Turning weaknesses into strengths

Cazenove has had to reinvent itself since being hurt by the technology crash. It still has some way to go, but its managing director is upbeat about the future. James Teasdale reports.

Cazenove Capital Management is the asset management subsidiary of Cazenove Group and provides investment services to a wide range of clients. The business has three areas of expertise: specialist investment management, private clients and charities. Within specialist investment management, Cazenove manages a range of pooled funds both UK and Dublin-domiciled, as well as several segregated portfolios and hedge funds. Cazenove Capital Management’s assets under management totalled 8.8bn at the end of June 2005.

Cazenove Capital Management has seen several changes over the past few years. The fund management company was one of many growth-based houses that suffered from the technology crash and has since had to go through a process of reinvention.

Performance of Cazenove’s onshore fund range is below average, with five of the 13 portfolios with a one-year record in the top half of their respective sectors, and four of 11 funds falling into the same bracket over three years.

But Cazenove’s high-profile funds are attracting strong inflows of new money and performing well, according to Robin Minter-Kemp, managing director of specialist investment management. He identifies five funds that make up the core of Cazenove’s long-only range: three onshore (European, UK Growth & Income and UK Dynamic), and two offshore (UK Equity and Pan Europe).

Minter-Kemp says: “We were a victim of the TMT fallout and funds under management suffered as a result. Cazenove’s fund management business went through a high-level strategic review including rationalising cost bases and evaluating what was commercially viable.”

The group took the decision to specialise and shut down a number of its desks in 2002, including the emerging markets, Far East, Japan, American and technology teams.

Cazenove embarked on an aggressive hiring policy in the same year, poaching a group of pan-European fund managers from HSBC, including Tim Russell, Chris Rice, Steve Cordell, Julie Dean and Wade Pollard. Minter-Kemp and chief executive Andrew Ross had joined from HSBC in 2001.

More recently Cazenove has made several senior appointments. The group brought in Neil Pegrum from Insight Investment, launching the UK Dynamic fund for him in September 2004. And Peter Harvey will join this September from F&C Asset Management as head of fixed income. Cazenove’s fixed interest business amounts to about 1.8bn and is almost entirely made up of private clients, says Minter-Kemp: “Harvey is a key appointment and is a pragmatic investor.”

Formerly Cazenove Fund Management, the business changed its name to Cazenove Capital Management in February 2005 to better describe its role as both a fund manager and a high-level provider of independent financial advice. Minter-Kemp says: “We specialise in the areas we are good at. It is important to know what you’re not so good at.”

Tim Russell’s pan-European equity team uses a business cycle approach to investing. Minter-Kemp explains: “We look at the different stages of the macroeconomic cycle and how it impacts corporate earnings. We let our peer groups focus on short-term themes and market sentiment.”

The team analyses style groupings including growth defensives, value defensives, consumer cyclicals and industrial cyclicals, he says: “There is a trade-off between cyclical and defensive stocks. Cyclicals are probably the most underrated stocks from sales-side analysts.”

Minter-Kemp adds: “We will always be first to the party identifying value opportunities. But we will also be the first to leave the party when valuations have nowhere to run. We implicitly deliver alpha at various points of the business cycle by tilting the style bias in the cycle.”

Risk-adjusted performance is also important and Cazenove’s fund managers tend to be more predictable at the mid-cycle stage by not taking risks, he says: “At inflection points we take the most risks where we have conviction.

“We provide an all-weather approach, delivering alpha consistently on a year-on-year basis. We want to be a long-term provider rather than a short-term speculator,” he adds.

Other than the duties of running their respective portfolios, fund managers take responsibility for analysis of certain industry sectors. Neil Pegrum is responsible for the media sector, says Minter-Kemp: “The fund managers meet weekly and there is also a monthly meeting with the macro team. We have small teams that can make quick decisions by avoiding bureaucracy.” Fund managers are assisted by chief investment officer Anne West, head of risk Nick Bucknell and recently hired pan-European strategist Graham Bishop.

Russell’s 645m UK Growth & Income fund and the 185m European portfolio, managed by Chris Rice, are both well supported in the intermediary market.

Justin Modray, investment adviser at BestInvest, says: “We use the European and UK Growth & Income funds. We have a lot of respect for Rice and Russell. They built up good track records at HSBC and continue to manage funds in the same manner. Performance in other sectors is mediocre.”

He adds: “It has really put itself on the map by poaching managers from HSBC. Groups are existing on one or two star funds that can attract a significant amount of assets.”

