Fund purge brightens shop window

Brown Shipley has cut back its Solus range and, surprisingly, assets under management have increased. Chief investment officer Kevin Doran explains the rationale behind the pruning.

Since the end of 2002, Brown Shipley has reduced its Solus fund range from 18 to just six. In the past eight months alone, three funds have been sold and two have been amalgamated. “Our stated strategy was to rationalise the range,” says Kevin Doran, chief investment officer. “We decided to manage all of the funds via our investment policy committee (IPC) and focus on funds where we had at least 50m in assets.”

The most recent changes took place in November, when Gilt Income was merged with Sterling Bond to create a fund with more than 100m in assets. “Gilt Income was designed as a risk-conscious route to income,” says Doran. “It was in step with what we wanted to do with the Sterling Bond fund.”

But two other funds, Short-Dated Gilt and Gilt Growth, were deemed incompatible with the firm’s fixed income strategy. The portfolios were sold to Premier Asset Management in the same month for 330,000.

“The changes in November were really the final stage of the process,” says Doran. “Gilt Growth had become a misnomer, as you can’t get growth out of gilts at the moment. We could not see how we could get the funds up to our 50m minimum. With Premier, it was the coming together of a natural buyer and a natural seller.”

But, he adds, the sale of the funds was not an intentional move away from fixed income. “Sterling Bond is the largest of the six funds we run,” says Doran. “The decisions were made depending on where we could best add value. Micro-managing is not where we are at.”

The sales of the gilt portfolios followed that of the 60m Eastern Enterprise fund to Premier, for about 1m, in August. “Again, we wanted all of our funds to be run on the back of the IPC,” says Doran. “The Solus range is a shop window for what we are doing at Brown Shipley”

The fund, now with 20m in assets under management, is run by Richard Muckart, chief investment officer and head of Asian equities at Premier.

The consolidation of the Solus range has allowed Brown Shipley to organise fund management on three platforms: British equities, fixed income and multi-manager. “All of the platforms are serviced by a senior fund manager, backed up by a fund manager,” says Doran. “We also have a floating fund manager, Jane Wilcock, whose default role is equity analyst. She has a good handle on all three processes.”

Of the 321m in assets under management across the range at April 10, 72m was in British equities, 101m was in fixed income and 148m was in multi-manager.

The platforms correspond with the three implementation sub-committees of the IPC, which maintains a list of approved stocks and funds for use across all Brown Shipley portfolios. “To give an example, we have an approved list of 45 or 46 third-party funds for the multi-manager portfolios,” says Doran. “Of these, we hold about 26 or 27 in the range.”

A fourth sub-committee is responsible for asset allocation, providing direction based on economic forecasts. The IPC, which was set up in December 2002 and meets on a monthly basis, has input from nine people, including Doran.

Following the upheavals of the past three years and the consolidation process, it is surprising to note that assets under management for the Solus range have increased. According to Doran, these have more than doubled from just 146m in December 2002, with the peak of 378m being reached in July 2005. “We have continued to see inflows,” he says. “Although we haven’t seen the same volume from the retail channel. But when we explain what we are trying to do, it is well received. This is backed up by the numbers.”

Doran says all mergers and sales received a high level of unitholder approval. “It was all done by proxy voting, followed by an AGM. We had no trouble on any of them,” he adds.

The new, reduced Solus range consists of three multi-manager portfolios and three dedicated funds. According to data from Standard & Poor’s, the weakest performer has been the Sterling Bond fund, based on absolute three-year returns to April 10. The fund, the largest in the range with 100.6m in assets at February 28, has returned just 9.66% over the period. “The fund has been subject to the weak performance of bonds versus equities over the past three years,” says Doran. “Equities have been fantastic performers and bond yields have not done much over the same period of time. There is no value at all in the market at the moment. We have been downplaying the virtue of bonds for some time and take the view that interest rates are more likely to rise than fall.”

Nonetheless, relative performance also appears to be weak. The fund is ranked fourth-quartile over both one and three-year periods in the Investment Management Association’s UK Corporate Bond Sector. But this does not seem to have had a negative impact on inflows. According to Doran, assets under management are up by 60m since March 2003.

The strongest three-year performer, by some margin, is UK Special Situations. The fund has returned 95.37%, almost 3% above the average and enough to achieve a second-quartile ranking in the IMA UK All Companies sector. This outperformance has come despite the disruption of three fund manager changes in the past six years. Current manager Paul Morgan has run the portfolio since December 2003. “James Buckley [manager from February to December 2003] steadied the ship and Paul has taken it on,” says Doran. “We have introduced a bit more aggression into the portfolio.”

This includes the taking of larger positions, he explains. “We are not afraid to back our convictions,” says Doran. “We also tend to look at companies that you would not see in other funds. Fenner [manufacturing] is our third-largest position, for example. We also have holdings in Hunting [oil services] and Halladale [financial.] These are stocks that would perhaps get no exposure in some other funds.”

