Sos to keep the solus ship afloat

Solus is the brand name for Brown Shipley’s range of collective funds. There are nine Solus funds with £325m under management at the end of September 2004, which are overseen by Brown Shipley’s seven-strong investment policy committee. Brown Shipley is a private bank with £2.4bn under management, offering investment management, fund management, pensions and banking services. Brown Shipley is part of KBL (Kredietbank Luxembourg), a major European private banking group with combined assets of over E30bn.

Brown Shipley’s Solus investment fund business has not had an easy few years. The Oeic business built up by Manchester-based stockbroking firm Henry Cooke Lumsden had enjoyed some success in the late 1990s bull market, when from time to time its UK Special Situations fund, then run by Nigel Thomas, topped the pile in the competitive UK All Companies sector. But since then performance has dropped off markedly, and over three years only one fund out of six – Solus Eastern Enterprise – is outside the third and fourth quartile. The picture worsens over the most recent 12 months, with none of the nine funds in the top half of their respective sectors. All but two funds are fourth-quartile over this period.

But Brown Shipley is taking steps to remedy the situation, and a year ago brought the fund range under the control of its investment policy committee. The group says this “provides a consistent framework as guidance for individual investment managers”.

Chief investment officer Kevin Doran explains: “All the Solus funds bar Eastern Enterprise (managed by ARN Partners in Singapore) are managed by the Brown Shipley investment policy committee and its three subcommittees – equity, asset allocation and third-party funds. Our belief is that you don’t take risk unless you are getting paid for it.”

As well as the overall committee, Doran sits on the equity subcommittee along with head of equities John Smith, UK fund manager Paul Morgan, smaller companies specialist Paul Harwood and former Legal & General investment supremo David Rough. “We also have two guys from the Brown Shipley front office, which gives us a grounding in what the front office requires from the committees,” he says.

When the investment policy committee took charge of the Solus funds in November 2003, it undertook a programme of consolidation that cut the fund range from 17 to eight. This has since risen to nine with the launch in June this year of the UK Flagship fund, which replaced five of the smaller funds that were closed. Doran says: “The strength is that it is a well-defined range under a group of managers who complement each other and bring different things to the committee. We have long experience in the industry. I come from a bond angle and tend to look at risks that an equity analyst wouldn’t focus on. Hopefully all the good things we bring to the table end up in the funds. It is a broad range across the risk spectrum, offering higher returns.”

Of the impact of the committee-led approach he says: “We’re not procedure-mad but there is more procedural impact now. We want to know what we are doing and why we are doing it, and to make sure that is communicated to our clients. The funds haven’t lost their flair; we just want to understand why we are taking the decisions we take.”

Given the unimpressive performance record, however, fund strategists are yet to be convinced by the new regime. Gary Potter, co-head of the Credit Suisse multi-manager division, says: “The Eastern Enterprise fund run by Chris Wong and Jeffrey Lum is the only one we use. Few of the other funds pop up on our radar screen. The funds are not big, they have little profile and don’t seem to be marketed. Our relationship with Chris is almost outside Solus – we talk to him direct.”

Bates head of investment strategy James Dalby does not currently recommend any Solus funds, and says this situation is unlikely to change in the near future. “Eastern Enterprise has delivered in the past although it has dipped below average more recently. Consequently, it is on the radar but we’d need to be confident it can recapture its former record before we would look to support it.

“UK Flagship will be watched, particularly as it falls into the ‘concentrated’ camp of funds, which we believe may have the best chance of delivering cash-beating returns. However, the performance record of UK Special Situations is not strong so we are not expecting great things from UK Flagship.”

Eastern Enterprise justifies its support with its three-year performance record. Growth of 61.47% makes it the best performer in the Solus range by a considerable margin, and places it seventh of 59 funds in the Far East ex Japan sector, where the average gain over the period was 45.95%. The fund has dipped to the fourth quartile over one year, but Doran says this is inevitable from time to time given the fund’s investment approach.

“Jeffrey and Chris are not consensus investors. From time to time, if they take a position against the consensus and the consensus view gains momentum, they will underperform. But over time they are usually proved right.

“Two things this year have had a negative impact on performance. Firstly, the managers believe Far Eastern technology shares are oversold and that any slowdown in the market is already more than adequately priced into the shares. Secondly, they do not see a Chinese hard landing. They predict a slowdown rather than a crash, with a reduction in the rate of GDP growth of about 2%. In both these areas they are against the market consensus, but they have a proven track record of getting these decisions right.”

