Ideal climate for Polar expansion

\"Determined to build a brand in the boutique space\", Polar Capital is on the hunt for managers or teams who can make an impact on the retail market from day one, writes Muriel Oatham.

Polar Capital, founded in 2001, is a publicly listed company. It has 52 staff, of whom 25 are investment professionals, managing 11 funds, with a total of £1.1 billion assets under management.

Polar Capital is an investment house focused on a fundamental research-driven strategy, describing its offices as more like a library than a trading floor. But it has ambitious plans for expansion.

“We are prepared to be more aggressive in pursuit of recruitment opportunities,” says Mark Kary, the firm’s chief executive. “Previously, we have recruited people who have the potential to be very good portfolio managers, but do not necessarily have a vast following.”

Now, he is seeking new hirings “who will make a meaningful impact from day one”, and they may be “individuals, teams or even small businesses”.

He is in no doubt that he will find the right people. “The type of investor talent that a boutique can attract is often superior to that of a big house,” he says.

Polar Capital’s recruitment focus will be on its long-only business rather than its hedge funds. With four specialist funds open to retail investors, covering technology, healthcare, Japan and UK Absolute Return, there are several potential gaps the group could seek to fill.

Kary says he is looking in particular at emerging market equities and multi-asset classes. “We do not have an American equity business,” he says, “but that is not a priority at the moment. And we would love to have an environmental business, but there are very few of those around.”

While he is open to sector and country opportunities, there is one fundamental on which he is not prepared to compromise. “Whoever we hire must fit Polar Capital’s culture and organisation,” he says.

Kary describes a culture of which the company is both protective and proud. This can be traced back to Polar Capital’s founders, Brian Ashford-Russell and Tim Woolley, who left Henderson’s global technology business to set up the ­boutique manager in January 2001.

Polar Capital aims to combine the entrepreneurial spirit of a boutique with the infrastructure support and operational robustness of a large fund manager.

“In large companies, fund managers can get fed up with the bureaucracy that becomes an integral part of their job and feel they are spending all their time in conference calls and meetings,” says Kary. “Here, we leave our fund managers alone to do what they love doing, which is to run money. All our portfolio managers spend their lives focused on the performance of their funds.”

This philosophy resonates well with investors. Robert Burdett, co-head of multi-manager at Thames River, who holds Polar Capital funds in his portfolio, says he likes the similarities between the fund manager and his own firm. “It is an interesting business,” he says, “with a number of different desks sharing common resource and infrastructure.”

Similarly, Tom Becket, the head of global investment strategy at PSigma Investment Management – who was the first major investor into the Polar Capital Health Care Opportunities fund – supports the operational strategy which allows fund managers to effectively run their own business.

“Since moving from Axa Framlington, Gareth Powell [the healthcare fund manager] has more time to focus on healthcare investment,” says Becket, “and that seems to have paid off so far.”

Earlier this year, Polar Capital received a jolt when a ­successful fund manager, 31-year-old Julian Barnett, left the firm to take a break from the industry and his Paragon hedge fund was closed.

“It was a huge surprise when he resigned,” says Iain Evans, sales director at Polar Capital. “But he had devoted the last five years of his life, seven days a week, to the hedge fund, and wanted to do something else.”

Evans says that Barnett has gone travelling. “He started in Latin America and is still going,” he says. “But his career is far from over. He will be back, and taking a year off will undoubtedly make him a better investor.”

Burdett says Barnett’s departure caused problems for Polar Capital. “They suffered from being publicly listed, and his departure did affect profitability in the short term.”

Polar Capital has no major changes planned for its ­present retail funds. Its Japan and Technology funds were established in 2001. The Health Care Opportunities fund was launched in December 2007 and the UK Absolute Return fund last year.

The immediate priority is to bring the funds back up to capacity, Evans says. “Today they are about 40% under capacity, consistent with the contraction in the long-only market last year.”

However, if they are successful in doing this, the group is prepared to cap funds. “Total capacity in our existing funds is about $4 to $4.5 billion [£2.5 to 2.8 billion],” says Kary. “We are a performance-driven business, more focused on quality of our fund performance than our ability to raise assets.”

The specialist nature of Polar Capital’s operation is ­popular with investors. “Specialism is quite attractive,” says Becket, “and they attract fund managers of very high ­calibre.” He describes Powell as “the best investor in the healthcare space”.