The portfolio is underweight HSBC and Vodafone and has no exposure to Barclays.

The dedicated range is completed by its newest addition, UK Flagship. The fund was launched in June 2004, as an amalgamation of the Income Portfolio, Growth Portfolio, Balanced Portfolio, UK Equity Income and UK Growth funds.

“The UK funds were folded into the fund easily,” says Doran. “But the income funds had to dispose of their bond positions. From the 22m held in the closed funds, we had 21m in UK Flagship at launch.”

The fund has yet to hit its stride in terms of performance and one-year earnings are only enough to rank it fourth-quartile, according to S&P. At April 10, the fund had a concentrated portfolio of 32 holdings. “It comes back to viewing Solus as a shop window for Brown Shipley,” says Doran. “This number of holdings would not be uncommon in a segregated portfolio. I wouldexpect to see no more than 40 positions in this fund, with a minimum of 30.”

Current overweights include support services, mining and resources, with a focus on oil and gas producers. Pharmaceuticals is a significant underweight. “This is a combination of going underweight on the sector and a zero weighting to AstraZeneca,” says Doran. “Considering the pipeline of drugs the firm has coming through, it does not compare favourably with its European and US peergroups. Generally speaking, we have also seen the prices of drugs forced down by governments and a shortening of the patent lifecycle.”

Management of the three multi-manager portfolios, launched at the start of 2003, was relocated to Manchester in 2004. Both of the managers at the time, Alan Stokes and Simon Brooks, subsequently left the firm and this was followed by a brief spell with Doran at the helm. The portfolios are now run by Michael Clarkson, senior fund manager. He will be supported by an as-yet-unnamed fund manager, due to arrive in June.

Doran says the relocation has proved beneficial. “It is a competitive advantage for us,” he says. “Fund management groups organise their sales forces on a regional basis. We get good service as we are one of the largest buyers outside London. We get excellent access to managers and all the figures and reports we require.”

Third-party fund research for the portfolios is focused on consistency and performance, says Doran. “It is easy to see which funds have done well over the past five years,” he says. “But we take that five-year data and reconstruct every three, six and 12-month period. It gives us 240 data points to work with. We look for at least a 70% probability that a fund will outperform, to skew the odds in our favour.”

This process reduces the list of investable funds to 60 or 70. Extra filters, including tracking error and correlation with benchmark, are used to further narrow down the field. While no Solus funds have been held in the portfolios, Doran says this is a possibility for the future. An added bonus for multi-manager investors would be the waiving of the annual management fee, he says.

Overall, performance for the multi-manager range is disappointing. The Balanced and Growth funds, biased towards British equities, are both fourth-quartile over one and three-year periods. International, with its largest holding in American equities at February 28, has produced third-quartile figures over the past year. But returns are still below average for its sector.

Tom Caddick, fund of funds co-manager at F&C, is not enthusiastic about the recent returns of the dedicated fund range. “If we apply our filter to the range, the funds don’t perform well,” says Caddick. “The pick of the bunch is probably UK Special Situations. Sterling Bond does very well in terms of volatility but does not flag up well in terms of performance. But in the shorter term, the funds have displayed an improving trend. It is still disappointing but they have caught up slightly.”

Ben Yearsley, senior investment manager at Hargreaves Lansdown, says the Solus range has included good-quality funds in the past. “They have had decent funds in their time but there is nothing on our screens at the moment,” he says. “We recently had Eastern Enterprise on our recommended list but then the manager changed.”

Yearsley says Brown Shipley is not targeting the IFA market strongly enough if the firm wants to increase its sales through this channel. “They are difficult to get to know and it is a problem with small groups like this,” he says. “They’re not banging on our door saying, ‘you’ve got to look at this’. They are not really bothered about dealing with you, so do not send any information.”

This is perhaps the result of a continued focus by Brown Shipley on increasing assets from its existing client base. “A number of our clients have seen what we can do in the bespoke portfolios and have said, ‘we’d like that in a packaged portfolio’,” says Doran. “It is a more efficient way to access what Brown Shipley does. In a retail sense, I would liken it to what Timothy Everest does with the Autograph range for Marks & Spencer. It is a bespoke approach in a packaged format.”

On the future, Doran says there are no immediate plans to expand the Solus range but that it has been considered. “We could go one of two routes,” he says. “We could use the existing platforms to add a UK smaller companies fund, or maybe another multi-manager product. Or we could add another platform – Japanese equities, for example.”

But the main focus for the firm is to get all six of its funds above 50m. “It is our immediate target and something we would like to achieve as rapidly as possible,” says Doran. “Overall, we are looking to get the range up to between 450m and 500m in assets over the next three years.”

Brown Shipley is a private bank with 2.5bn in assets under management. Some 321m of this is held in its range of Solus mutual funds, which has been consolidated from 18 to six since 2002. The range currently consists of three multi-manager portfolios and three dedicated funds. The firm is owned by Kredietbank Luxembourg, a European banking group with combined assets of more than 30bn (21bn).