few years?

Recently, we launched a report assessing European institutional investor attitudes to allocating to specialist managers. Almost two-thirds of surveyed investors believed that the asset management sector is lacking specialist investment managers, while also perceiving those strategies to be higher risk. At the same time, the trillion-dollar club is growing, presenting a challenge to the squeezed middle, with increasing costs and reduced fees.

See also: Track to the Future – with Sarasin & Partners’ Christopher Cade

Because of this, as well as what our report showed, we see the multi-affiliate model becoming more favoured for its potential to reduce compliance and regulatory risks, mitigate ESG and greenwashing risk and allow managers to concentrate on making informed investment decisions. Indeed, in our survey, 83% of respondents indicated they would be more likely to invest in a specialist manager who is supported by a multi-affiliate investment management partner. This model will facilitate new market entrants over the next few years, thereby maintaining quality and competition in investment strategies.

Corah joined CCLA, which is the UK’s number one charity asset manager, in 2010. Over that time he has been responsible for the firm’s approach to sustainable investing which includes active stewardship, aligning investments with the values of its mostly non-for-profit clients, and developing programmes helping to combat climate change, modern slavery and poor mental health in the workplace.

See also: CCLA reveals companies leading on modern slavery

And now, he believes the asset management industry has reached a point where “nobody is willing to tolerate that these three letters mean nothing anymore – they want something else”.

“For us it’s about stripping everything back to what matters, which is putting money in the pockets of our clients and actually making change happen, because that is going to help them put money in their children’s pockets in the future – as well as contribute some good within society.

“To our mind, this current era of ESG genuinely should die. SDR is going to be very helpful in this and allow us to play our part in building something that makes a difference. This presents a huge opportunity for us.”

Indeed, the Financial Conduct Authority (FCA) published its policy statement on Sustainability Disclosure Requirements (SDR) at the end of last year, in a bid to help investors identify and compare financial products relative to their morals and ethics. It also imposed an anti-greenwashing rule, which is due to come into force in May this year.

“I think there’s a real risk that the industry throws the baby out with the bathwater when it comes to SDR – because companies can’t greenwash anymore, so they decide to stop focusing on sustainability. Or, they see it as a complete waste of time,” Corah warns.

“There is a sense that the industry could begin to turn its back on [sustainable investing], which is a real shame. First and foremost because our industry has an amazing power to drive change. So, for firms to say they can no longer market their products as sustainable anymore and that sustainable investing is a waste of time, could be very damaging for the credibility of our sector.

“Our sector is all about authenticity but it faces a trust issue. We could undermine this by going full circle – from saying sustainable investing is a great thing to do, to no longer doing it. But we need to stay truly on that path. We think SDR should be seen as an opportunity to raise the bar, not a reason to throw in the towel.” 

Sustainability

While SDR has put increasing pressure on asset management firms to make sure they are doing what they say on the tin, the regulation has been welcomed by CCLA with open arms. Plenty of firms will band around phrases such as ‘sustainable investing is in our DNA’ or – an oddly common analogy – ‘we’re like a stick of rock. Cut us down the middle, and you’ll see sustainability running through our core’.

See also: CCLA’s head of investments: Why 2024 is best-suited to quality stocks

But for CCLA, this isn’t hyperbole. It’s just the truth. Having first been created back in 1958 to manage the Church of England Investment Fund, the company now manages £14bn of assets.  A majority of this is for charities and faith-based organisations, with non-profit offerings including the likes of the COIF Charities Investment fund and the Catholic Investment fund. 

“This is a tremendous responsibility but we absolutely love that,” says Jasper Berens, head of client relationships and distribution at CCLA.

“Companies often talk about putting clients at the heart of what they do, but we really do that here. Our ownership structure is our client base – we are owned by our funds, and our funds are our clients. So, it’s a circle that squares itself very easily.”

Therefore, ethical and sustainability considerations are paramount to how CCLA manages money for its clients. But how does the firm navigate a world that is at a turning point in the sustainability landscape, and where the ESG acronym is arguably waning in popularity?

“ESG, over the last five or six years, has become very metrics-driven,” Berens explains. “Then investors felt let down by those portfolios in 2022. So, there has been a pushback in the marketplace, and it was at the end of 2022 that the regulator stepped in and decided we needed to be clearer as an industry [and introduced SDR].

“I also think there is a lot of pressure on the ESG and sustainability industry. Where I think we, and a small group of fund management groups, can make a difference, is by accepting that capitalism has to play its part in sustainability and building a sustainable future. This is one of the reasons I decided to join CCLA.

“One Sunday evening I was figuring out which bottle and which tin should go in which recycling bin and I thought to myself that, things like this can make a difference. Society has to make a difference and it is comprised of individuals, all making independent decisions. This is important, but it is nothing compared to if your pension or ISA fund manager is piling into fossil fuels.”

As such, CCLA is on a mission to prove that investment portfolios can make “a big difference to society” as well as a big difference to investment performance. “It is possible to do both of those things”.

Philosophy

The approach CCLA adopts to investing is driven by engagement and active ownership. It will exclude any investments which do not align with the company’s philosophy, or any sectors which are notoriously difficult to engage with (oil and gas companies being a key example). However, the ultimate goal is to improve the day-to-day running of companies which have scope for improvement, and which will engage with CCLA.

“If you look at what charities need, every single penny of their capital is important, so they need to be able to perform across every different type of market cycle. They also want to make a difference,” Corah says.

“We think sustainable investing today has become a bit detached from that principle. It has very much become about investing in the top percentage of the marketplace which, when you think about where we come from, really doesn’t work for us. Because if you’re investing only in a small percentage of the market, you are leaving yourself open to portfolio bias and therefore underperforming during points in the market cycle. We can’t do that.”

He adds that investing in companies which are already sustainable “isn’t actually going to drive change”.

“All you are doing is buying things on the secondary market. What does drive change is the ability to get in, get your hands dirty, engage in active ownership work with businesses and make them better.”

Berens adds that while there is a place in the market for “traditional green, clean and thematic funds”, it isn’t CCLA’s style of investing.

“We think the majority of our clients want to make money, and they want to make change happen. Our approach is to recognise the world for what it is, warts and all, and try to make it better.”

Engagement

£14bn of assets is a great deal of money. But taking into consideration that the combined market cap of the ‘Magnificent Seven’ stocks equates to the GDP of 11 major world cities, how does CCLA manage to engage and incite change on a global basis?

“What we have found is that, often, sector and size doesn’t matter. It is about the resources that we have,” Corah reasons.

“We have a very deep specialism across a number of issues such as modern slavery – we don’t think the industry has picked up on this in the way that it should have done. We are at the point now where FTSE 100 businesses come to us because they want to learn from us, rather than us approaching them.

“So, we have not come up against any particular barriers in this sense. Some businesses are obviously more challenging than others. But oil and gas aside, I wouldn’t say there is an entire sector of the market that doesn’t engage with us. We have even managed to engage with Amazon – they have listened to our mental health policy and have created new approaches to mental health across the business now on a global basis.”

See also: CCLA IM: Companies continue to increase mental health awareness

Alongside its wide range of institutional funds – and indeed its newest retail fund offering – CCLA has corporate mental health and modern slavery benchmarks, covering both the UK and global markets. The key purpose of these is to hold companies to account – whether they are investing in them or not – and to offer guidance to firms looking to improve how they operate.

“When we were designing these benchmarks, we wanted to create them in a way that allowed us to judge the progress of businesses and therefore genuinely lead to change, and to allow the rest of the investment industry to get on board with us,” Corah says.

“We realised the most simple theory of change you can have is to rate a set of businesses from one to 100. So, with our mental health programme we took emerging literature on what businesses can do to look after their employees, and – with the help of experts like Mind, the UN Principles for Responsible Investment and the Harvard School of Public Health – turn it into genuinely rigorous assessment criteria of how businesses can take this seriously, then go out and rate these businesses, as well as measure their progress over time.

“This is how we are able to have these types of conversations with businesses like Amazon, and how we have built up our expertise in this field. We are in the third year of our mental health programme now, and we have 20 to 30 companies which have improved on their score over this time frame. Who have gone from doing nothing or very little, to being leaders in this space.”

Retail offering

CCLA’s 60-year history, engagement work and long-term performance track record led to an increase in demand for a fund available to UK retail investors.

In April 2022, the firm launched its CCLA Better World Global Equity fund, which is currently £291.9m in size. Managed by Charlotte Ryland since launch, the fund aims to provide both capital growth and income to investors over rolling five-year periods, using CCLA’s active ownership approach. Its largest holdings include the likes of Microsoft, Amazon, Visa and biotech company Thermo Fisher.

Since launch, it has returned 17.9% compared to its IA Global sector average’s total return of 12.3% over the same time frame, according to data from FE Fundinfo.

“It’s differentiated, because it’s all about change and that is what clients want from us, That is so important,” Berens says. “And I think the industry needs it. People can see we have an authenticity around who we are and what we do. Our benchmarks are a good example of that.

“We are also outperforming at the same time, with low levels of risk. We have been managing this strategy since 2007 and we can demonstrate this strong performance and consistency.

“Yet, people are saying they haven’t heard of us. We are the City’s best-kept secret. Of course we are very successful in the non-profit space, but less so in the broader retail market. So, this is our opportunity to take what we do incredibly well, to a wider audience.”

“When David Roberts tells you he has an exciting opportunity, you meet him,” she tells Portfolio Adviser.