Ben Yearsley, investment manager at Hargreaves Lansdown, says: “Rice and Russell manage the funds using their business cycle approach. The European fund has performed well and although last year was a poor one for Russell’s fund, the portfolio has bounced back this year. The business cycle approach has allowed them to outperform in all markets.”

New Star fund of funds manager Mark Harris says: “They have a sensible business plan focusing on what they are good at. We have enormous respect for Russell, who has a great information ratio. We held his portfolio for a period, but the fund has grown significantly and we decided that the level of assets might swamp returns available. He has also done well on his hedge fund.”

Harris adds: “We hold Rice’s European fund and have done so for a while. He is underrated in the investment management community – a pragmatic investor using a business cycle approach.”

The 145m UK Dynamic fund offers investors a slightly different approach. Minter-Kemp says Cazenove did not have as much expertise in the smaller-cap arena, but Pegrum’s hire gave the group heavy-duty support in this area.

He adds: “I am cautiously optimistic for the fund. The portfolio is unconstrained and has no risk controls other than the usual regulatory requirements. The fund has recently fallen from 12% outperformance of the FTSE All-Share index to 6%. The last quarter has not been too good, but the portfolio is supported by expert investors who understand what they are buying.”

Yearsley says: “Pegrum’s fund is completely different. It is a stockpicking, higher-risk, spicier portfolio. He performed well at M&G and Insight and has continued since joining Cazenove.”

Cazenove also offers its investors a number of hedge funds. “We offer both long-only and long/short funds and believe there is synergy from running both side by side. The hedge fund side has worked exceptionally well,” explains Minter-Kemp.

The only onshore fund to post top-quartile performance over both one and three years is Julie Dean’s UK Opportunities fund. The 113m portfolio is the best-performing of Cazenove’s funds in absolute terms over three years, with a return of 37.1%. Bottom of the pile is the 41m Cazenove Sterling Bond fund, managed by Alex Smitten.

Minter-Kemp says: “We have a very specific pan-European product range. The rest of our funds are mainly legacy products.” Cazenove’s business is focused on multi-managers and the sophisticated end of the market, he says: “Private clients, charities and the sub-advisory market make up a good chunk of our funds under management.”

Minter-Kemp explains that highly experienced relationship managers are used to market the group’s funds with an in-depth knowledge of how the portfolios are managed.

But now that three-year performance records are coming through on a number of funds, Cazenove will generate interest from the wider market. “We are reviewing our strategic approach to the broader market,” says Minter-Kemp. “We are heavily exposed to the multi-manager market and it may be prudent to expand the range of intermediaries we target.

“The last few years has seen sophisticated scrutiny of our funds from multi-manager teams. But the broader market is not so interested in why it works and just wants consistency in returns. As time goes on, there may be a greater need to build up the sales team, which could require investment into the marketing resources side.”

Offering a scaleable strategy is fundamentally important for the adviser market, says Minter-Kemp: “Can we deliver as well managing 500m as we can running 100m? We don’t overweight smaller companies and tend to deal with liquid stocks, so we are not constrained by capacity issues.”

Cazenove has closed down legacy assets where it cannot compete. “We have sacrificed legacy and retention for expertise and asset gathering,” he explains.

New Star’s Harris says: “Cazenove has a eurocentric book of business. There will eventually be a limit to assets invested in these funds and they will have to look at what they do next. But they have transformed an ailing asset management business.”

As for the future, Minter-Kemp wants to evolve the business and encompass the broader market: “We have focused on the multi-manager markets at the expense of regional franchises. We are fairly fully represented on supermarket platforms, but have not got the conversion yet. People see the funds, but don’t buy them. We want to participate more in new money from fund platforms.”

He adds: “Where we see opportunities we will acquire talent. We are employing star teams and this can attract new star players.”

Maintaining the momentum of the business is also a priority, according to Minter-Kemp: “We have grown the long-only side from 198m to 2bn since the beginning of 2003 and there is nearly 500m on the hedge fund side now.”

Creating more defensive strategies to maintain Cazenove’s book of assets may also be necessary by innovating and expanding the product range, he explains: “We are keen to explore Ucits III. It could be an area of product development. We have proven expertise delivering both long-only and long/short funds, so we are well positioned in this area.”

Peter Harvey will be involved in looking at the possibility of launching an absolute return bond fund, says Minter-Kemp: “We are hoping for a launch in autumn.” But he says that Cazenove is not about launching funds for the sake of it: “Before launching new products we need to make sure we can accommodate them, be competitive and endure in the marketplace.”

He concludes: “The business is simple and is now profitable. But half the battle is about knowing what you don’t want to do.”