Close harnesses third-party skills

Close Finsbury Asset Management is certainly not one of the big players in the asset management world. The company currently has just over £610m in assets under management. However, it employs a distinct specialist approach to running its funds by hiring third party boutique managers to carry out the management of its portfolios.

The company, formerly known as Finsbury Asset Management, used to be focused solely on closed-ended funds. However, following the launch of its Dublin-domiciled Oeic in 1998 and Close Brothers’ acquisition of the firm in 1999, Close Finsbury offers both investment trusts and open-ended investment funds. Alastair Smith, the managing director, joined the company in 2000 from Schroders. Smith reports to Jonathan Sieff, chief executive of the Close Asset Management division, who overseas all of the group’s asset management businesses.

Performance of its Oeic range was below average over the past 12 months. Only two of its eight funds occupy first or second quartile positions, with five in the bottom quartile, according to Standard & Poor’s. However, three-year performance is better. Four out of seven funds are in the top half of their respective sectors. Investment trust performance is similar – below average over one year and above average over three years.

Smith explains that Close Finsbury’s philosophy is to select managers on a best-of-breed basis: “Our goal is to provide quality boutique managers with a route to market. They do the stock selection and we provide them with distribution resources. We have the operational, sales and marketing infrastructure.” He says Close Finsbury is looking for boutique firms that have something different to offer; that is, managers who run money in a distinctive style: “The focus is on offering differentiated funds to the market.”

The fund managers are not on the Close Finsbury payroll. It has a sub-investment management agreement with the fund managers. Oeic fund managers will typically have a six months’ notice period and a one-year period applies to the management of investment trusts, adds Smith. “Sometimes managers knock on the door with ideas for a fund, wanting to plug into the Close Finsbury brand. Conversely, we might want to find a new manager, perhaps because we are unhappy with the current investment adviser.”

Close Finsbury monitors and reviews the performance of its funds and employs Investment Manager Selection to appraise managers rather than carrying it out in-house. IMS looks for new managers that have not been noticed, says Smith. It produces quarterly reports on the investment managers who are used by Close Finsbury. Smith then meets with the portfolio managers for a review of the funds.

Smith adds: “IMS is a good sounding board for new ideas. If we are looking to change advisers or launch a fund, IMS will come up with a shortlist of fund managers. We also have our own “subs bench” of managers that we keep based on its recommendations.” The best performing fund over three years is the Finsbury Growth and Income Trust, managed by asset managers Lindsell Train. Nick Train has managed the investment trust since 2001 and returned 54.4% over the period.

Train favours companies with strong franchises such as Wolverhampton & Dudley Breweries. His style is to invest in companies that generate a lot of cash, usually with above average dividends. Total assets at February 28 were £108m. The trust is currently in the process of raising new share capital.

Poorest returns were achieved by the North American Equity fund. The £6.6m Oeic is managed by Ed Walczak at Vontobel Asset Management and was launched in September 1998. The fund is focused on achieving long-term capital growth and currently invests in 28 stocks.

The largest holding, making up 13.1% of the portfolio, is Berkshire Hathaway, Warren Buffet’s investment vehicle. Over 60% of the fund is invested in financials. The fund has a deep value style, says Smith: “If you look back over 10 years, it has done extremely well, but over the last year performance has not been too good.”

Gary Potter, head of multi-manager at Credit Suisse Asset Management, says: “They are an interesting collection of boutique franchise managers. We invest in the Far East fund run by Jade Absolute Fund Managers. Stephen Swift is a good manager.”

Potter used to invest in the North American Equity fund, but he says it was not growing enough: “Close Finsbury’s funds are generally small, which has limited its ability to grow. The Japanese Equity fund has done well since Michael Lindsell took over the fund.”

Fund performance is volatile, but perhaps this is something you might expect from the investment approach. Its UK Equity Oeic has top quartile performance over three years but is bottom quartile over one year. “We are not going to be number one all of the time, but on a long-term view you will do well,” says Smith. “Our managers are differentiated from our competitors, many of them having much more concentrated portfolios.”

The Japanese Equity fund currently invests in 22 stocks and other funds, including the Growth & Income Trust (27) and UK fund (31), have a focused approach to stockpicking. However, the technology funds tend to have more holdings, as the funds are in a higher risk asset class with more need for diversification, says Smith. Indeed, the Finsbury Technology Trust has 96 holdings. “We are focused on selling a specialist investment style and can complement the style of investors’ current investment portfolios,” he explains.