The opportunity in question, which led to Roberts re-entering the industry despite retiring 18 months previously, was to co-launch a bond boutique at Nedgroup Investments.

“We met the next day and discussed the group opportunity, and the boutique, as well as the fact we had a blank sheet of paper in terms of how we structure the portfolio,” Ralph explains. “The more we spoke, the more it became obvious that we were very aligned in how we had previously run money.

“We both keep a keen eye on risk. We don’t take huge bets one way, and we do keep tabs on what clients expect from us.

“It became very clear that, despite coming from different angles – where David is much more of a macro rates manager and I am more of a credit fund manager – that we manage money very similarly.”

After just “a week or two”, Ralph commits to the idea. And by September, both her and Roberts are fully integrated into the company.

“We started in September, which reflects one of the reasons I joined – there is no elongated pipeline or process in terms of decision-making; people agree and things gets put in place.”

Palomar Fixed-Income

Ralph and Roberts’ boutique, Palomar Fixed-Income, was the first boutique to be created for Nedgroup Investments’ in-house multi-boutique model, which came to fruition in May last year.

Nedgroup Investments is housed under the Nedbank Group umbrella, a South African-based financial services group which offers banking services to both wholesale and retail clients, as well as insurance, wealth management and asset management services.

But despite being a global asset manager in its own right with more than $20bn of assets under management, Nedgroup Investments remains a “sleeping giant” within the UK asset management industry, according to the firm’s chief commercial officer Apiramy Jeyarajah (pictured right).

The former head of UK wholesale at Aviva Investors, who moved to Nedgroup Investments ahead of the launch in April last year, says: “Nedgroup has been in the UK for 30 years, but it has not really made itself known. It is an organisation that has grown organically from $2bn to $20bn.

“We started off supporting our South African clientele in building their offshore exposure. But one of the fundamental beliefs that we have always held is the ‘boutique advantage’.

“So, by partnering with boutiques, each manager has a singular view on an investment strategy, and they are therefore much more aligned to their end clients than if they were working within a larger corporate structure.”

The business has a long track record of establishing partnerships with other boutique asset managers from around the world, including the likes of Veritas Asset Management, First Pacific Advisors and Resolution Capital. But the difference with the new platform launch is that it will allow fund managers to open up a new shop from scratch, as opposed to integrating a pre-existing business into the firm.

“When Tom Caddick took on the responsibility of CEO and managing director of international business [in December 2022], he began to analyse where the gaps in the market are and which client concerns we can really deal with,” Jeyarajah says.

“What we noticed is that, regulatory-wise now, it is so hard to set up new boutiques. How can we support that?

“The second element ahead of the boutique set-up was that, over the last three-to-five years, we have had diminishing returns in core fixed income markets.

“What can we do – and particularly now given uncertainty and volatility – now that there are opportunities arising in that space?”

The chief commercial offer adds that, in order to generate desirable returns amid a challenging backdrop, fixed income managers have been increasingly allocating to exposure outside of their funds’ benchmarks. This therefore changed the risk-reward exposure of mandates and made it increasingly difficult for fund selectors and asset allocators to “understand where the risks lie and where their returns are coming from”.  

“We were therefore looking for people who were very consistent in their approach in this space, who have been very focused on core markets and how they drive those opportunities.

“That’s why we decided to contact David Roberts, who then contacted Alex.”

One particular reason Roberts seemed a good fit for the business is his long-held view of having ‘skin in the game’, according to Jeyarajah.

“David has been very vocal in the marketplace saying he was invested in his own funds, and that when there were no longer opportunities in this space, that he would step away.

“This is effectively what he did. When we first started engaging with him, he told us markets aren’t looking very good. Integrity is very important. Then, as that conversation progressed and the market dynamics started to shift, progress accelerated massively.

“Then, David joined in March and I joined in April. Everything moved super quickly.”

Shortly after Roberts’ appointment, Ralph was quickly chosen as the top candidate for co manager.

Jeyarajah says: “I was in the office when David [Roberts] and Tom [Caddick] were discussing who his co-manager should be. David asked about Alex Ralph and, without skipping a beat, Tom reeled off her fund’s entire track record. When you have been a fund selector your whole life like Tom has, this is an enormous benefit when building a team.

“We had no shortlist whatsoever. In fact, David said Alex [Ralph] was always his biggest competitor in the market, but that he had never met her. And that was when he sent the LinkedIn message. The next day Alex was in the office.”

In fact, it was this ability for the business to make decisions in a timely fashion that attracted both Jeyarajah and Ralph to the business in the first place.

“It was a great opportunity to challenge what a good boutique looks like,” the chief commercial officer continues. “How can you remove the friction in the sales system? How can you be as client-centric as possible?

“We don’t have any of the old legacy or infrastructure issues. We can be agile, we can create a nimble team, and we can hire people based on their individual skillsets and how these skillsets come together.”

Global Strategic Bond fund

By November last year, Ralph and Roberts had already set up the parameters that their fund – the Nedgroup Investments Global Strategic Bond fund – would operate under.

Now widely available to UK retail and professional investors, the fund aims for superior rolling three-year risk-adjusted returns relative to the Bloomberg Global Aggregate Total Return index. It does so through a portfolio of between 80 and 100 issues, 20% to 60% of which are held in investment-grade corporate bonds at any one time. However, it will also hold between 30% and 40% in developed market sovereign bonds and 20% to 30% in high-yield bonds, although it will steer clear from so-called ‘junk bonds’, which are rated as CCC or lower. It can also hold up to 10% in emerging market debt.

Ralph says: “The investment thesis is back to the core, because we believe that given where yields are, we can derive a very attractive income from these core markets.

“We have put certain parameters in place – we won’t go into AT1s for example, or CCC-rated bonds. We’re very much staying out of those equity-like instruments, because we think we can generate good performance without them. For the fund throughout the cycle, the average credit rating will be BBB.”

In terms of current positioning, the fund is underweight high yield relative to its own median parameter. And, for any emerging market debt that is held, this will only be issued in US dollars or euros.

“We don’t take any currency risk – it is all hedged, and it’s all hard currency. However, it will essentially be developed market [debt] in the main,” Ralph explains.

In terms of duration, the manager says this currently stands at an average of six years – although the fund is able to move from zero to ten years. However, this will typically remain between three-to-eight years.

“We do believe that the levels of yield are attractive. We think most of the returns over the short-to-medium term will be income-driven,” she says. “Having said that, on a 12-month view, we do think we will make money on government bonds. That is why our duration stands at six years. We would look to go longer if yields rise a bit further at the long end. But right now, we’re in the belly of the curve.”

Ralph and Roberts believe we are close to – if not at – peak interest rates. However, they don’t believe yields will collapse which is “what some competitors are positioning for”, given their “very long duration numbers”.

“We think yields will hover around where they are now. And, if they do come down, they will only come down slowly because of the current supply dynamics,” Ralph says.  

In terms of credit opportunities, she is positive on European telecoms, as the manager thinks their balance sheets will improve “significantly” over the next decade due to the completion of fibre network roll-outs.

“We also have a preference for senior financials,” Ralph adds. “This fits in with our idea that overall spreads aren’t massive ‘buys’, but that financials are fairly cheap relative to the rest of the market. We would rather play it safe in senior parts of the sector because overall spread dynamics aren’t hugely attractive. So, we are staying quite defensive.”

Next steps

Palomar Fixed-Income and its Global Strategic Bond fund is just the first launch for Nedgroup Investments’ multi-boutique platform, says Jeyarajah.

While the firm’s ‘Best of Breed’ list of funds houses eight sub-investment managers, Palomar Fixed-Income’s offering stands as the sole player on its new platform.

“We are always looking at what phase two looks like,” the chief commercial officer says. “We are always thinking about solving the next problem for clients, and what they are interested in.

“It is a process that we went through [with Palomar’s fund] – talking to clients around the design of the strategy to make sure it aligns with their needs.

“And, as a result of those conversations, we will do the same in the future, looking to grow and launch new boutiques that solve problems for investors.” 

The economist and author tells Portfolio Adviser there is a “tug of war” debate as to whether rates will return to near-zero levels as inflation falls, then revert to a ‘new normal’ of 2% or lower; or whether the past two decades of ultra-low interest rates were an anomaly, and that they are set to return to a more normalised range of 3-5%.

See also: Unsustainable’ US debt: Could the Fed consider cutting interest rates?

Depending on which scenario comes to the fore, she says there will be significant ramifications on which asset classes will outperform, and which will struggle, over the medium-to-long term.

“Anything where the opportunity to generate returns is based on a low rate is going to suffer. So, anything that relies on leverage or on taking outsized bets – I believe venture capital falls into this space, for example,” she says. “This is why I don’t think the Targeted Absolute Return sector is winning right now, either.

“Of course, there is a debate as to whether we will return to a low rate environment, in which case these opportunities could become interesting again. But given what happened to markets in 2022, 2023 was a case of going back to basics and asking: ‘in a higher cost-of-capital environment, where will the genuine returns come from?’”

Over the last three full years, equity and corporate bond market returns have varied widely. In 2021, the MSCI All-Country World index achieved a total return of 19.6% while the Bloomberg Global Aggregate Corporate Bond index fell 2%. Then in 2022, global equities suffered with the MSCI ACWI falling by more than 8%, while global corporates also lost more than 6%. Both asset classes achieved positive returns last year at 15.3% and 5.5% respectively, according to data from FE Fundinfo.