The UK Special Situations fund has fallen from grace considerably since its days under Thomas, and is comfortably the worst performer in the range over three years, with a decline of 10.55% against an average gain for the UK All Companies sector of 8.8%. Only two of the 249 funds in the sector can boast a worse three-year record.

Since Thomas gave up the fund to launch a similar vehicle at ABN Amro (now part of an Artemis fund after Thomas’s departure to Framlington and ABN’s subsequent merger), the UK Special Situations fund has been through a number of managers. Thomas’s successor, Nick Greenwood, presided over the worst of the slide; the fund was then run by James Buckley and is now under Paul Morgan.

Over one year, the fund has reached the third quartile, with performance only slightly behind the sector average. Of this relative improvement, Doran says: “What we have done is to exit a number of positions that were causing us untold grief – illiquid stocks with profit warnings almost on a weekly basis. These were the key drivers of the underperformance under Nick Greenwood. It is still a special situations fund but it is more mainstream now and is no longer loaded with Aim stocks. Liquidity has improved but only time will tell if we have got it right.”

The consolidation last year saw the closure of many of the Solus equity funds, and a complete withdrawal from key markets such as the US and Europe. Yet the range still includes three gilt funds acquired from Whittingdale in 2001, as well as a corporate bond fund. Dalby says: “We would steer clear of the gilt funds as once you place gilts into a collective investment scheme and apply retail product charges, the viability in terms of return potential is questionable. However, I can see how they might be useful as a holding position for asset allocators.”

Doran says the consolidation still has further to run. “It is no secret that we plan to consolidate the fixed income range, but we were prioritising where we needed to consolidate. Economically it was more important for us to consolidate the equity funds. Some were run on an outsourced basis like the Eastern Enterprise fund, but their fund sizes were not comparable with Eastern Enterprise.

“We try to focus on areas where we are competent, where we have resources in place and where we can add value. The fixed income consolidation is still at the debating level, but we hope for something more concrete by the end of the year.”

He does not rule out re-entering the US and Europe at some stage, but adds a proviso: “We have now said publicly that we will not launch a product unless we can see definite demand of £50m – so we never say never but it would have to fit that criterion if we were going to go back into those markets.”

Dalby and Potter both welcome this stance. Potter says: “It’s a valid thing to say – distribution is important. There is no point running small funds that are going nowhere. I applaud the broad view that you shouldn’t be doing things unless you are going somewhere with them.” Dalby adds: “Given the costs of running investment funds a £50m minimum target seems sensible.”

Dalby sees the Solus multi-manager range, launched in January last year, as key to the group’s future success. “Their biggest opportunity is to be seen as a credible multi-manager player. Despite the sheer number of players, Solus’s small size and ability to be nimble could give them a performance advantage.”

Doran says the rigorous process applied to the funds of funds aims to ensure that outperformance is a realistic ambition. “On the fund of funds side, we identify funds that outperform the benchmark, then seek to understand why – the $1m question is will they continue to outperform. If our funds are populated with funds that continue to outperform their benchmarks, then we will outperform our benchmarks.

“We screen the whole universe for consistent performance – not just in discrete years but in all the three, six and 12-month periods within the past five years. We assess the fund’s performance relative to the benchmark in each of those periods. We can then calculate the probability that a fund will outperform in the future.”

Like the UK Special Situations fund, however, the multi-manager funds have seen some upheaval, with launch managers Alan Stokes and Simon Buckley leaving the company in April this year. But Doran is keen to stress that the high turnover of managers is not indicative of an unhappy ship. “I suppose it is bad luck. When Nigel Thomas stopped managing the UK Special Situations fund we were keen to get a replacement. Nick Greenwood came in and his performance was disappointing. Greenwood left and was replaced by James Buckley, who also ran the European fund. He shored up the performance and got the fund into decent shape but he is now at Premier running the European fund.

“It is a combination of bad luck and circumstances. There isn’t a bad atmosphere and it is not a difficult place to work, but sometimes things just happen.”

In a tough retail market, a revolving door of fund managers will hardly improve a company’s image. Nor will uncertainty surrounding a firm’s market positioning. But Potter says this is an area that Solus needs to work on. “There have been a number of people at the helm and there is little clarity as to where the Oeic business is going. The market needs clarity from the helm of Brown Shipley about the Solus range – what is it, what does it stand for and is it being marketed?” Doran, however, is confident that improved communication will allay the concerns of fund strategists. “As we improve our communications, people will see there is a strong, dedicated team behind all the funds. It is committee-led but the funds are not hamstrung by that. We bring our best attributes to the table and hopefully that is reflected in the funds and in the performance.” But while the funds may have been reshaped since the move to a committee structure, the performance still has some way to go.