Client focus is key to adding value

The West Midlands seems to be an excellent breeding ground for fund of funds managers. A number of well-known figures in the multi-manager industry have learned their trade at Coventry-based Berkeley Fund Managers.

Under the tutelage of Berkeley’s Brian White, Richard Philbin (now at F&C), Ian Rees (Premier), Scott Spencer (Credit Suisse) and Raj Basra (Gerrard) have all forged successful careers and moved on to big-name firms.

White runs three funds of funds at Berkeley. He says the whole ethos of the company is to manage clients’ risks and expectations: “I believe that managing volatility is the main driver of the business. We could be called Berkeley Risk Managers – client focus is key.”

Clients’ attitudes to risk are assessed and a profile of suitable investment styles is constructed. Investors can access a number of model portfolios with different asset allocations in British and international equities, fixed interest and property. They can also gain exposure to hedge funds through alternative investment strategies. The non-property element of long-only portfolios is invested in a combination of Berkeley’s multi-manager range, comprising UK equity, international equity and bond funds.

The funds are bought almost exclusively through intermediaries, using Berkeley’s discretionary portfolio management service. “We see ourselves as an extension of an intermediary’s practice. Advisers can outsource responsibility for their clients’ investments to us,” says White.

He adopts a team-based system and is aided by Louise Babin and Kathy Joiner. White says: “It’s both a top-down and bottom-up approach. We meet monthly as a group to discuss both micro and macroeconomic issues and receive input from economists.”

The next stage involves positioning the portfolios and deciding on asset allocation. For the UK fund, this effectively means taking a view on the asset split by market capitalisation. Different geographies are considered for the international portfolio.

The UK Growth & Value fund aims to outperform the FTSE All-Share index over rolling 36-month time periods with lower volatility than the market. It currently has 16 holdings.

The fund has adopted an overweight position in small and mid-caps over the past two years, but is currently moving up the market capitalisation scale, explains White: “In the last quarter, the portfolio has shifted in favour of large-caps.”

This shift has come about through an increased exposure to funds with a focus on large-cap stocks, including the Mellon Newton UK Opportunities and Lazard UK Omega funds. However, the portfolio is still skewed to FTSE 250 companies, says White: “I think mid-cap stocks will continue to add value.”

He adds: “We tend to focus on market caps rather than sectors. We leave individual fund managers to make calls on sectors and individual stocks. It is not my decision to buy Tesco and sell Sainsbury’s.”

The team uses quantitative processes to analyse potential holdings. A questionnaire is sent to fund managers and once completed is carefully scrutinised. White says: “It’s like stripping out the engine of a car and putting it back together.”

Style characteristics are also important. White argues that although the portfolio still invests in equity income funds, it now has more of a growth tilt to it. The largest holding is JO Hambro’s UK Growth fund. “We are constantly looking at the managers that are outperforming and the respective positions they are taking. There is a possibility that growth stocks are going to come through and perform.”

Although not currently part of the portfolio, the fund has invested in exchange-traded funds in the past. White explains: “Looking at some of the blue-chip funds with a 1.5% annual management charge, it is difficult to outperform the market net of charges. If we do see a change of momentum into FTSE 100 stocks, most money will go into the top 10 companies. ETFs are a cost-effective way of getting exposure and can also allow tactical positions to be held. We are seeing this in America with the S&P 500 index.”

George Luckraft’s Framlington Equity Income fund has helped solid performance over the last year, but the Schroder UK Alpha fund has been disappointing, says White.

The small-cap funds in the portfolio generated strong profits in the first quarter of this year and White has not hesitated in capitalising on this: “Prudent fund management is about taking profits and recycling money through the fund.”

White maintains a list of reserve funds in case the performance of existing funds falls short of expectations. He generally adopts a long-term view though: “The benchmark is set with reference to rolling 36-month time periods. Three years gives managers sufficient time to get things right. To achieve good performance and keep volatility low in the short term is difficult.

“If we can continue to select funds on behalf of clients that add value in the UK equity sector while keeping the volatility down over long periods, we are close to getting it right.”