These returns coincide with varying moves from developed market central banks in a bid to curb rising inflation. When central banks embarked on interest rate rises at the end of 2021, bonds suffered while economic uncertainty weighed on equities. Rate hikes continued throughout the course of 2023, with inflation beginning to fall by varying degrees across the US, the UK and Europe.

“In 2023 there was a lot of discussion about value investing returning to the fore,” Baroness Moyo says. “If we consider the businesses which can survive over the long term and generate real returns above the cost of capital, these types of businesses certainly do look interesting. Which is why what happened in 2023 was odd, because the performance of growth stocks such as the Magnificent Seven was an anomaly in terms of the mood music of markets, given the interest rate moves we had seen.

“In short, it has been too easy to make good returns in bog standard, traditional multi-asset portfolios. You didn’t have to go into long/short portfolios, or venture capital, or anything that required a lot of leverage to make returns. And in fact, it is those areas which have now become higher risk. So, for now, I would argue that it is still very difficult to make the case for people to allocate capital to absolute return strategies.”

The economist says that, while investors started 2023 “excited about credit”, given interest rate expectations, they are now beginning to hold off and question longer-term themes, given continued economic uncertainty.

AI and decarbonisation

“I would argue that there are two huge key themes. One is AI; hence the Magnificent Seven breaking out of that value anomaly last year. The second one is decarbonisation,” Baroness Moyo – who is also co-principle at the Versaca Investments family office – says.

“The last time we had a catalytic move in the economy on a structural basis was the 1980s, when we saw tech investment opportunities. This is the next one.”

These two themes spell a “real fundamental shift” in how economies will work in the future and therefore which assets will perform well, the economist says, although she adds that the cost of capital “obviously matters” in terms of how people will play these markets.

In addition to historically higher rates, Baroness Moyo says geopolitics have become more volatile – at a time when markets are pricing in interest rate cuts.

“I don’t think anyone over the last year would have accounted for two wars, the announcement of 11 countries joining Brics, swing states – real issues that could now be re-inflationary,” she warns.

“US inflation still stands at 3.1%. Germany is in a recession and Europe is weak, which could signal that rate cuts could be on the docket.

“Geopolitics could be incredibly disruptive, and could mean we live a ‘higher for longer’ environment and that is set to continue.”

Finding dislocations

Alongside moving out of leveraged plays, this uncertain backdrop has also led Baroness Moyo to play equities more “opportunistically”, holding out for market dislocations in favoured sectors such as healthcare, or more attractively-valued companies set to benefit from AI.

See also: Can tech come up trumps again in 2024? The top trends to be excited about

“We are mostly looking at AI on a ‘wait-and-see’ basis for the reasons that I mentioned. But if we start to see real productivity gains and genuine possibility for disruption from AI, I think it will be an opportunity.

“What does this mean for us? It means a skew towards taking money out of equities and putting it into cash or bonds, and waiting for opportunities in these much more structured bets such as AI.

“If it is true that, over the next 20 to 30 years there will be a fundamental shift in how the world operates, we want to be a part of that. So, the best thing to do is to dip in and take some money out of markets where we could be losing and put it into bonds, which are earning us 5.5-6%, until there is more clarity around how best to play the AI space.”

That being said, Baroness Moyo has “taken a nibble” at some less widely-held stocks she believes are attractively valued such as US healthcare provider HCA and cloud-based software company Salesforce.

Not-so-magnificent Seven?

When it comes to the Magnificent Seven stocks – many of which have become synonymous with investing in AI such as Nvidia, Amazon and Alphabet – Baroness Moyo is less tempted and says valuations are “too rich”.

“I understand the whole euphoria; it’s the New Year, let’s all get excited. But the market has sold off a fair amount already, coming into the year.

“But when it comes to the Magnificent Seven, which are trading on high price-to-earnings multiples… We had a bad 2021, a mixed 2022 with a big skew to certain stocks. In 2023, my sense was that people were waiting and seeing. And now, I think people are waiting for that first rate cut, then they are going to bank as much of that return as possible.

“So if anything, I’m worried that markets are going to sell off. Not initially, but I think institutional investors could be waiting for a rate cut and a market rally, at which point they will bank their gains tactically.”

The other risk with the Magnificent Seven stocks, says Baroness Moyo, is that they account for a very significant proportion of the S&P 500. According to data from Yahoo Finance, this handful of companies accounts for 29% of the US index’s entire market cap.

See also: Why Blue Whale’s Stephen Yiu rebought Meta in 2023

“If I look at the Magnificent Seven versus the 493 remaining stocks in the index, and I had to take a bet on either a bigger rally among the Magnificent Seven, or a revenue catch-up from the 493 others, I am going to bet on the catch-up,” she reasons.

“Do I believe that tech is the future? Absolutely. But we are talking about a numbers game here. I am looking at multiples and margins, the ability to grow top-line revenue and the ability to cut costs.

“On that basis, I think it will be harder for those very efficient larger companies, which achieved enormous gains in 2023, to continue that growth. I think a lot of value has been squeezed out of the Magnificent Seven, and a lot of that value is now dependent on how they execute on AI.”

Value in energy

In contrast, Baroness Moyo says the energy sector offers attractive valuations. “Why? Because we’re consuming 100 million barrels of oil every day across 8 billion people. People need energy to live – whether that is from fossil fuels or from renewables. That is an area where I think there have been relatively bad returns, but there is real opportunity for upside.

“For me, value investing is about a compelling sector-based narrative that is based off of basic needs, such as food, energy and transportation. But these companies have to be well-run. You have to be able to look at the margins, the fundamental demand and what that might mean for long-term opportunities, in order to generate risk-adjusted returns above the cost of capital.”

For the economist, this could mean investing in companies which provide fossil fuels and are looking to embark on the transition to net zero, as well as those leading the charge on reducing our dependence on carbon.

See also: Cohen & Steers’ Rosenlicht: Investors must look beyond alternative energy to smooth returns

Zambia-born Moyo says: “When you have been raised in an environment – like I have – where electricity and water is not automatic, you have a very different understanding of how difficult it is to deliver energy and deliver water.

“In the west, there are a lot of people who have good intentions for us to move and transition into this new equilibrium, which is renewables-based. That’s fantastic. I don’t know anybody who is against that.

“However, we have to be sensible about what the costs of that journey are and how easy it is to execute. It’s 2024 and there are many countries around the world which cannot create energy on a sustainable basis. And I’m not just talking about desperately poor countries – this includes middle-income countries like South Africa. Even California has suffered from energy disruption.

“This, to me, is precisely the dislocation that presents investment opportunities. The vast scale of our energy requirements, the need to transition, and the requirement to find the best companies at actually providing this.”

Has Japan turned a corner?

On a regional, macroeconomic basis, Baroness Moyo is positive on the US and Japan. When asked whether Japan has become a consensus trade, given its recent stockmarket rally, Baroness Moyo says there are two key reasons the market has performed so well. “One is technology and the other is energy – the two big long-term trends driving markets. These are massive pivot points for the world, and I think people see Japan as very much at the coalface of that.”

See also: Zennor AM founder and CIO: Eight reasons why it’s not too late to invest in Japan

But people have been predicting a “new dawn” for Japan for decades – since its economy slumped throughout the nineties. Is the recent recovery the real deal? The economist does indeed believe the country has “turned a corner”.

“It’s extremely difficult to run an economy, to get a slow economy moving, and to get businesses and companies to work efficiently. There is a whole potential system of errors – a lot of things have to go right, and we have seen in the past how quickly things can fall apart. Germany was a huge economy doing well, and look how quickly it has come off the rails,” she explains.

“Japan has a lot of things going right for it. It has strong levels of high education, it has a business sector which is sharp and knows how to innovate. It is difficult for a country to put these things in place.

“We have seen it in the UK – I often talk about how, 15 years ago, business was a big piece of the story. Business accounted for a large part of the UK economy; everyone was talking about the banks, Rolls Royce, Marks & Spencer. Today, that is less the case.”

Home market

Indeed, while the Topix has gained 9.2% over the last six months alone, according to FE Fundinfo data, the FTSE 100 has achieved less than one quarter of these gains over the same time frame, at just 1.3%. It has also achieved less than half of the gains of the MSCI All-Country World index over the last five and 10 years. Does the UK market present a value opportunity?

See also: Finsbury Growth & Income: Six UK ‘digital winners’ to benefit from AI megatrend

“I’m afraid it will still be a case of ‘wait and see’ for the UK. There is a lot of hope that this is the home of industrial revolution; that we can get back to business and back to clarity. But the business and markets have become so intertwined with politics that there is risk,” Baroness Moyo says.

“It is at the point with politics where business has not been able to work without a political overhang creating costs from a regulatory perspective, and from a risk mitigation attitude when it comes to investing.

“In the US, if I talk about AI or the energy transition, the first question people will ask me is how much money they could make if they invest $1 – what return would this generate? When I have the same conversation in Europe, the first question is how to mitigate any risks coming from those themes.

“Our only way out of this is to find some kind of balance between these two attitudes. I’m worried that a lot of conversation in the UK is still very top down and government led, where people would rather kill off investing in certain areas, rather than use innovation to solve any issues.”

Emerging markets

Baroness Moyo is also reticent to invest in emerging market equities, arguing there are other areas where investors can generate “considerable returns, above the cost of capital, without the inherent risk”.

