Autonomous manager offers tailored services

Richard Whiteley, Cardale Stockbrokers investment director, responds to questions from Simon Hildrey.

Q: Why was Cardale launched and why did you believe there was room for another stockbroking firm?

A: Cardale Stockbrokers was established by four people who were formerly partners of Cawood Smithie & Co. The four directors of Cardale are Stephen Jackson, Ashley Alger, Charles Kerr and myself. We were all partners at Cawood Smithie, which was established in 1975 and then sold to Brown Shipley in 2000. The company had 14 partners.

Cardale was the first stockbroker to have been set up for around three or four years. The Financial Services Authority was not used to dealing with new stockbroking firms.

We decided to establish Cardale in 2003 because we saw an opportunity to offer a stockbroking service that provides bespoke investment management for each private client. We felt many clients were not happy with being offered model portfolios rather than tailored discretionary managed portfolios. We cannot see how someone aged in their 20s can be offered the same portfolio as someone in their 50s.

It was also apparent that as the stockbroking market has become more institutionalised, so the investment management has been centralised. Many stockbrokers do not allow their investment managers to choose their own stocks. In these cases, the decisions are made centrally. We saw the opportunity to launch a bespoke discretionary service with flexibility for each manager.

Q:Do all your private clients come to you direct?

A: Many clients are referred from intermediaries, such as IFAs, lawyers and accountants. We manage a lot of portfolios for Sipps [self-invested personal pensions] and family trusts. Some IFAs approach us to run share portfolios, while others ask us to manage either the UK or overseas portion of their clients’ portfolios.

Q:How large is Cardale and can you explain how portfolios are constructed?

A: Cardale has 37 employees, with three being in the research team and 14 working as investment managers. We have attempted to differentiate ourselves from the institutionalisation of some stockbrokers. Their focus is on capital adequacy, cost cutting and centralised investment management. Some set a minimum investment, such as £100,000, for discretionary management. Clients with less than £100,000 may only be offered multi-manager funds.

In contrast, each manager at Cardale chooses all the stocks and funds within portfolios depending on the risk profile and objectives of every client. We are small enough to be able to provide this bespoke service for each client.

The three-strong research team draws up a recommended list of stocks and funds from which managers will normally choose. Therefore, 60% of the portfolios will be similar, with the differences being around the edges. If a manager wants to select a stock or fund not on the recommended list, he has to gain the approval of the monthly research meeting.

This does not mean the returns are inconsistent between the different managers at Cardale. Over the past two and a half years, the difference in returns between managers has been minimal and reflects the asset allocation within the portfolio.

We tend to hold direct stocks for equities and government bonds in the UK. To gain exposure to overseas equities and specialist areas, we usually invest in unit trusts, Oeics and investment trusts.

We have cash as the benchmark for our private client portfolios and therefore we take an absolute approach to managing them. Many of our clients are aged in their 60s and thus are looking for wealth protection.

Even though we provide bespoke discretionary portfolios, we do not set minimum investments for clients. We believe there is always an appropriate investment strategy regardless of how much money clients have to invest.

We do offer advisory and execution-only services as well. But around 85% of client money is in discretionary portfolios.

Q:Which asset classes do you use?

A: We focus on equities, fixed interest and cash. The decision on which asset classes are used within portfolios is driven by two factors: the risk profile and objectives of the client and the value offered by the asset classes. If the client has a low risk profile then we may increase exposure to fixed interest. But this also depends on our view of whether fixed interest offers attractive valuations and which are the most attractive sub-sectors within bonds. If we are cautious about equities and fixed interest, we can move intocash because our benchmark is cash. Our aim is to minimise risk within portfolios.

We have not used hedge funds within portfolios. This is because we have not felt hedge funds have provided sufficient returns to justify the risk taken. We have taken property exposures within portfolios through collective investments. We have not invested in direct property, although we will look at Reits [real estate investment trusts].

It is important to consider whether asset classes can meet the risk profile and objectives of clients. If a client is seeking 10% a year income but fixed interest is only likely to deliver 6%, the other 4% will have to come via capital growth from equities. Alternatively, clients will have to change their expectations.

Q:How often do you change the asset allocations?

A: We keep the asset allocation under constant review rather than analyse it every quarter. We will not buy into asset classes or stay invested for the sake of it if we do not believe they offer attractive valuations.

Q:What is your current view of equities and fixed interest?

A: Following three years of a bull market, UK equities are generally not as cheap as they were but they are also not overly expensive. We have bought banks for their income. Stocks in this sector have benefited from bid speculation. HSBC seems to be the only bank that is not for sale.

We have been moving away from small and mid caps in the UK towards large caps and those companies generating earnings from overseas. Around 60% of earnings from the FTSE 100 come from outside the UK.

It is hard to find investment opportunities in fixed interest. Generally, government and corporate bonds look expensive. We expect minimal returns from this asset class over the next year to 18 months.

We see investment opportunities in the US and Europe on a valuation basis. The US has underperformed other markets over the past few years but corporate earnings have risen over the past year. We expect the stockmarket momentum in Europe to continue. Over the medium and long term, we are still optimistic about growth prospects in Japan and Asia but we do have concerns about short-term corrections.

Cardale Stock-Brokers was established in 2003 with offices in Harrogate and Hull. It offers discretionary managed portfolios, advisory and execution-only services to private clients. Cardale has about 1,200 clients and £210m in assets under management.