The key names in PSigma’s game

1 February 2010 | By Tomas Hirst

PSigma Asset Management was established in January 2007 as a joint venture between the Punter Southall Group and Bill Mott, Graham Fuller and Ian Chimes with the aim of widening the range of unit trusts offered by PSigma Unit Trust Managers. The group has £1.2 billion under management.


Having celebrated its third birthday at the start of 2010, PSigma Asset Management finally has a chance to reflect on its beginnings.

It would be hard to think of a less propitious start. The boutique was launched into one of the most challenging markets since the Great Depression of the 1930s followed by an unexpectedly sharp snapback.

The extreme nature of the investment climate might have frightened investors away from a new boutique, but Ian Chimes, the managing director of PSigma, says the experience of key personnel helped to keep the business steady.

“Primarily the main fund is the PSigma Income fund, which is Bill Mott’s fund,” he says. “I feel that in the long term a business that has a Bill Mott, a James Abate and Neil Cumming is playing to where we want to position ourselves. We want to do a few things, but do them very well, with recognisable names who can present their cases well.”

Having spent 30 years at Credit Suisse, Mott is considered one of the industry’s best known British equity income fund managers. His thematic style looks for “inflection points” in the economic cycle and, on top of managing PSigma’s core Income fund, he is also a founding member of the group. (article continues below)

Chimes’s claim that the staff, and in particular the ­reputation of Bill Mott, have been vital for the boutique’s ­success to this point is a view that many in the advisory community share.

”We want to do a few things, but do them very well, with recognisable names who can present their cases well”

Mark Dampier, the head of research at Hargreaves Lansdown, says: “We mostly look at Bill Mott, like most people. but we’ve also started looking at Neil Cumming. They’re not doing a bad job and they’re growing. Bill is an excellent presenter, one of the best, and he’s always worth listening to.”

The financial crisis posed problems for even the most experienced managers. These include veteran investors such as Bill Miller, the chairman and chief investment officer of Legg Mason Capital Management, who was among the victims of troubles at Freddie Mac, an American government-sponsored mortgage insurer.

Mott, however, faced additional complications as the Investment Management Association (IMA) stepped in to split his sector in two.

“Obviously, with the IMA deciding to split the Equity Income sector, the thing that we had to decide at the end of 2008 was whether to stay in the sector or move with Neil Woodford and Robin Geffen into the Growth & Income ­sector,” says Chimes.

“We were disappointed with the way the decision was made because an equity income sector without Neil Woodford in it is unfortunate for everyone. Bill has known him for a long time and they know each other pretty well, so we were always comparing what we were doing against what he was doing. Neptune has also been excellent in building its business.”

Although this initially posed a problem for Mott, once the decision had been made to stick in the Equity Income sector it helped to define more directly what was needed from the fund heading into the market in 2009.

“So at the end of 2008 we knew that we wanted the yield of the fund to be 110% of the All-Share to stay in the Equity Income sector,” says Chimes.

“At the start of 2009 Bill was saying that assets were looking cheaper than at any other time in his career and we felt at that point that it was one of those binary outcomes; either things were going to go bust or they we worth about three or four times the amount they were being priced at.”

The consequence of these extreme market conditions meant that the portfolio was shifted to reflect the expectation of a recovery while hedging itself against the residual risk of default.

Because of this, by March 2009 the Income Fund included 125 stocks, the highest number that Mott had held in a portfolio in his 30-year career - even exceeding the number he held while managing as much as £2.2 billion at Credit Suisse, despite the Income fund’s more modest size of £350m.

 

“The reason for this is that we felt that if things weren’t going bust, they were the wrong price,” Chimes says.

“But the risk was that if you overlaid that with some big poachy bets on the bottom end of the FTSE 100 and you got one wrong you could blow your performance out of the water. So what we did was build a series of baskets of stocks and put 2% of the portfolio into, say, five stocks.”

While the call was a departure from Mott’s previous style, the fund’s performance was more modest in its achievements. It returned 28.4% over 12 months to January 23, 2010, against the IMA UK Equity Income sector average return of 32.50% over that period.

“I think perhaps they should have done better, as Bill has made a lot of solid macro calls,” says Dampier, “but I think he would admit that he didn’t put enough on the table.”

Tom Caddick, the head of multi-manager at LV= Asset Management, says Mott’s ability to remain flexible is the main appeal of his management style, but that it can also pose problems for fund of funds managers.