“I understand the arguments on paper. The macroeconomic arguments are very compelling. But as a practical matter, life is too short,” she says. “It sounds flippant, but it’s fundamentally true. Investors only have a certain number of years to make returns. That doesn’t mean they can’t ultimately achieve gains and compound those returns. But why take the risk by putting your capital in a market with slowing growth geopolitical risks and FX problems? It’s very hard.

“In my case, I only have 20 years to compound any returns. Why would I waste my time trying to work my money in an uncertain environment? Yes there could be some outside bets but I am willing to leave that money on the table.”

See also: Macro matters: Digital India

She cites India as an example which is popular among investors. According to FE Fundinfo, the MSCI India index has returned 26.3% over the last year – more than double that of the MSCI ACWI.

“Lots of people say they are going to make billions by investing in India. Good luck to you, but I am willing to reduce my basis-point returns and not have to deal with the risk,” she reasons.

“Would I ever say India is never going to make it? No, it’s not my place to say that. But what I will say is it is extremely difficult to generate predictable returns in that kind of environment. There is a lot of red tape; it is definitely skewed towards locals winning over the foreign partner. It doesn’t have a great track record.

“People have to understand it’s not free money; there are other places you can invest and generate returns with relatively little risk.”

“I have always felt that, even a little bit of impostor syndrome is no bad thing. So long as it isn’t overwhelming.”

It is hard to imagine that fund manager Thomson would suffer from imposter syndrome. Last month marked his 20-year anniversary running the £3.6bn Rathbone Global Opportunities fund. Over the last two decades, it has returned just shy of 1,000% to investors, more than doubling the 381% average return of its peers in the IA Global sector, and marking it as the single best performer out of 87 funds, according to FE Fundinfo data.

It hasn’t always been plain-sailing for Thomson, however. He first took over the helm of Rathbone Global Opportunities after three years of experience in the industry, when the mandate had just £5m in assets under management. Then, less than three years later, the global financial crisis hit.

The fund struggled, falling by 20.9% between the start of 2007 and the start of 2009 in total return terms. It was during this period that Thomson recalls some of his lowest moments in the industry.

“One of the worst investments I have made was in an airline stock, which went out of business on Christmas Eve in 2007,” he says. “You always try to learn from your mistakes. They never repeat themselves precisely, but there is an element of rhyming. I have never invested in an airline since, because one of the big drivers of profitability for the sector is something outside of its control – which is jet fuel prices.

“It means you end up trying to predict things that are impossible to predict. For the most part, this has kept me out of all commodity stocks – I don’t want to hold companies where the main driver of their success is out of their control.

“This means my fund hardly ever has any oil and gas, or mining stocks – it has therefore always had quite a big divergence from the benchmark.”

Alongside commodities, Thomson also steers clear of emerging market equities, on the basis that they lie outside of his knowledge sphere.

“I think the right thing to do is to stick with your principles – but it can bite us as well,” the manager reasons. “In 2022 the oil and gas sector was up 60% and we didn’t hold any. That was a very hard mountain to climb, but it is a health warning I give to all of my investors – there are certain areas of the market where we just don’t think we should invest, from a quality and growth perspective.

“That can mean, at times, we underperform as a result.”

See also: Interview with Bryn Jones, head of fixed income, Rathbones

Despite falling by 20.6% in 2022, the fund went on to achieve a top-quartile total return of 18% in 2023. It has also still managed to achieve a top-quartile total return of 77% over five years and a second-quartile Sharpe ratio (which measures risk-adjusted returns), despite the challenging year.

“There are always career lowlights and stock mistakes, but with the healing power of time you can use that to your advantage further down the road and learn from those mistakes. They probably make you a better manager of money, ultimately.”

‘Cheap’ doesn’t mean ‘attractive’

Alongside the importance of humility, Thomson has also learned that stocks can be expensive but not overvalued – a concept he describes as “almost anathema” to value fund managers.

The fund retains a strict quality and growth bias, which has resulted in a current 69.2% weighting to US stocks, and 21.6% in European names. It also has significant allocations to consumer discretionary and technology names at 22.5% and 16.3%, respectively, with its list of top 10 holdings populated by stereotypically ‘expensive’ names such as Nvidia, Microsoft, Visa, Alphabet and L’oreal.

“This has been the source of a lot of my returns over the last 20 years,” he explains. “I think the confusion here is that, often, the companies that offer better growth and greater resilience actually deserve a higher multiple. And the types of companies in the index are changing as well, which is why the US market is now on a quite a high valuation multiple, while the Russian market is trading on an average price-to-earnings ratio of 2x, for example.

“It is because one market offers very mission-critical, resilient businesses where demand is predictable, while the other has very unpredictable outcomes. So, the market gives a much higher multiple to those types of businesses. And those are the kinds of businesses that tend to live in the US – the Microsofts and Nvidias of this world.”

In fact, Thomson says the three best investments of his career so far have been Amazon, Rightmove and Visa – all of which were added to the portfolio following the doldrums of the global financial crisis in 2009. Since the beginning of 2009, the three companies have returned a respective 5,919.2%, 2,975%, and 1,966.4%, according to Yahoo Finance.

“I remember meeting [Amazon’s] management team in 2009,” the manager continues. “Fund managers are used to being spoonfed at manager meetings. A meeting with Amazon is totally different – they don’t tell you anything.

“You could almost see the steam coming out of the other fund managers’ ears. But Amazon don’t have an interest in spoonfeeding fund managers; if they have the customer experience right, the shareholders will be taken care of.”

Thomson explains that, at the time of the meeting, Amazon was investing in launching Amazon Web Services, which is now the largest cloud business in the world.

“Thank goodness they did not telegraph their intentions, because that would have allowed their competitors to catch up quicker and would have eroded the lead time that they had.

“I’m proud of myself in that I was able to look through the typical checklist of requirements that most fund managers had. Many fund managers after that meeting would have said that Amazon was uninvestable. Because we weren’t given an easy way out, we had to dig around for the answers and really build the investment case ourselves.”

Holding any stock for 15 years requires a significant amount of conviction. How does Thomson weather the storms of volatility, or avoid temptation to sell after a company has already achieved stellar gains?

“Often, investors declare victory too early,” he answers. “If they get something right, they will be tempted to overtrade, sell out and then hope they can come back in again at a favourable price. The justification for this is often some sort of scientific analysis, but I have never really thought of this business as scientific. I think it is mostly art, combined with common sense, some adaptability, and ultimately the healing power of time.”

Inconsistency is key

Looking ahead over the next 20 years, Thomson believes there will be a “scarcity of certainty”, and that investors will have to adapt their return – and volatility – expectations.

See also: Will markets ignore the busiest election year in history?

“Investment returns will probably be lower and more inconsistent, but that doesn’t mean people shouldn’t invest. I think a lot of people are on the sidelines at the moment.

“A few months ago, my own mother became very nervous. She asked me whether she should sell all of her investments until things become clearer and calm down. Which was upsetting to me, because my fund is her largest investment,” he jokes.

“I calmly told her that investors have to think over at least five-year time horizons and, if you don’t need that pot of money for the next five years and you still think equities are a good place to invest, you should see it through.

“People wait for the perfect moment to come. That is what investors are implicitly trying to do – but it will never come and it will never be clear. Usually, the best returns come when you least expect them.”

The managers, who have headed up the £1.2bn Edinburgh Investment Trust (EDIN) since 2020 and earlier this year respectively, say their stock shortlist is “pretty long” currently, with UK-domiciled companies remaining attractively priced compared to “like-for-like” overseas names.

“There are no longer good reasons why the UK market is trading at a material discount to global markets,” Sattar says. “Investing in the UK stockmarket is not synonymous with investing in exposure to the UK, because only 25% of earnings in the UK are domestic. The rest are very much international.

“When you look at some of the global names in the UK stockmarket and compare them to overseas names, they are trading on a material discount. That’s not right.

“The market will close that discount and, to some extent, we have already seen the beginnings of that. We think there is a lot more to come.”

In addition to solid company fundamentals, the managers point out that inflation data and interest rates are no longer significantly divergent from other developed market economies. And, while the UK’s political backdrop is “far from perfect”, Sattar argues that both Labour and Conservative parties have “moved closer towards the centre” in terms of their beliefs.

“We have been somewhat of a political outlier between 2016 and 2021, given Brexit. But there are lots of other extreme political outcomes across the rest of Europe now that the market has to think about,” the manager explains. “I would say, if we have been a bit of an outsider over the years, we are now very much in the pack.

“Is our political backdrop perfect? Of course not – it is never going to be perfect. But we are no longer an outlier on the political spectrum.”

Pieces of the puzzle

Despite keeping an eye on the macro, both managers select stocks for the trust on a bottom-up basis, with between 40 and 50 companies being held in the portfolio at any one time. De Uphaugh and Sattar do not lean towards any specific style bias, instead prioritising companies which offer a competitive advantage relative to their peers, an ability to take market share and improving returns on capital.

“We like businesses to be run by smart capital allocators who make good decisions for the long term,” Sattar says. “We like chief executives to be taking three-to-five-year decisions, not running the business based on what it will look like over the next six months.”

De Uphaugh likens choosing companies to invest in to “analysing a large jigsaw set”. “At any point in time, you know the type of company that you want to hold but the pattern isn’t quite there yet. So, you have to find a piece that falls into place,” he explains.

“In terms of [the trust’s third-largest holding] M&S, it could be an article in The Grocer, or a snippet from a competitor. But it is one piece that feeds into your fundamental research that you have done, in order to appraise the valuation of the company. And, as your confidence builds in a stock, you buy more.