Kary says the decision to enter the healthcare sector was motivated by a search for demonstrable long-term growth. “The question we asked at launch was ‘Can we make money for investors over the next five to 10 years?’” he says.

Becket agrees that the prospects for the sector are good and are improving. “The changing demographics of an ­ageing population will start to create demand for new medical capabilities,” he says, “which means healthcare investment offers good, alternative long-term growth, especially in the biotechnology space.”

“We expect the sector to deliver a profitable outlook in an environment of low growth,” he adds. “And as the big healthcare companies start to see their drugs roll off patent in the next few years, they will be looking for new biotech investments to replace them.”

Becket says the managers who make the right picks in this sector will be well rewarded, and he expects Powell to be among them.

Robert Salter, a fund manager at Brooks Macdonald Asset Management, says the Polar Health Care Opportunities fund is strong as both a defensive and secular growth investment. The fund represents “a globally diversified portfolio of healthcare opportunities, looking at the whole healthcare value chain, not just pharmaceuticals,” he says. Polar Capital’s UK Abso­lute Returns Fund, launched last year, is managed by Philip Hardy, who joined the firm in 2001 from Schroders.

Kary is dismissive of the number of new entrants into the absolute return sector in what he describes as “the craze of the last six months”. In his view the fund manager talent in this sector is too ­limited to enable every fund launched to do well.

“Last year, very few people were able to deliver an absolute return, but this year they are all launching Ucits III funds,” he says. “If a manager did not do a good job in a standard Cayman structure, why are they suddenly going to do a good job in a Ucits III structure?”

Kary, of course, is strongly supportive of his own manager. “Philip Hardy has been incredibly consistent, returning 9.95% every year since 2001, with volatility that is less than half that of the ­market,” he says.

“That is what absolute return should be: returning higher than the market at a risk that is lower than the market,” says Kary.

While investor feedback has been positive, Evans says the inflow of assets to the fund has been slower than Polar Capital would have liked. Here, he concedes, the influx of new entrants into the market will prove an advantage.

“The more funds that are launched, the better inves­tors get to know the sector,” says Evans. “It accelerates their

Burdett, who invests in the Polar Capital UK Absolute Return fund, agrees with Evans. “That fund deserves more assets,” he says. “It is much more active than some of its ­competitors.”

Burdett also shares Kary’s confidence in the performance of his fund manager. “Philip Hardy has been working very hard on a hedge fund for a number of years,” he says, “but the switch into Ucits III has allowed us to invest in him for the first time since Schroders.”

Polar Capital’s Technology investment trust and Global Technology fund are at the heart of the company. They represent a third of its assets as well as the company’s beginnings.

The £299m Polar Capital Technology Trust, managed by Ben Rogoff, announced its results last week. Over the three months to July 2009 it increased the value of its portfolio by 7.2%, outperforming the Dow Jones Technology Index, which gained 5.4%.

“As an asset class, technology has outperformed,” says Evans. “In the last financial crisis, technology was at the ­epicentre, but this time it could not be further away. ­Technology companies have cash and are continuing to grow,” he adds.

Evans points out that technology stocks are well positioned to benefit from today’s bear market. “Technology has little resonance in a bull market,” he says, “because it is all about growth. Now companies are focusing on cost ­cutting, which is what technology is all about.”

Evans is optimistic about the prospects for Polar Capital’s Technology funds. “We are seeing the early stages of the next technology upcycle,” he says, “but over the last seven to eight years, whilst technology assets have been suffering, most of our competition has disappeared. Companies have closed technology funds or rolled them into other funds.”

The final retail portfolio is the Polar Capital Japan fund, which outperformed by 14% in 2008 and is 6% up so far this year. “It has done very well at a time when no-one really cared about Japan,” says Evans.

Polar Capital did a Japan mandate for Skandia before the company undertook a restructuring of its regional and global mandates. However, managers are beginning to notice the fund’s performance. “The Japan num­bers are looking very good at the moment,” says Burdett.

Thames River has previously invested in the fund and rates the manager, James Salter, highly. And while ­cutting his Japanese weighting led to Burdett removing the Japan fund from this selection, he does not rule out including it again. “It is definitely still on our bench,” he says.

However, Polar Capital is not content to remain on the bench. “We are determined to build a brand in the boutique space,” says Kary. “The potential to do this is bigger than ever before. Boutiques are now infrastructurally more robust than eight or nine years ago, when they were last fashionable.”

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