With £1.8bn under management gathered since its launch in 2006 the long-only specialist boutique River & Mercantile is now planning to expand into the Australian and US markets.
River & Mercantile may be just six years old, but it has the look and feel of more established business. There is the name for a start; River & Mercantile was established in 1881 and has a long history of managing investment trusts; and then the personnel are also familiar, from backer Sir John Beckwith, who has been involved with a variety of fund management groups from Liontrust to Thames River, to chief executive James Barham, who helped launch and float Liontrust to Mark Thomas, who was previously head of UK retail sales at Credit Suisse. For investors, this familiarity has proved reassuring and has allowed the group to build some considerable momentum in its first few years since launch.
The group has some natural credibility in a market perhaps over-supplied by boutique asset managers, but some credit for the £1.8bn under management gathered since its launch in November 2006 also go to its fund managers. The UK equity team of Dan Hanbury, ex-Investec, Hugh Sergeant and Richard Staveley, ex-SGAM, had already established reputations in their own right prior to joining the group. Equally, the global equity team, now five-strong, had a strong pedigree with Alex Stanic and Alex O’Reilly having built a strong franchise at Newton Investment Management.
Mark Thomas, manager director of the wholesale business at the group, says: “We designed River & Mercantile as a long-only specialist boutique. We wanted to create a business and culture that could stand the test of time. We started with a UK equity division in 2006, then launched a global equity division in 2009.” In both cases the managers were selected in consultation with pension fund managers and top-end private wealth managers, who advised on potential hires.
But Thomas says that the selection process went beyond simply isolating top performers, though all had good track records at their previous fund management groups: “We also needed to be sure that the managers would suit a smaller environment. Some fund managers are reassured by a larger group and we needed to be sure that they would be happy with greater autonomy.”
Thomas describes the culture as that of a family business. All the fund managers are equity partners in the business and the business as a whole is 100 per cent owned by the partners. He adds: “The fund managers joined us because they wanted to manage money unencumbered by bureaucracy. Investment has to be at the centre of what we do.”
The group has also put capacity constraints in place for all the funds to ensure that managers are not burdened with too many assets. Each team has an individual philosophy and process and acts autonomously, though the two groups sit together and discuss ideas.
The funds are not geographically constrained. The group says that in a globalising world, companies compete internationally and therefore need to be evaluated on that basis. The group defines it as a pragmatic approach, enabling flexibility and preventing style bias. As a result, it does not naturally fall into a value or growth category. This is seen in performance. The global equity fund is the best performer of the group’s funds, first quartile over one year and second quartile over three. This is a well-diversified portfolio of 80-110 stocks, primarily invested in large and mid-cap names. It is currently £72m in size.
The Opportunities fund, a more concentrated version of the global equity fund, is larger, at £177m. It holds 40-60 large and mid cap stocks, but performance has been weaker than on the global equity fund. The Global Equity Income fund is, as yet, too small (at £11m) and its track record too short to make a meaningful judgement.
In addition to the global and UK groups, River & Mercantile retains a third division, loosely termed ‘special products’. Thomas says they have no pre-conceived ideas of the funds that should be launched in that division, but the structure allows the group to look at asset classes where there is longevity and good interest from clients. Both must be present for the group to consider expanding its investment range further.
That said, Thomas says the group can also be opportunistic if a great manager came along. The group stated from the viewpoint that it would take two years to launch the UK equities division and another two years to build up the global equities division. This suggests the time is ripe to build out the third division and the group has committed capital, but has made no firm plans as yet. Thomas says this remains an important target to diversify the business further and is likely to be developed next year.
The group remains predominantly an institutional house in its distribution focus. Currently, its split is 90 per cent institutional to 10 per cent wholesale business. Thomas says there is still an intention for the group to generate more of its business from the wholesale market, possibly targeting a split of 70 per cent institutional to 30 per cent wholesale, but the directors have found it easier to raise assets in the institutional market in the shorter-term.
The group’s £1.8bn is split approximately 50/50 into funds and segregated mandates (of which it has eight). Thomas says: “We are agnostic about where our assets are generated and whether our clients are wholesale or institutional. It is the quality and stickiness of those assets that matters to us.”
To date, the group has not distributed significantly in the adviser market, lacking the resources to do so effectively. River & Mercantile does not appear on some of the major fund platforms for example.
McDermott says: “The group is not on Cofunds, which means that it does notcome onto our radar. They have a small sales team and as a result, are not targeting our sort of business. That said, we had Daniel Hanbury on our buy list at Investec – he is a manager we know and like.”
The global equity division has attracted more assets than the UK equity division, with the former now nearing £1bn and up 26 per cent in the year to March 2012.
The group made gross profits of £7.57m in the latest financial year and is now redeploying that growth into building the business in new markets. In particular, the group has announced plans to expand in both the US and Australian markets. The group is now registered as an investment adviser with the SEC and has employed a sales executive to cover the region. Senior staff are also visiting Australia and researching the market there.
Thomas says that the group still feels like a new business, despite its growing asset base. It has built credibility with the institutional market, multi-managers and top end private wealth managers and is now showing momentum. Ultimately, it may look like a new business, but investors would be forgiven for feeling that they had seen it somewhere before.