“And, on the selling side, you might have evidence of hubris, or capex that isn’t being spent very well. You might have a manager change.”

The trust, which resides in the IA UK Equity Income sector, also adopts a total return approach to investing, as opposed to focusing specifically on high-yielding stocks. The portfolio currently yields 3.96% – the same as the FTSE All-Share index, but it has comfortably tripled the performance of its average peer in the sector, in total return terms, since de Uphaugh took to its helm in March 2020, having gained 46.3%. This, according to data from FE Fundinfo, means the trust is the second-best performer within the 20-strong sector.

Passing the baton

Earlier this year, De Uphaugh announced that he would be retiring from the industry, fully handing the reins over to Sattar from February next year. While Sattar has only been listed as co-portfolio manager of EDIN since October, the duo point out that they have worked closely together for years – not just at Majedie, which was purchased by Liontrust in 2020 – but back in the late nineties, when both managers worked together at Mercury Asset Management.

“We’re at the stage where the baton is about to be passed to Imran to manage the trust,” de Uphaugh says. “I have managed this trust with the team for three and-a-half years and, during that time, I have worked closely with Imran – at our predecessor company, Majedie, as well.

“I am very confident that the style that the team and I have cultivated over this period is going to be in a similar vein going forward.”

See also: “Kepler: Edinburgh IT’s succession plan ‘one of continuity’ in run-up to de Uphaugh’s retirement“

Sattar explains that, while trust has been led by de Uphaugh, it is run using a team-based approach, and that this team remains the same.

“It will be led by me, but it is very much a collegiate approach,” he says. “Yes, you do need somebody to pull the trigger on certain things and a fund manager who is accountable for the trust, and that’s going to be me, but the most important thing is that our team of investment professionals is not changing .

“The other thing to note is that, from the start, James has very clearly articulated our total return approach to the trust’s board. We are not about chasing high-yield shares. And again, that is not changing. It has served the trust very well over the last three and-a-half years.

“So, there are clearly things that are very similar between James and I, and the team-based approach is not changing. Of course we are not the same person – not all fund managers are created the same, so there will be some stock-specific change. But the broader portfolio construction of the trust is not changing.”

Next steps

When asked about his medium-term plans for EDIN, Sattar says his focus will be to narrow its discount to net asset value which, according to AIC data, stands at 8.1%.

De Uphaugh explains that, when the team first took on the trust three years ago, the aim was “very much to get that first phase of rehabilitation in place”.

“Because when a trust comes up for review, the board wishes to have a change. That is when we put forward our total return-type strategy based on fundamental research,” he says.

“We were gratified – the numbers since then have been good in absolute and relative terms. That has helped to heal the initial outsized discount, which was at the low teens and has now moved to high single digits.

“We would all say there is more to do here. Part of that will relate to continuing to perform well, part of it is also spreading the word in terms of what Edinburgh Investment Trust offers investors. We want to move the trust back to where it was, which was the ‘go-to’ investment trust choice for UK equities. I think that is a realistic goal.”

Now, the manager is turning his attention to tech stocks, a sector more commonly associated with large-cap growth companies.

“The small-cap market has been pretty crummy for about two years, and a good deal of it has to do with Fed raising rates to get inflation back to target levels, which is ironic because small-cap value has historically done pretty well in inflationary environments,” he told Portfolio Adviser.

“But also, I think a lot of the things that were supposed to happen [over the last year], didn’t happen. Economies were supposed to pick up because China was supposed to open up and drive global demand. Oil prices were not supposed to go up, especially after China didn’t expand at the rate. And the two wars are not helping now.”

According to Hench, one of the major factors that negatively impacted smaller companies this year was the failure of Silicon Valley and Signature banks earlier this year.

“It was not so much because these banks make up a large percentage of the small-cap index, but because most small companies rely on small banks for financing,” Hench says. “That, I think, is what really shook the market, and not so much that they wouldn’t be able to get financing, but more that it would be expensive and much harder to get. Combine those things with the fact that anybody who was asked would tell you that we’re going to have a recession. As a result, the small-cap part of the market has become really, really cheap.”

Market turnaround

Over the last four quarters, small-cap US stocks have trailed large caps. In Q3 this year, small caps were down 5.1% versus a 3.1% fall for the S&P 500. However, Hench is still optimistic about the prospects for the Small Cap Opportunity fund.

“I don’t know when that will improve, but I do know that, historically, anytime you’ve been able to buy small caps that are at very, very cheap levels, you’ve done alright. And I don’t think that this time should be any different.”

He adds: “We’re value players. We don’t try to buy things that are high and hope that they go higher, we buy more when they’re down and hope to get back to normal and that delta has been enough historically for us to make our clients do better than they would have in the index, and that’s all we try to do.

“It’s part of our philosophy. If you’re going to take the risk of investing in small caps, you want to get paid for it, because otherwise, why bother? We’ve found that the best way to do that is to buy assets at really cheap prices. You don’t know when you’ll get a turn, but a healthy amount of bad news has already been priced into a lot of these things. Can things get worse? You bet. But the cheaper they are, the better your odds will be that you’ll have some success.”

The Small Cap Opportunity fund has a sizeable weighting to tech, a sector more commonly known as a hunting ground for growth investors.

“We tend to get more of the nuts-and-bolts stuff,” Hench explains. “We get a fair amount of devices and a large amount of semiconductor capital equipment. So the tools that TSMC and Applied Materials use to produce devices, contract manufacturers, and to a lesser extent, software.

“It’s a healthy part of the portfolio… and for a value fund, that’s very odd. But they are really all value stocks, because they tend to have lots of cash, and in many instances, net cash and no debt. And they sell at incredibly low multiples, because people look and say: ‘Oh, they’re not growing anymore.’ But guess what? When the cycle returns its: ‘oh, my goodness, look at this.’”

Hench added: “Unlike a lot of value players, we have a lot in tech and we don’t have a lot of financials. But that’s only because we take what the market gives, right? We go to those sectors where we think we can make the most money and find the cheapest [stocks].

“But I think financials are definitely, in my opinion, overlooked here. So we’ve been finding more value in things like banks and insurance companies, but they make up a very small part of the portfolio.

“It’s a name-by-name exercise. When we look for things like turnarounds, asset plays, undervalued growth stories, busted growth stories, and no matter what environment you’re in, you’re always going to find things. It’s a big enough market that even in the greatest market, things are going to be cheap. And even in the crummiest markets, things are going to show up with really good value.”

Smaller end of small cap

The strategy’s holdings fall on the smaller end of the small cap spectrum. “Our median market cap is significantly lower than most of our competitors and in the index itself, which has implications for performance,” said Hench. “So in tough periods, we usually do worse than the index and our competitors. But coming out of bad, ugly periods, we tend to do a lot better.

“It’s primarily due to liquidity. When people get nervous in the bad markets, they don’t exactly run to buy the stocks we own. But when they get excited and they think things are going to get better, they understand that increase you get when things start to get better, traditionally has been more than enough to make up for the nasty periods.

“In small cap, it’s very rare for things to be bad for more than a year. So last year, the small-cap index was down about 20%. This year, it’s flat at best, maybe we’re up one or two, but you rarely get two consecutive bad years.”

According to the fund’s latest factsheet, it currently has 260 holdings. At the end of September, the fund’s top 10 holdings accounted for just 7.66% of the overall portfolio, with the largest position being a 0.80% holding in Alpha and Omega Semiconductor Limited.

Meanwhile, the smallest of the top 10 holdings was manufacturing firm Louisiana-Pacific Corportation, which makes up 0.74% of the portfolio.

When asked why the strategy employs a relatively unconcentrated approach, Hench said: “We think that as far as managing risk, the best way to do it is to spread your bets. Also, given we are truly small and sometimes micro-cap, we don’t want to go in and buy a lot of stocks all at once, we like to buy a little bit at a time. And quite frankly, no matter how much work you do, no matter how much research you do, no matter how smart you think you are, you’re going to make mistakes. And in small cap, when you make mistakes, it’s hard to recover if they’re a big percent of your portfolio.

“It’s very difficult to own 6% of something and go to bed feeling good and waking up and finding out that your 6% position is 3% especially with the liquidity. So without great liquidity, the best way to handle that is to really be diverse.”

“All of our ideas start out because they’re cheap. And then the rest of the process is simply trying to figure out whether or not you could get comfortable with some avenue for it to get better. Many times, it’s just time. Other times, it’s more complicated than that. But mostly, we’re buying proven companies that have done well in the past, but for whatever reason, have had a hiccup or an impairment to their value.”

The other goal he set the team last year was a renewed focus on diversity – not just in terms of the people themselves, but in terms of client and “genre of product”.

“This is always a work in progress but, invariably, we have done that,” he explains to Portfolio Adviser. “What I am most pleased about is that, when I joined five years ago, LGIM was predominantly known as an index house. We are still very proud of our index capabilities but that is not all that we do.

“My biggest challenge was to get the message out there to financial advisers, wealth managers and banks that we are good at index products, but that we have a lot of active capability. This can sometimes get overshadowed by the perception of us being an index house.”

An active fund in LGIM’s stable of products which Crossley is pushing at the moment is the £425m Legal & General Strategic Bond fund, which has been co-managed by Matthew Rees and Colin Reedle since 2019. Launched in 2007, the fund has comfortably achieved top-quartile returns relative to its average peer over three and five years, according to data from FE Fundinfo. Over the last half a decade, it has found itself in fourth place within the 71-strong IA Sterling Strategic Bond sector with a total return of 18%.

