Frontier spirit boosts regional expert

Investec’s regional knowledge – especially in Africa – has been rewarded by retail investors’ fresh interest in niche markets, such as frontier, emerging or exotic, writes Tomas Hirst.

Investec Asset Management attaches a significant importance to the number 10 this year. Having established itself in Britain 10 years ago, following the creation of the company in South Africa in 1991, it found itself in the top 10 fund management groups for net retail sales at the end of 2007, according to Lipper Feri statistics.

“We’ve been lucky [compared with other groups],” says David Aird, managing director of Investec Fund Managers. “If you look at the Lipper Feri fund flow report, we finished 2007 in the top 10 for net retail sales. We only rely on third-party business and predominantly, for our retail business, we rely on UK IFAs.”

While headlines claiming retail investors have deserted the fund management industry in their droves have dominated the year, fund managers with access to niche markets have benefited from the flight from traditional asset classes.

“While the retail investor has drifted away from core traditional British or American equity funds,” says Aird, “what we have found recently is that they had an insatiable appetite for anything that was frontier, emerging, exotic beta.”

James Davies, an investment research manager at Chartwell Investment Management, says Investec’s South African roots has cemented its reputation as a global specialist. “The core area I think of it in is as a specialist global equity provider,” he says.

The global focus, however, allows Investec to offer diversified global exposure, but also gives it the ability to launch region-specific funds based on regional expertise gained by the firm’s global presence. “I think it is benefiting from other firms moving into the Africa space,” says Davies. “If I was looking to invest there, I would want to invest with a company which has a pedigree in the area. It also has good pedigree in North America.”

Michael Clarkson, a senior fund manager at Solus, who holds two of Investec’s regional offerings, says: “We use Investec UK Smaller Companies Fund and Investec Japan. The Smaller Companies Fund has a good track record and has outperformed its peer group.”

Over five years to August 19, the UK Smaller Companies fund was up 92.9% against an Investment Management Association UK Smaller Companies sector average of 59.1%.

“When it changed the manager in 2006, the new manager [Philip Rodrigs], who was deputy manager of the fund previously, used exactly the same process, so we weren’t worried about it,” says Clarkson.

News of a convergence between institutional clients and retail investors could be expected to yield more bad news. In many cases however, the unwillingness of institutions to sell off their holdings has offered a sense of stability and, increasingly, the priorities of the two groups have become aligned.

“Retail and institutional businesses in asset management groups are converging,” says Aird. “The big retail investors such as the private banks are starting to give us managed accounts, rather than just investing in funds, and some of our institutional investors want to invest in our funds.”

He says the push from both sides saw Investec unite the distribution side of its business model. “On the manufacturing side we’ve always had managers managing institutional and retail money off the same platform, using the same process,” says Aird. “It just made sense to have the front end of the business unified under a single distribution.”

The business model of Investec is almost unique as it splits its teams between its London and Cape Town offices. Increasingly, however, the two sides are being drawn together through projects such as the Africa and Middle East Fund launched in June.

“In our London office we hired Amr Seif from JP Morgan, who is building our Middle East team and we have our Africa team based in Cape Town, so our Frontier propositions are able to leverage off each other,” says Aird.

The spirit of co-operation, however, does not mean that groups in the business are going to be forced together. The firm’s 4Factor team, for example, which uses the proprietary investment process, similar to Artemis’ SmartGARP, has different buying triggers to Alistair Mundy’s contrarian deep-value process.

“Each of our teams are self-resourced and in charge of their own production, but bounce off a central hub,” says Aird. “So, what we’ve created after 17 years in South Africa and 10 years in the UK is a $60 billion business, which feels like a boutique because of the way we’ve structured it with regards to the centralised servicing.”

The success of the boutique-like structure has seen IFAs watching some of Investec’s offshore products, particularly the multi-asset offerings, which have held up well despite troubled markets. Davies is keen to see the firm expand its target market in the multi-asset space.

“Investec’s core future with the IFA community will likely be its multi-asset offering,” he says. “It would be a natural thing as money has been moving into multi-asset and it can provide good-quality products in that space. In the future, UK investors will be putting more money into cautious and balanced managed products and Investec will benefit from this.”

Investec’s flagship multi-asset offering is the offshore Guernsey-domiciled Trio fund managed by Philip Saunders. The fund has produced annualised returns of about 9-10% since it was launched in 2003, with about 6% volatility.

“The point of multi-asset is that there are not many people who have been working in the space for five years and Philip and his team have made an excellent product for wealth managers and IFAs,” says Aird. “We’ll be looking to develop our multi-asset business to roll it out further into our different distribution channels.”

Despite the wealth of good news for the firm, the Managed Distribution Fund, managed by Mundy, has languished in the fourth quartile over three years, producing a return of 3.81% against an Investment Management Association (IMA) Cautious Managed sector average of 7.41%. Owing to its poor performance S&P rating agency removed the A rating from the fund.

Volatile markets have hit Mundy’s contrarian strategy badly as deep-value investments have failed to yield returns as share prices continue to tumble.

Aird says Investec operates a hands-off policy as being a contrarian investor can often lead to periods of underperformance, but adds the fund will be monitored to ensure poor performance does not continue over a sustained period.

Better news, however, has come from the firm’s decision to move the management of the Investec Global Energy Fund in-house in February. The offshore fund had been managed by Tim Guinness, who left Investec in 2003 to set up Guinness Asset Management, but it was felt the time was right to take it back.

As Fund Strategy reported (February 18), the fund was given to Mark Lacey and Jonathan Waghorn, who were hired from Goldman Sachs. The move reflected the firm’s confidence in its newly created commodities team, says Aird.

“We hired Bradley George who joined about two years’ ago from Goldman Sachs. He has hired specialists from across the industry on the sell side, through hiring commodity analysts from Goldman Sachs, and we also hired from BHP Billiton, so we have people from industry.”

Owing to the change in manager, Old Broad Street Research suspended the fund’s AA-rating, but this has not adversely affected its performance. Since Lacey and Waghorn took over the fund, it has delivered a 12.4% return.

The new team has also facilitated the launch of the Investec Enhanced Natural Resources Fund in May. The fund is fully Ucits III-enabled which, Aird says, allows it to offer the downside protection offered through the use of derivatives, while reaping the full benefit of the recent surge in commodity prices.

The strategy was tested last month as commodity prices fell off sharply following their strong upwards rally since the start of the year. JP Morgan Natural Resources Fund, one of Investec’s main competitors in the commodities space, lost 14.9% over one month to August 20. In comparison, the Enhanced Natural Resources Fund lost only 6.5% over the same period.

“We’ve tried to go out into the market and educate clients as we took the view that our role was not simply to run traditional funds for clients, but to introduce moneymaking opportunities,” says Aird. “You do feel that you have some scars on your back when you approach it in that way because the buy-in and take-up is slow. There is an inertia as people like to stick in what they feel are safe sectors, even though they may not make money for clients.”

INVESTEC ASSET MANAGEMENT is a specialist investment manager, providing a range of products to institutional and individual investors. Established in 1991, the firm manages about $60 billion (£32 billion) on behalf of third-party clients. Based in Britain and South Africa, it serves an international client base from Africa, the Americas, Asia, Europe and Middle East.

The best and worst funds
The best and worst funds for each group profiled in the Focus are shown on a relative rather than absolute basis. Until recently, the best and worst funds were defined in absolute terms. But the percentile ranking of a group’s funds are now shown relative to their respective sectors.