TwentyFour AM on lookout for “fourth pillar of the business”

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In an industry where turnover is rife and succession planning is key, fixed income boutique TwentyFour Asset Management is proud of its retainment record. Indeed, in its eight-year history, not one investment professional has left the firm.

For chief executive Mark Holman this is a welcome change from his background in the investment banking sector, where he says “topgrading” prevails.

He says: “We have the same partners today as we did when we founded TwentyFour in September 2008, and 20 investment professionals. No investment professional has ever left the firm. If you don’t have to worry about people leaving you can be client focused.”

To say TwentyFour did not launch under the most auspicious circumstances would be an understatement. There were originally seven partners (there are now 13, including Vontobel Asset Management); the week they opened for business Lehman Brothers imploded.

“It was one of the worst weeks in financial history,” Holman says.

“We had no assets under management but we were in this office [in the City]. It was one of the worst times ever for gathering assets. But there was a huge need for advice and we were willing to help out, so we started with advisory. We looked at a lot of problem portfolios and some went on to be portfolios we managed in the future.”

Despite the testing start, TwentyFour now manages over £7bn in assets having seen steady growth, but Holman is happy to maintain the firm’s “boutique mindset”.

“If you see an opportunity in the market- place, how long does it take to reflect that in client portfolios? It’s about being nimble and smart at the same time. If there are too many portfolios you need to make the same changes across the range to treat customers fairly, inevitably it’s going to take a lot longer.”

Holman says TwentyFour is somewhat of a lone operator in the market, which he attributes to fixed income firms requiring larger numbers of personnel and the higher barriers to entry than with other asset classes. However, he maintains that “fixed income is just as exciting as any other asset class”.

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Being a boutique means the bonus is on TwentyFour to prove itself performance-wise, especially as the strategic bond sector – which houses the TwentyFour Dynamic Bond fund – is becoming increasingly competitive, says Holman.

“We don’t get money because we’re called TwentyFour. We have to win on merit. We have built a good reputation but we still have to earn our reputation everyday.”

Prior to setting up TwentyFour, Holman’s investment banking background included stints at Morgan Stanley, Lehman Brothers and Barclays Capital. Having identified an appetite for a fixed income boutique, Holman set up the firm with executive committee chairman Graeme Anderson and five other partners.

“We felt that if we were client-focused we had a chance of being successful, and that if we performed well for 10 years, we could be a reasonable presence in the UK.”

As the boutique celebrates its eighth anniversary this month, does Holman think they are on track?

“I’m happy with where we are. We have seen good performance and we have a fund range we’re excited about.

“When we started our goal was to launch relatable products in the market, build a track record and establish foundations. Today we plan for five years out, but at the beginning it wasn’t about that. We weren’t concerned about profit; that was just a consequence of doing well. It is performance that gets us up every day.”

The range consists of three divisions which between them house eight funds and 20 mandates.

Originally the firm focused on asset-backed securities, now the largest division by volume with over £3bn in AUM, although it is not the most profitable.

The £180m Monument Bond fund was the first product to launch in August 2009, investing in investment grade European asset-backed securities. Also in the range are two closed-ended vehicles: the £358m TwentyFour Income fund, which invests in non-investment grade European asset-backed securities, and UK Mortgages which invests in UK residential mortgages. The £249m fund launched in July 2015, and Holman describes it as “one of the most exciting propositions”.

Holman admits the portfolios in the asset-backed securities range have not performed as well as he hoped this year, but he remains sanguine. Year to date, the Monument Bond fund returned 2.55 per cent, according to FE Data.

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“The performance of asset-backed securities is due a catch up. A 5 per cent bond nearly always outperforms 2 per cent bond – it is bond maths.

“Provided the companies don’t go bust, you get the performance. We can be pretty confident it will outperform other sectors over the medium term.”

Unconstrained fixed income is the second-largest division with just shy of £3bn in AUM and is the largest revenue driver. This is the division Holman sits in and hosts the firm’s flagship £1.5bn Dynamic Bond fund and the £250m Global Unconstrained Bond fund, which launched in November.

The outcome-driven range was set up most recently by Chris Bowie, who joined as a partner in September 2014.

Bridging the gap between the ABS and Unconstrained divisions, the Outcome arm comprises the £291m Corporate Bond fund and the £74m Absolute Return Credit fund, which both launched last year and are now “reaching critical mass”.