“We have changed our narrative on the fund to explain its unique selling points and travelled the country speaking to wealth managers and advisers,” Crossley says. “I think it is fair to say that, before we did this, a lot of people believed it was only for institutions. It took a lot of work to make people realise that it is a unit trust and a retail wholesale product.

“We just needed to speak about the product differently.  We have sold £300m in units, in gross terms, year to date, which is a big number for a fund house that is not known for being active.”

Crossley says the fund’s “real edge” over its competitors is its duration management, which sets it apart from “many fantastic and competitive strategic bond funds out there”.

‘One size fits all’

Crossley admits the firm is “not selling lots of active equity” fund units at the moment but that, for now, he is focusing on building LGIM’s active reputation through the strategic bond mandate.

“What is interesting is that the fund is being bought more by advisers than wealth managers – advisory rather than discretionary. The market seems to see strategic bond funds as a ‘one size fits all’ global fund, and so wealth managers are opting to pick their own exposures to gilts, credit and high yield.

“Who wins? We will have to see. I have seen this phenomenon go through cycles where DFMs decide to allocate these decisions to the likes of us, and then to do it themselves. But at the moment, discretionary fund managers tend to be making their own calls.”

That being said, Crossley says the firm can also provide discretionary managers with “building blocks to make their own decisions” through its suite of indexed products.

He adds: “And, if investors don’t want to pick their own funds, we have our multi-asset franchise which is now ten years old and has almost £80bn of assets under management.”

Onuekwusi’s departure

In April this year, it was announced that Justin Onuekwusi, LGIM’s head of retail investments EMEA and head of retail multi-asset funds, would move to St James’s Place as CIO – a role which he commenced at the beginning of the month.

Having held a senior and integral role on the firm’s multi-asset team for more than a decade, Crossley says it was “sad to see him move on”.

“We will miss him – not just as a fund manager but as a person. Justin is a great man and he is a friend of mine. But the benefit of our multi-asset franchise is that it is very much a team-based approach.”

He points out that Emiel van den Heiligenberg continues to head up LGIM’s asset allocation, and that he has in excess of 30 professionals on his team comprising economists, strategists, fund managers, dealers and support staff.

“John Roe, who was Justin’s manager, is still head of multi-asset funds. Andrzej Pioch now technically speaking has his hands on the tiller, having worked alongside Justin on the funds for the last ten years.

“But again, it’s a team approach. Did anything go disastrously wrong when Justin left? No. Clients have also reacted very well, we haven’t seen any sudden redemptions and that is down to good communication.”

Evolution of index funds

With £470bn of index assets under management, and products held across more than 400 index portfolios, this side of the business inevitably remains a key focal point for Crossley.

While traditionally investors measure the success of an index-tracking fund via its charges and its tracking error, the head of UK wholesale says the industry has evolved to encompass much more in terms of what constitutes a successful product.

See also: “Invesco’s Aujla on US growth stocks, bright spots in small caps and why passive investing isn’t passive“

“There is more to offering index services than being a bog standard replication service now,” Crossley argues. “Investors look at your company profile, they look at the service you are providing, and they look beyond the basic products. A lot of people buy thematic indices from us – health and pharma have proven particularly popular over the last few years.”

He adds there are ways the team can protect investors against some downturns, and that the firm’s ESG overlay is a sought-after service.

“But, if you’re an index provider, you still have to do what the product says on the tin and you have to manage the price sensibly,” Crossley continues. “I would say this because we offer both, but the argument is no longer active versus passive. It should be active and passive.

“However, it is undeniable that post Retail Distribution Review, when the payment framework changed, indices have become more widely available and, given it has been a tough time for fund managers over recent years, indices have become more popular.”

He says the “next layer of the cake” is Consumer Duty regulation, which kicked in on 31 July this year, with the aim of setting a higher standard of consumer protection in financial services.

“When I talk to advisers they are scrutinising their prices more and more and, as they do that, they naturally consider the weighted cost of their investments overall.

“Sensible advisers that have lots of active funds are not throwing them out completely, they are just interchanging as and when the time is appropriate. If an adviser can get a good outcome from using actives and passives that’s brilliant. But the trend for index-linked products is undeniable and it is more than replicating a benchmark.

“But as an industry, we need to stop making it sound like a choice, and see it as more of a basket.”

Consumer Duty

When asked how the roll-out of Consumer Duty impacted LGIM as a firm, Crossley explains that while it required “a lot of hands to the pump”, much of what the Financial Conduct Authority required from firms was “already in place, in one way or another”.

“We were codifying what we were doing already with Assessment of Value [reports], we’ve had PROD [the launch of the FCA’s Product Intervention and Product Governance Sourcebook in 2018] and Dear CEO letters [notes issued by the FCA and Prudential Regulation Authority addressed to company executives], so products have to be tested.

“But, the way in which you articulate your messaging to clients needs to be translated for the end investor. You have to be careful about how you tell investors what the fund is and what it is doing. But again, you should be doing that anyway. So, it has been a case of sharpening the pencil in terms of how we do things.”

He adds: “Don’t get me wrong, Consumer Duty is important and I am not saying it wasn’t necessary, but a lot of the infrastructure was already in place as a large established UK business. We were very comfortable with the idea. Big isn’t always beautiful, but it has benefits.”

Open-ended property

Given LGIM houses the £1.4bn open-ended L&G UK Property fund, managed by Michael Barrie and Matt Jarvis, it would have been remiss of Portfolio Adviser not to ask about M&G and Canada Life’s recent decisions to shutter their PAIFs due to liquidity concerns. Will LGIM follow suit?

Crossley was unable to say too much on the matter, but explains: “As of today, nothing is changing. The PAIF is open. It has cash on the balance sheet. We speak to all our investors regularly. They’re happy.”

Providing the official company comment, co-manager and director of fund management for LGIM’s real assets Barrie states: “The L&G UK Property fund (PAIF) and its feeder fund, the Legal & General UK Property (Feeder) remain open to investors. Fund size and liquidity remain stable with cash and REITs in the fund(s) at 14.2% as of 31 August 2023.

 “L&G has been a property sector leader for over 16 years and is well positioned to provide balanced property exposure to investors. We remain committed to providing investors access to the sector, as well as LGIM’s award-winning property fund management expertise, via robust products that are fit for purpose and within the remits of the regulatory landscape.

“With assets under management of over £1.4bn, the L&G PAIF is the largest in the sector and one of the best performers over three and five year periods respectively.”

 He adds: “Relative to other asset classes, we believe that the UK property sector remains an attractive diversifier in any balanced portfolio, and is well positioned for investors with long-term horizons. The L&G UK Property fund continues to offer investors access to this real and alternative asset class, and remains well placed for any structural changes to the UK property market.”

Biggest challenges

Look over the short-to-medium term, Crossley admits the asset management industry faces several challenges.

“If people can earn 6% in a fixed rate cash product for a year, then I understand why they are likely questioning whether they want to spend the annual charge to put their money into risk assets. But I do think we need to educate consumers that inflation is still higher than cash,” he says. “If you miss the best days in markets you lose a lot of potential returns, and I find whether you’re an intermediary or an individual investor, it is easy to say when to come out, but very hard to say when to come back.

“Sitting in cash is a temporary phenomenon. But if I were to make a prediction, and I’m not an investment manager, I think as the cash positions roll off over the next 12 months, some of the best opportunities will be in fixed income. Investors will sell down their holdings in money market funds and move into the asset class.

“But, given it’s going to be tough for at least the next six months or so, I expect people to buy into multi-asset, too.”

Bonds have obviously come out of the wilderness after many years, so I’m presently interested in the optimum way of maximising yield without taking on excessive duration or credit risk. Sterling volatility and relentless dollar strength means currency considerations are key, too.

Q: What asset classes should investors be thinking about beyond equity and bonds?

Within alternatives, we have been using risk-constrained real assets to provide diversification and improve inflation resilience. While inflation is now moderating, it will remain structurally higher for the medium term, in our view.

See also: Don’t count out active management amid land grab by passives

Q: How do you see sustainable and ESG-oriented investing evolving from here?

It’s definitely not a fad – the ultimate aims and benefits of ESG investing are clear – but there are still likely to be definitional bumps in the road ahead. Regulation and standards need to evolve fast in order to minimise risks of greenwashing and ensure investor confidence is maintained. That’s a big, multi-jurisdictional task, so I don’t think it will be solved overnight.

See also: PA+ Sustainable investing: Transition your portfolio into tomorrow

Q: What will be different about the investment sector a decade from now?

I think active funds will have to be more clearly active. There is a large swathe of ‘closet trackers’ in the long-only retail space. We welcome differentiated ‘true active’ strategies as providing potential for alpha, but they are hard to come by. Across the board there is a focus on value for money, so we expect aggregate fund costs to continue to decline, which is good news for investors – and a challenge for fund manufacturers.

To read the rest of this article visit the October edition of Portfolio Adviser Magazine

Rossbach, who is also lead manager of the firm’s World Stars Global Equity strategy, is a strong believer in investing in very high-quality companies and retaining conviction in them over long time periods – in many cases, decades.

For instance, J Stern & Co – which is backed by a 200-year-old European banking family that has been investing in stocks for three generations – has now been invested in Nestle for more than 50 years. There are other names in the firm’s flagship global equity fund which Rossbach has been analysing and investing in for more than 20 years.

