Reforms aim to ram home results

After successfully launching two fund boutiques, Britannic Asset Management is about to enter the next stage of its development, rebranding itself as RAM. Will Jackson reports.

Britannic has had a busy year since Fund Strategy last focused on the firm’s asset management arm (BAM) in early 2005. Indeed, the group name no longer exists following September’s merger with Resolution, creating a combined entity with a market capitalisation of more than 2bn.

To continue the rebranding, BAM will become RAM on May 2, explains Jonathan Polin, sales and marketing director. “It is purely a name change and will have no measurable impact on our existing clients,” says Polin. “But having a financially strong parent is important and we are now able to leverage off the Resolution brand to grow the asset management business.”

One way that Britannic has sought to expand in the past year has been through the foundation of two semi-autonomous fund management boutiques: Argonaut Capital and Cartesian Capital. Both have been set up on a 50/50 basis, with partners recruited from Neptune and SVM respectively. While Britannic provides distribution, sales and compliance capability for the boutiques, the partners are able to focus on portfolio management. “Operationally, the day-to-day running is handled by BAM,” says Polin. “We want the boys to concentrate on picking good stocks, not regulatory issues. The beauty of this structure is that we are saying ‘all you need to bring is your intellectual capital’.”

The intellectual capital at Argonaut has been provided by ex-Neptune fund managers Barry Norris and Oliver Russ, who set up the boutique in May last year. Norris and Russ focus purely on European equities and currently run two portfolios: European Alpha and European Income. Neither fund has a one-year record at present, so a fair comparison with Britannic’s longer-established range is not yet possible. But Polin says the early figures are encouraging, with both funds beating their year-to-date benchmarks at March 31.

“The funds have performed fantastically well. We thought it would take longer to bed down,” he says.

The funds seem to be receiving an equally positive reception from investors and this can be seen in the growth of the alpha portfolio. The fund is fast approaching the previously proposed capping limit of 250m in assets under management. “We still need to make a final decision on the limit,” says Polin. “We are looking at what we consider the capacity to be but we want to keep an open mind. It could be somewhere between 250m and 350m.”

The fund has grown from about 40m in July last year, to 211m at March 31. An institutional share class of the fund has boosted assets by about 50m, says Polin.

Cartesian, run by former SVM managers David Stevenson and Andrew Kelly, was launched in December. The boutique has just one, long-only fund in its range: UK Opportunities. This will be joined by a hedge fund on April 24, a replica of the Saltire fund Kelly ran at SVM. Again, it is too early to draw conclusions from performance figures for UK Opportunities but Polin points to above-benchmark year-to-date numbers. The fund had accumulated 30m in assets at March 31. The portfolio’s largest allocations were to financials (25.1%), industrials (24.7%) and consumer services (22.7%). The top three holdings were Legal & General, Royal Bank of Scotland and Aberdeen Asset Management, all equally weighted at 4%.

Mark Harris, fund of funds manager at New Star, is a convert to Britannic’s boutique approach and a believer in Argonaut in particular. “In my book it is the most innovative thing they have done,” he says. “It is an excellent idea, very forward-thinking, and we have significant holdings in the Argonaut funds.”

Harris adds that the portfolios were seeded with New Star money at launch.

Justin Modray, an investment adviser at BestInvest, is similarly enthusiastic on the boutique strategy. “The boutiques have been shining quite brightly,” he says. “It is an exciting concept for investors and the side we are focusing on at the moment.”

The 50% equity stakes given to the partners by Britannic are central to the success of the model, he adds.

While Harris and Modray are positive on the boutique funds, they are less keen on BAM’s longer-established portfolios. “We did consider David Roberts on the fixed income side,” says Harris. “But he moved to Aegon and we have given him more money since. Overall, the traditional range is pretty mediocre.”

Modray is in agreement. “Britannic was highly thought of in the mid-to-late 1990s,” he says. “But generally speaking, the traditional range has taken a turn for the worse over the past five years, with widespread underperformance.”

This view is largely backed by performance data from Standard & Poor’s. Overall, six of the 14 funds with three-year track records are ranked first and second quartile to April 17. This worsens slightly to six of 15 over a one-year timeframe.

Pacific Growth is the only traditional BAM fund thought to be worthy of consideration by Harris and Modray. According to S&P, the portfolio has achieved first-quartile performance over both one and three-year periods, the only fund in the range to do so. Three-year returns are some 23% higher than the average seen in the Asia Pacific ex Japan sector. The fund aims to achieve capital growth with at least 80% of assets invested in Far Eastern equities. The portfolio’s largest allocations were to Korea, Hong Kong and Australia at March 31.