“I’ve invested with Bill in the past and I instinctively like his thematic approach,” says Caddick. “He’s either very right or very wrong, as is often the case with thematic fund managers, but if you look back at his history he’s got it far more often right than wrong.”

To some extent, Mott’s idiosyncratic investment style makes the job of a multi-manager looking to buy into the fund all the more challenging.

“If you’re running a balanced portfolio it can sometimes be difficult to allocate against his binary strategy,” says ­Caddick.

While the Income Fund is undoubtedly the star portfolio on PSigma’s books, the boutique has also been busy expanding its reach into other markets. This, says Chimes, is part of a ­central strategy to build up the business incrementally by drawing in well-respected talent.

“We wanted to build up our ’non-Bill’ money. We were three years old last week and we’re moving the business ahead to around £1.2 billion,” he says. “If you look at other boutiques, they’ve started with a star fund and then built it out, and that’s really what we want to do here.”

One way in which they sought to push this strategy through was by launching James Abate’s American Growth fund towards the end of 2007. Abate is another former Credit Suisse employee, having managed the Credit Suisse Transatlantic fund and US Select Equity Strategy. He subsequently joined GAM, where he took charge of the GAM American Focus Funds before moving to PSigma.

 

With the launch of its American Growth fund, PSigma stated its intention to expand outside the equity income market.

“We’d like to build up James Abate’s American business,” says Chimes. “We launched his fund in October 2007 and plunged him straight into Bear Stearns and Lehman Brothers, so it has been amazing times.

“The thing about James is that he’s very focused in his large-cap growth style and he’s had a tough time in the last couple of years.”

The timing of American Growth’s launch and the portfolio’s large-cap focus have led to the fund slipping into the bottom quartile over both one and two years. In that time it has produced returns of 8.42% and a loss of 3.31% over 12 months and 24 months respectively, against IMA North America sector average returns of 16.02% and 2.46%.

Because of the difficulties Abate has faced since the launch of his fund, both Dampier and Caddick say that, while he is a well-known manager, they are not waiting to invest in the fund just yet. That situation, however, could change if predictions of a rally in large-cap defensive stocks this year prove correct.

“We think 2010 will be bracing but not impossible,” says Chimes. “The index might not go very far - 5-6% by the end of the year - but there will be a few themes running through it. The first one is that we think there will be a dramatic search for yield, and equity income yield could be revalued significantly.”

This environment should favour companies with strong global brands higher up the capitalisation scale, and would fit nicely into Abate’s traditional areas of expertise. Whether it proves to be the case, however, is yet to be seen.

Another area PSigma launched into was Europe, through its European Income fund. The fund has proved successful, returning 28.43% over the past 12 months against an IMA Europe Excluding UK average return of 28.69%, while over two years it ranks 17 of 97 funds in its sector.

 

“We’ve got the European fund as well, which is ­outsourced to a group called 2CG,” Chimes says. “They are seeking dividend yield in Europe and are both hugely experienced guys. The performance has been pretty good and we’ve been able to attract a bit of money on top of our seed capital, but we’ve really just been incubating the ­performance.”

The group also offers a balanced managed fund of funds proposition, managed by Tom Becket, the chief investment officer of PSigma’s sister company, PSigma Investment Management. Chimes, however, says that this is mainly focused on private wealth management clients.

The final facet of the PSigma team is Neil Cumming, the manager of the UK Growth Fund and the four equity income funds the group manages on behalf of Premier.

Cumming came to PSigma in 2004 from Teather and & Greenwood. He had joined the latter after spending six years at Prolific Asset Management, where he held the role of head of equity income, and was part of the team managing the UK Blue Chip trust.

After some disappointing early numbers, PSigma’s British equity product has stormed ahead over the past 12 months, returning 44.36%.

What PSigma’s challenging infancy has shown is that while its fate in the near term seems to be tied to its core equity income offering, the business appears to be broadening its reach.

This could prove key to the boutique’s development as it looks to cement its strong start.

Dampier, however, says the firm should be wary of overstretching and focus instead on a selection of core products. “It’s an absolutely perfect model for the small boutique,” he says. “There are one or two groups who I think have over-expanded but there’s no need to have a huge range of funds.”

This model fits well with how Chimes envisages the ­near-term evolution of PSigma, although he says that the beginning of the year traditionally throws up the possibility of a migration of talented staff from larger firms to boutiques. He says he remains happy with the progress made so far.

“What we did achieve is that our unit-holders stayed with us and we actually attracted a fair bit of new money because we were a bit more bullish on the economy than some,” he says.