“We believe that global growth is driven by sustainability, entrepreneurship and enterprise,” he says. “You can invest in these entrepreneurial companies in a number of different ways – whether this is early stage or late stage. But our belief is that, if you buy the best companies in the world which have the highest degree of quality, and which can compound over time, that is how to succeed.”

While its strategy has been in place for significantly longer, J Stern World Stars Global Equity was launched as a UCITS vehicle in April 2019. Since then, the $172m (£140.5m) fund has achieved a top-quartile total return of 49.4%, according to data from FE Fundinfo, compared to its IA Global peer’s average gain of 36.1% over the same time frame.

This is despite the fact quality and growth-focused stocks suffered a sharp sell-off in 2022, with the MSCI World IMI Growth index tumbling by 19.9% while its value counterpart gained 4.5%, as rising interest rates and inflation across the developed world pushed investors into cyclical and economically-sensitive sectors.

See also: To cut or not to cut: Are markets in for a ‘pleasant surprise’ from central banks?

But now, with the growth index already up almost 19% so far this year and value left trailing in the dust once more, Rossbach believes we have finally experienced a long-term normalisation of the macroeconomic environment following more than a decade of unprecedented monetary policy.

“After almost 15 years of essentially deflation since the global financial crisis, we experienced the disruption of the pandemic and the lack of capacity to invest in infrastructure – which caused a tremendous short-term spike in inflation,” the CIO explains.

“We are now in an environment where interest rates have finally normalised for the first time since the crisis. We are very, very close to peak rates in the US. We are close to peak rates in Europe. We may or may not be there in the UK – but that is the result of specific issues. The US economy is ultimately what matters the most for the global economy, and for most of the companies we are invested in.”

While Rossbach believes interest rates will not keep rising, he doesn’t believe they will fall either. Yet, despite the widely-held view that an environment of falling rates is best for growth stocks – as rate rises eat into the value of future cash flows – he calls the current backdrop a “Goldilock’s environment” for the fund.

“This normalisation of rates is a positive. And, as part of that, we very much believe that ‘the new normal’ which people have been so worried about, is a return to the good old days,” he reasons.

“When I started my [analyst] training, we were using risk free rates of 4.5%. We have essentially never used anything else. So, in a world in where interest rates are between 4-5%, and where we have more sustained inflation of between 2-4% we therefore live in a world where real rates are between zero and 2%. That is a world to look forward to – not to be afraid of. It is not a world to spend all our time worrying about when the next rollover takes place.”

Underpinning the current economic landscape, according to the manager, is robust underlying consumer demand, a moderation in inflation and “a pro-active and data-driven approach” from central banks, which he says will “support markets during a critical period”.

“These data points we are seeing truly point to a Goldilocks scenario. Markets are never ‘just so’ but at the moment, the data places us on the balance between the two.

“[As quality growth investors] we have been dealt the blow of inflation and of rising interest rates. The third blow we have suffered is valuations. We saw a significant factor rotation last year where value outperformed growth and all indicators for the types of companies we invest in went against us.

“But despite that, throughout this period since 2020, our stock selection has provided positive returns.”

That being said, a brief market pullback over the last month has seen the MSCI World IMI Growth and Value indices fall by a respective 1.6% and 1.5%, and the average peer in the IA Global sector fall by 2.9%. J Stern World Stars Global Equity was particularly hard hit, having lost 3.5% over the last month to the time of writing (7 October 2023).

“That pullback has been caused by investors thinking over the short term – worrying that either the US economy is slowing down, or that inflation is still running too high so we are going to have a problem with interest rates,” Rossbach explains. “We believe it is going to be neither – it is going to be complicated and choppy, but ultimately a positive path. And in terms of the stocks we own, we now think valuations are at very attractive levels.

“If people are worried that they have somehow missed the right time to get into growth after the sell-off last year, moments like we are in right now suggest otherwise.”

Investing style

While there are several quality and growth-focused funds in the IA Global sector with low turnovers and concentrated portfolios, Rossbach says there are multiple differentiators between his fund and how it is run, relative to other players in the UK retail space.

Firstly, the manager says he has a long-standing focus on the diversity of his colleagues in order to reduce groupthink, with a 50/50 gender split across the six-strong investment team, and each member hailing from varying socioeconomic, geographic and ethnic backgrounds.

See also: A step in the right direction’: FCA bids to boost diversity and inclusion in financial services

“We believe very, very strongly that the diversity of the team provides diversity of thought and approaches – this allows us to have more robust discussions,” he explains.

Another differentiator is that the fund – which prioritises the long-term sustainability of businesses – will invest in industrials, unlike many of its peers with similar mandates. Contrary to what investors may assume, Rossbach says it is the fund’s focus on sustainability – as well as its team’s independent research – that leads them into these names. According to the fund’s latest factsheet, it currently holds 21% in industrials & infrastructure, as well as 24% in consumer goods and 39% in companies associated with the digital transformation of society.

“We believe that there are great industrial companies out there which are ‘shovel providers’ to the energy transition movement or to net zero, and which are going to be instrumental in enabling us to overcome the challenges we have,” Rossbach says.

“These are tremendous opportunities linked to sustainability. And yet some of these companies earn zero points in relation to EU taxonomy They are also directly linked to the UN’s SDGs [Sustainable Development Goals], which are not just some slogan – they are profound targets which are necessary to overcome society’s greatest challenges.”

One example of an industrial stock held in the portfolio – but which scores a ‘zero’ in terms of its taxonomy – is Sika, a Swiss multinational firm which develops systems and products for bonding, sealing and reinforcing into the building sector. Rossbach has been investing in, and researching, this stock for approximately 20 years.

“About 60% of its business is in the refurbishment of existing buildings,” he explains. “Sika can provide a more efficient use of concrete – it converts buildings so they are fit for purpose, rather than pull them down. It also modernises buildings, which dramatically reduces carbon use.

“It now has the technology to aggregate concrete back into sand, gravel and cement. Recycling concrete is one of the greatest challenges out there. This is a business which is actively disrupting how the industry works for the better.”

EVs

The manager says a ‘false friend’ when it comes to sustainable investing, however, is the electric vehicle sector.

“We are not sure whether the future of transport will be electric cars at all. We think the future of transportation is going to be more of a system and, where autonomous driving is required, we could see the likes of pods that are owned on a shared, rental basis, which would be much more efficient and ecologically sustainable,” Rossbach says.

“Of course we will still have cars over the medium term. But there are some large issues. One of which is around the battery technology – it seems to me that lithium ion batteries are a legacy technology.

“The main issue with lithium ion batteries is that they are not very efficient, and the way the materials are extracted is highly pollutant.”

Rossbach adds that, when making investment decisions, his team “always considers where the disruption is going to come from”.

“I am convinced that, with energy, we are going to move from a hardware phase to a research-led, physics driven phase, where we find new transformative sources of energy altogether.”

Multi-asset fund manager Aujla, who has been at the Henley-based firm for 11 years, heads up its risk-targeted Summit Growth multi-asset range, and is co-manager of its model portfolio service and managed funds.

“At the end of 2021, we were worried about duration and therefore fixed income, for obvious reasons. Yields are pretty low. So, we came into 2022 with lower duration, which helped us,” he tells Portfolio Adviser. “The issue with being a multi-asset investor is that, no matter what you do, you always wish you had done more or less of it. But we were pleased to have reduced our duration.”

Aujla did so through exposure to one-to-three-year US treasury ETFs. Then, at the start of 2023 when yields were higher, he increased duration through adding a 10-year-plus treasury ETF.

“We weren’t totally convinced that there was no risk in duration at all, but it became more of an insurance policy for the multi-asset portfolio than it had been in years,” he explains.

“A lot of investors think the sole benefit of investing in ETFs is the cost, but on the fixed interest side there are implementation benefits, because it allows you to choose exactly where you take your duration.”

ETFs also allow multi-asset investors more control of their currency exposure, according to the manager. For instance, when the sterling tumbled from 1.35 to 1.06 relative to the US dollar last year, he hedged one third of the fund range’s US equity exposure back to sterling, via a hedged share class of one of the ETFs he already owned.

“Our view was that sterling has fallen by a lot and that this was not sustainable. If it were to go back up, it would have been a big headwind for our overseas US equity returns,” he reasons.

“As it transpired, sterling went back up from 1.06 to 1.25 rather recently. Of course now, I wish we’d hedged 100%, but it was more of a risk-mitigation decision than an alpha generation decision.”

The Summit Growth multi-asset team will invest in a blend of active and passive funds, all of which are housed at Invesco. However, the manager emphasises that investing in passive instruments is not the same as passive investing, given they provide access to active allocation decisions.

“We do not have any kind of intellectual preference for active versus passive investments, necessarily. It’s more about how you use them, in which market area and why,” he says.

See also: “Consumer Duty impacts active-passive debate“

For example, approximately 80% of the Summit Growth range’s US equity exposure is currently passive, given the efficiency of the market, with 20% being held via a Nasdaq 100 tracker.

However, given the tech-focused index is already up 32.3% year to date, according to data from FE Fundinfo, Aujla is now “considering what to do next”. That being said, he believes there is “still a leg to go” in terms of returns to be had, given the index has performed so strongly without any interest rate cuts, and individual companies’ structural benefits.

“We want to be underweight the US on valuation terms, but an area we have more confidence in is the growth-orientated stocks,” he says. “The overall style exposure for the equity part of our portfolio is relatively neutral overall, but we wanted to take the growth where we thought it made sense.”