“Year to date investment grade corporate debt has performed fantastically well. Since Brexit, 50-year gilts have made 30 per cent.  The duration rally is so painful, coupled with the Bank of England buying corporates too, it is no surprise they have had the performance they had.”

Over one year, the Corporate Bond fund has returned 10.76 per cent against the 12.58 per cent of the IA Sterling Corporate Bond sector, according to FE data.

This year product flows have been “pretty consistent and predictable”, Holman says, no mean feat this year.

“Even in the run-up to the referendum flows were positive, if smaller, and in the [global market sell-off] in February they only went to flat.

“The unconstrained funds are large and growing steadily and Chris is taking money every day in the Corporate Bond fund.

“Asset-backed securities funds are more complex and less mainstream, but I can see us taking a lot of money in that sector.”

Holman says the firm has not ruled out launching a global macro product, but adds that it is not on the horizon.

“With interest rates where they are, I don’t think it will work. There is no hurry.”

However a distressed debt vehicle sounds more promising; Holman says it could be “the fourth pillar of the business”. The firm has already done its market research and is keeping its eye out for any openings.

“We are looking at distressed debt; a research-driven, value-added, research-heavy product with the potential for terrific returns. We are looking for opportunities in terms of people or small distressed businesses.”

There are also plans in the pipeline to sell TwentyFour’s products globally, a strategy that will be facilitated by the firm’s partnership with Zurich-based Vontobel Asset Management, which took a 60 per cent stake in the firm in April 2015.

“We didn’t set out to get an institutional shareholder,” Holman says. “But it has taken eight years to build a reasonable reputation in the UK, and the average partner has been in the market for 23 years, so how long would it take to start from scratch elsewhere?

“Vontobel has a multi-bow approach so we were guaranteed they would leave us alone. They were light in the UK and fixed income in terms of assets under management so it is a good fit.”

The wheels are already in motion to sell TwentyFour’s products into the US. Initially the firm plans to roll out a US version of the Global Unconstrained Bond mandate under the 1940 Act. “We have got investors lined up,” Holman says. “They are keen.”

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Darius McDermott, managing director, Chelsea Financial Services

TwentyFour is one of my favourite fixed income boutiques. Their specialist knowledge of the asset class is really second to none and they have a very high quality investment team. Importantly, they are also really good communicators. They are really on the ball with all developments in the market and are happy to share their views and insights on a very timely basis. With so much happening in the world of fixed income in recent years, this has been extremely useful for advisers and clients alike. The fund we recommend most is
the Dynamic Bond as our clients generally prefer strategic bond funds. They have a number of very good, more niche offerings, however, which will appeal to more experienced investors.

Ben Yearsley, investment director, Wealth Club

Twentyfour are specialists in asset-backed securities and it could be this focus that has led them to being less known. In a falling rate environment the capital value of a normal fixed rate bond will increase, and in a rising rate environment, the reverse happens, but as ABS typically have floating coupon rates, their capital should be more stable. This could partly explain why in the last few years performance has not been top-quartile. With interest rates set to be lower for longer, it could be tough for TwentyFour’s funds to rise to the top of the performance tables. However, that should not put off investors; these more specialist funds could form part of a wider bond portfolio with an emphasis on capital preservation – something that could be vital in the years ahead.

Jason Hollands, managing directo, Bestinvest

I am a big fan of TwentyFour Asset Management. The key investors at TwentyFour previously worked at leading investment banks and this gives them a slightly different perspective from your typical fixed income manager. The business has real edge when it comes to understanding the trading environment and it places a significant emphasis on risk management, including the use of derivatives to manage interest rate and credit risk.  Whereas fixed income is often perceived as a scale game, dominated by the asset management divisions of life offices, I like the fact that TwentyFour remains relatively nimble and is very liquidity aware, prepared to limit the size of its funds, including through the use of closed-end structures.

TwentyFour Asset Management is a fixed income specialist based in the City of London. Founded in 2008, the boutique currently manages £7.3bn for its clients. The firm takes a detail-oriented investment approach in targeting risk-adjusted returns with a strong focus on capital preservation. In April 2015 TwentyFour entered into a strategic partnership with Vontobel Asset Management, a subsidiary of the Vontobel Group. Vontobel Asset Management acquired a 60 per cent stake in the firm, with TwentyFour’s partners retaining a 40 per cent stake in the business.