BAM recently announced that the fund’s manager, Diamond Lee, will be increasing the amount of time he spends in East Asia. “Diamond will be in Asia for six months of the year, starting in September,” says Polin. “This will enable him to find companies ‘in theatre’ and add value to our Far East management capability. It also makes sense to use his language skills.”

The move also seems to be in preparation for an expansion of BAM’s Asian fund range. An onshore version of the firm’s China Sicav, run since December, is likely to be launched towards the end of 2006, says Polin. In addition, a new product will be added to the range. “We are looking at an alpha Asia ex Japan fund,” he continues. “Pacific Growth is very much a core holding and the new fund will be more concentrated and aggressive. Again, we are aiming to launch by the end of the year.”

At the opposite end of the performance spectrum from Pacific Growth is European Growth. Although the fund is not the worst performer in terms of absolute returns, it is the only BAM portfolio to be ranked fourth-quartile over one and three-year periods. Returns are well below the sector average, a fact acknowledged by Polin. “The fund has performed badly and has been right at the bottom of its peer group,” he says. “In general, we are believers in working with managers through periods of bad performance. But sometimes you need to take radical action. After all, there is no other reason for us being in the business than to perform.”

This willingness to take action was shown in the firm’s recent announcement that it has hired Gartmore managers Tim Callaghan, Adrian Darley and Jonathan Fearon to take over its European equity funds. As reported in Fund Strategy on April 10, BAM’s head of European equities, Andrew Killean, and investment manager, Diane McEwan, have left the group as a result. European Growth will be run by Fiona Page, European investment manager, and Kevin Fenelon, investment director, until the arrival of the appointments. Polin is confident that the three men will be able to turn around the performance of the firm’s core European fund. “I have spent a lot of personal time and effort on this and am very happy with their investment process and philosophy,” he says.

Fearon is expected to arrive within the next three months, with Callaghan and Darley following three months later. This may be earlier, depending on who buys Gartmore and when, says Polin.

The new arrivals will be permanently located in London, a new departure for Glasgow-based Britannic. Although the Argonaut boutique is run from the capital, this is the first time the management of a core fund has been moved. “Tim and the team just happened to live in London and there are no plans to expand in the South,” says Polin. “But it does mean the universe from which we are fishing is larger.”

He adds that BAM may consider launching new funds for the three managers, depending on performance. “Any new products should be investment-led, not marketing-led,” says Polin. “If Tim says he wants to run a similar fund to the products he managed at Gartmore, we will launch it for him.”

Polin says BAM is also looking to grow its stable of hedge funds, following the launch of the new Cartesian product. “We may launch one for Argonaut in 2007,” he says. “The aim is to have five or six hedge funds by the end of next year. But it is a twin-track process and we will continue to launch long-only products into the marketplace. It is wherever we see demand.”

In the shorter term, there will be a focus on expanding the boutique side of the business. “I would be very happy if we did another two [boutiques] this year. We are always looking for opportunities,” he says.

Harris and Modray are both supportive of an expansion of BAM’s boutique business. “This could be a blueprint for firms with staid existing ranges,” says Modray. “I can potentially see other firms following suit.”

Polin says the reforms of the past two years are beginning to pay off. “We are very much ahead of target in the retail sector,” he says. “In January and February this year, we did more sales than we did in the whole of 2004.”

While he is unable to give exact figures, Polin says the Argonaut and Cartesian ranges have seen strong inflows. “Our property fund has also been doing fabulously well,” he adds. “We decided not to make it Isable this season. There has been a mass of money going into property funds and we did not want to water it down. The fund is 100% bricks and mortar, while some of its competitors are purely invested in property shares. Ours is a genuine diversifier.”

On BAM’s priorities for the next two years, Polin says the aim is to build the firm’s retail offering, develop the boutiques and improve performance on the core funds. “We want to be a top 10 player within the next three years, in terms of fund sales,” he says. “At the moment we are on target and very pleased with the progress made.”

Britannic Asset Management is based in Glasgow and is the fund management arm of Resolution group, a publicly-quoted company with a market capitalisation of more than 2bn. BAM had 306 employees and 31bn in assets under management at February 28. Of this, 3.5bn was held in the company’s retail range of funds. BAM will become Resolution Asset Management next week.