This year has seen a complete reversal in fortune for US growth stocks, with the Nasdaq having fallen an eye-watering 23.9% during 2022, compared to an 8.1% fall from the global MSCI ACWI index. Now, 10 months into the year, it has comfortably tripled the global index’s total return.  

See also: “Brooks Macdonald’s Cady: Inflation slowdown and AI boosts case for US equities“

Aujla explains there are “a number of reasons” why investors may have become more bullish on growth-orientated US large caps.  

“One reason is if you think interest rates are going to come down; these types of stocks will benefit from that,” he says. “Another reason is that they are capable of ‘self-help’ and are more in control of their own destiny in terms of revenues or earnings, compared to more economically cyclical industries.

“And of course, investors would have bought these stocks if they wanted to be a very early player in AI – a theme which has gone gangbusters this year. This could continue, but I think there is a fair amount of exuberance priced in there.”

See also: “To cut or not to cut: Are markets in for a ‘pleasant surprise’ from central banks?“

In contrast, Aujla opts for actively-managed funds in less efficient or under-researched market areas such as global small caps, which the Summit Growth portfolios have a modest long-term structural overweight to through Michael Oliveros’s £545m Invesco Global Smaller Companies fund.

“Around two-thirds to three-quarters of the global equity universe is made up of large caps. However, Apple and the whole of the Russell 2000 have a similar market cap. That is 2,000 stocks versus one. So, despite large caps taking the bigger market share in aggregate, there are far more individual offerings further down the cap spectrum,” he points out.

“Small caps do also tend to outperform large caps over the long term. And, if you invest in smaller companies globally, the diversification effect you get is far more powerful than what you can achieve with large caps.

“Finally, the domestic nature of them means they are less driven by global factors.”

Aujla also upped exposure to UK small caps earlier this year, so that they now account for approximately 10% of the portfolios’ small-cap exposure overall. He did so through Invesco’s £492m UK Smaller Companies Equity fund, run by Jonathan Brown and Robin West.

“I have lots of doubts over the UK economy, of course, and there is a lot of negative investor sentiment, but valuations on a three-year-plus view look quite attractive. There is a lot of bad news baked into valuations.”

He takes a more granular approach to emerging market equities, holding actively-managed global emerging market, emerging market ex China, and China funds. However, he also holds an emerging market ETF and toggles the exposure across all of these.

“we see China as a separate entity between EM and DM, and we want the tools to be able to access that. As a multi-asset investor, sometimes you want to take control of these aspects yourself,” the manager explains.

“Sometimes when investors think about having an in-house universe they think of the old-fashioned, 1990s-style fettered fund-of-funds. But in practical terms, it means we have an in-house universe of  more than 800 funds to choose from with better access to the managers, and without having an enforced house view from Invesco. We also don’t have the charges to contend with.

“We are only investing in 25 to 30 funds, so hopefully we are giving our clients the best of both worlds: active management through our asset allocation and fund selection, but without the cost this typically incurs, and for a variety of risk appetites.”

In May 2019, Felicia Hjertman (pictured) left Edinburgh-based asset management firm Baillie Gifford, where she had co-managed the Japanese Smaller Companies OEIC and Shin Nippon Investment Trust, alongside Praveen Kumar. The portfolios, which had a combined AUM of £1.9bn, had significantly outperformed their average peers over her tenure.

“I love small caps and I love Japan; it is such a quirky and special place. I also loved working both on a fund and an investment trust. With the latter, it was an interesting experience working with the board and becoming closer to the retail market,” the Tillit founder and CEO tells Portfolio Adviser.

“But while that was a really interesting and exciting intellectual challenge, I have always had this little fire inside me, this need to build something tangible myself – to create something out of nothing and try to help people in one way or another.”

The idea for Tillit – an investment platform offering a universe of carefully chosen funds to investors – came after Hjertman decided to allocate her pension herself.  

“I was on an investment platform and I found it really hard to make an informed decision,” she said. “There were thousands of options – which was great – but I only knew about Baillie Gifford funds.

“I wanted that decision to be made simpler. I could see the managers, their fees, their top holdings. That somebody went to Oxbridge 20 years ago. But it didn’t tell me what I wanted to know.”

In the end, Hjertman ended up pooling information on each fund from various sources, including managers’ websites, Morningstar data and KIID documents.

“I complained constantly to my friends until they said to me: ‘why don’t you stop moaning and do something about it?’”

Hjertman noted that institutional clients are travel around the world, enlist the help of consultants and speak to the fund managers directly, in order to choose the best investments for them.

“Individual investors don’t have that luxury. How do we bring this to them? How do we build a platform that empowers people to make their own decisions without having to pay for advice?

“We want to make sure that everyone has the access to the tools, the information and the confidence to do that themselves.”

Tillit, which means ‘trust’ in Swedish, became an incorporated company in February 2020 – just weeks before the Covid pandemic hit. By this point, Hjertman had been out of full-time employment for nine months.

“I had already been living on my savings since the end of May the previous year. I had to raise capital before October 2020, because that is when I would run out of money,” she says.  

“In hindsight, I’m very happy that I made the decision to resign the previous year because I don’t think I would have dared to do it otherwise. But by this point, I had no choice. I just had to push forward and, if I couldn’t get it off the ground, find a job elsewhere.

“So, I reached out to a handful of individuals who I knew were in a position to potentially support something like this, and to provide some angel money early on.”

In the end, Tillit closed a £1m funding round by October, with industry heavyweights including Schroder’s Nick Kirrage and Hjertman’s former Baillie Gifford colleagues Sarah Whitley and Patrick Edwardson throwing their hat into the ring. This amounted to double the £500,000 Hjertman and co-founder Paul O’Neill had initially hoped for.

“This would have been nowhere near enough to get the business of the ground, as it turns out,” Hjertman explains. “We were very fortunate at a time when raising money generally was incredibly difficult.

“I told [our seed investors] about my vision and my frustrations, and they were very much on board. A small selection of platforms had been dominant in the market for so long that there was a level of complacency – they were excited by the prospect of challenging that.”

Not only does the platform aim to offer “best in class” funds to retail investors to choose from, it also only charges one fee of 0.4% for the first year, which falls by 1 basis point each year down to 0.25%.

Another marked difference is the way its fund list is displayed. Rather than lead on a fund’s name, it instead offers a brief synopsis of what the fund intends to do.

“I got this idea through my love of whiskey,” the CEO says. “There is a place in Scotland called The Whiskey Society and, instead of writing the brand on the bottle, they write the flavour profile and you never know the brand.

“I wondered whether this should be the case for funds, because a fund name doesn’t necessarily mean anything to the investor. What does mean something is the fund’s goal, what it is aiming to achieve.

“We wanted to give investors, in plain English, a snapshot of what the fund is like. So that they can decide whether to move on or read more.”

The company now has physical offices in London and Edinburgh, with CTO O’Neill based in Scotland and the team split between both locations. Because the firm was founded during the throes of the first lockdown, it was a full year before the co-founders met in person.

“That was a surreal experience. But it forced us to think about how to build connections and a company culture. How do we share goals and visions while working virtually? The fact we didn’t know any different was actually quite good,” Hjertman says.

Another challenge the CEO faced was engaging in a second round of funding during a turbulent time for markets. As it transpired, Tillit scored a £3.6m fund raise last year.

Fund selection

A key member of the team is Sheridan Adnams, who joined as head of fund selection in June last year. Fund selectors Ben Yearsley and Gavin Haynes, from Fairview Investing, are also on the firm’s investment committee, as is former Baillie Gifford multi-asset fund manager Patrick Edwardson.

“A lot of fund selection is asking the right questions and really trying to dig into their decision-making process – it’s about separating the marketing speak from what the managers are actually trying to do,” Hjertman says. “With some of us coming from fund manager backgrounds ourselves and having been at the other side of that table, we know which tough questions to ask and which answers will be the most revealing.”

A new addition to the board is ESG expert Alexandra Danielsson, who joined earlier this month. Her goal is to help Admans cut through any potential greenwashing among sustainable funds.

“With sustainable funds, there are some that don’t have exclusions because they believe it is better to empower the transition,” Hjertman explained. “We have funds which don’t necessarily have a sustainable mandate but which will not invest in fossil fuels because they don’t invest in that way.

“This is why we built filters onto our platform for excluding fossil fuels specifically. This means that an investor can be certain the fund will never have fossil fuels in their portfolios, for example, rather than them just not holding any right now.

“So there are filters, but it is also trying to understand philosophy and process – what rules are there in the fine print? How do they weight the ‘E’, the ‘S’ and the ‘G’? There is still a lot more we can do in this space but we are certainly at a decent starting position.”

The CEO describes her stance towards sustainable investing as ‘neutral’ however, and even warns that fund labelling and the desire not to be labelled as an Article 6 fund under Sustainable Fund Disclosure Regulation (SFDR) could lead to managers chasing similar assets and inflating their prices.

Another key theme she is focusing on is the lack of value funds available relative to their growth counterparts, given ultra-loose monetary policy has – until recently – kept equity returns slowly ticking upwards.

“We also think a lot of hedge funds are sitting on very interesting strategies at the moment because they are not as constrained, but we’re yet to find the right vehicle,” Hjertman says.

“But ultimately, it is not about making a call on a specific sector or market area. It is about having a diverse universe where, regardless of who you are as an investor, you can find something that suits your goals, your risk tolerance and which can satisfy your curiosity for any number of different investment styles or products. We want to cater for that curiosity.”