Adam Carruthers, investment manager at Origen, says: “We don’t invest in any of its funds, although we used to invest in Scot McGlashan’s Japanese Equity fund before he moved to JO Hambro. They are a highly specialist boutique house and offer a lot of single sector funds. But they are not necessarily the best in their respective sectors. The North American Equity fund is a highly concentrated portfolio. This is fine if you know what you are buying, but it is too concentrated for our purposes.”

The Growth & Income Trust and Worldwide Pharmaceutical Trust are approximately 20-25% geared. Gearing policy is driven by the board of directors and is effectively based on whether the fund manager wants to borrow money. The technology and life sciences trusts tend not to gear, as these are much more volatile sectors where gearing could be exacerbated, says Smith.

While both the investment trust and Oeic businesses are growing they have different dynamics, he explains: “Growing assets on the closed-ended side is more of a lumpy exercise. Trusts generally need to be trading at a premium to raise more share capital. When you can do it, you can raise a decent size of money. With the Oeic funds we can take in money every day.” The Finsbury Worldwide Pharmaceutical trust raised £67.5m at the end of last year through issuing share capital.

The marketing approach has recently changed with a split of resources between the open and closed-ended business. The sales force has been doubled on the Oeic side, with four sales staff backed up by a marketing and investor services support team. Investment trust distribution includes a sales director, marketing manager and support team.

Smith says there is generally a distinct universe of closed-ended and open ended investors and that the split in the distribution approach has been hugely successful and led to more money coming in on both sides of the business. Oeic funds have almost doubled since August 1, 2004, with assets rising from £69m to £131m, according to Smith.

Close Finsbury has considered moving the Oeic onshore into Britain, but has decided to keep it based in Dublin. The funds are all FSA-recognised and have UK distributor status.

Smith says: “When the Oeic was originally launched, funds were aimed at offshore investors including discretionary asset managers, institutional investors and private banks and, to an extent, this is still the case.

“We are not a New Star or Jupiter that aggressively market themselves to the UK intermediary market. We don’t have adverts in underground stations or on taxis. Our fund range is aimed at specialist investors, who tend to buy in bigger chunks of money. If successful, the money comes in quickly, but there is a risk that big lumps go out too.”

Marketing is also targeted at fund of funds managers and the top-end of the intermediary market to companies such as Hargreaves Lansdown and Killick, explains Smith.

Credit Suisse’s Potter says: “It has had some success, but it could have done better. The key is distribution where it has had mixed results. The company’s growth will depend on its ability to market to key distribution channels such as fund of funds managers. Intermediaries don’t have the time to buy Dublin-domiciled Oeics.”

Smith says Close Finsbury has a narrow range of funds but wants to offer a suite of funds that deserves to exist, rather than launching new products for the sake of it. The most recent launch was the MultiAsset portfolio in November 2004. The fund is structured as a non-Ucits retail Oeic to enable it to invest in a wider range of assets than currently allowed under Ucits regulations. The portfolio currently stands at £3m and its management is outsourced to Berry Asset Management.

“Growth of the fund has been slow so far. It is aimed at intermediaries which is not where we have generally concentrated marketing efforts before. It is more labour intensive,” says Smith. This is a problem that Close Finsbury is used to, he adds: “The gilt fund took nine months to get to £10m.”

Close Finsbury’s main weakness is on the distribution side, says Smith: “The problem is being addressed; we have doubled our sales force and spent more money on marketing.”

The company has several aims for the next year. The most important of these is to continue to grow funds under management, says Smith: “We don’t want to be dragged into launching new funds that we can’t be sure will be successful. We also have to be mindful of the need to change investment advisers when there are compelling reasons to do so.”

Close Finsbury’s success may well be judged on its ability to attract more money into its funds. It appears to have intensified its sales and marketing drive, but for such a specialist boutique its focus has to be sharper than ever to ensure success.

CLOSE FINSBURY Asset Management was set up in 1985 as Finsbury Asset Management before being taken over by the Close Brothers group in 1999. The firm manages over £610m on behalf of both private and institutional investors, and is the actively managed division of Close Asset Management. Close Finsbury’s business model consists of outsourcing the management of its funds and trusts to specialist boutique fund managers. The fund range includes five investment trusts and eight Dublin-domiciled Oeic funds.