On its own since it cut ties with Ignis in the summer, Argonaut Capital Partners is adding to its team and fighting the gloom on Europe by focusing on the “good bits”, writes Shaun Cumming.
Argonaut Capital Partners faces a challenging task in its efforts to sell its range of European-only products in the present climate. As the eurozone debt crisis rumbles on, investor sentiment on Europe is low because years of compounded sovereign debt problems appear to have reached a pivotal stage.
The boutique is pursuing growth in a specialist European range that consists of three strategies – alpha, equity income and absolute return. But Barry Norris, a partner and co-founder of Argonaut, concedes that investors are weary of Europe. “We are experts in the world’s most unpopular sector,” he says.
Given the European situation, the firm’s decision during the summer to move away from being a 50-50 joint venture with Ignis, the established asset manager, may seem a brave one. The decision to go independent seems especially courageous because although Norris has run Argonaut as a two-man operation alongside Olly Russ since 2005, they have done so in a partnership of equals with the larger firm. The breakaway means they will have to deal with many business aspects that they did not previously handle as well as managing money.
Norris says that he and Russ had been aiming to achieve this for several years. “We were the first of four boutiques to come together with Ignis under a joint venture structure,” he says. (Focus continues below)
“That worked well for a number of years. Following a management change at Ignis, it was decided that they could focus more on in-house developing of products. At the same time, [Argonaut] had grown in assets from zero to £1 billion. We had been looking to change the corporate structure for a long time, so we went from this joint venture to going forward as a separately capitalised independent firm.”
From next May the firm’s funds will drop the Ignis name and be single-branded Argonaut products. “The many services Ignis provided we will take over incrementally,” Norris adds. “This means middle and back office functions as well as distribution in Britain. Ignis will continue doing distribution in continental Europe – come the middle next year, that is probably the only thing they will be doing.” Ignis will retain a 40% stake in Argonaut.
Argonaut is recruiting more staff and will build an administrative structure to deal with the business side of the operation.
Its first new appointment after the break was Edward James, who arrived from Octopus Investments in August as chief operating officer. He is responsible for managing Argonaut’s transition process. Norris says James’s arrival frees the two founders to focus on investments.
In October, Argonaut announced that Greg Bennett had been appointed as a fund manager. “When we bring new people in, it is very important that they fit,” says Norris. “I worked with Greg at Neptune. It is important that new additions are known quantities.”
Even though the addition of staff may hint at expansion, Norris rules out the launch of any new products in the near future. “Our core franchise is Europe. The success of the company is built on this core franchise, and I think we will see lots of growth prospects within this core. To go beyond that, particularly at this stage, doesn’t make much sense.”
However, Norris does envisage the addition of several new staff over the next six months to help support the overall business.
Industry professionals see the immediate hiring of staff as an essential part of the firm’s development. Ben Yearsley, an investment manager at Hargreaves Lansdown, says: “If they do not hire fund managers it would always just be Barry and Olly running growth and income – there is only so much the pair of them can do.”
As is to be expected, Norris is passionate about Europe, and takes a different view from that of British investors who have taken flight as fears over the region grow.
“One of our biggest frustrations is that people think that European funds are all about Spain, Italy, and Greece,” he says. “In my unit trust, I have 25% in Norway. Norway is one of the richest countries in the world and its sovereign wealth fund is 2% of the global market.
“We are considering rebranding to ’Europe without the bad bits’. What we have realised is that over the last three years country investing has become incredibly important. You can put together a good portfolio by missing out the banks and the periphery.”
Norris adds: “Looking at the rest of Europe, there is the likes of Sweden, Finland, and Germany – these are all robust economies. And then you have Switzerland, which is probably a better economy than Germany. All of these countries have better growth prospects than Britain.”
Norris holds the view that investors who put money in British funds but not in similar European products could be missing an opportunity.
Nevertheless, a stark reality faces investors. Although there are some strong European countries, the wider economic backdrop is understandably creating an atmosphere of caution. In recent weeks, commentators have predicted a variety of potential outcomes such as countries defaulting on their debts, countries leaving the single currency, and even a total break-up of the eurozone. Any of these would have far-reaching global results that would affect investments.
Even Norris is cautious, especially about banks and southern Europe. “It has got to the stage where a lot of negatives are so imbedded in popular consciousness that, as a fund manager, you have to assess where this consensus might be wrong,” he says.
The troubles in countries such as Portugal, Ireland, Italy, Greece, and Spain (Piigs) would surely be at the head of a European fund manager’s concerns, and, indeed, Norris says he has not found many good opportunities within the Piigs in the past few years.
”You can put together a good portfolio by missing out the banks and the periphery”
“I have never experienced a situation where, if policymakers do not do the right thing, there is a significant downside to equity markets, but if they do the right thing there is not also a reasonable upside,” he says. “I have certainly become less bearish over the past few weeks. That does not mean I have become bullish, it just means I believe the risk is more binary.”
Norris adds that while there are many potential outcomes to the eurozone crisis, “most of them are not very good”. Pointing to Greece, he says the outcome would be far worse for its population if it left the eurozone than if it stayed in.
“The periphery simply have to do austerity. There is no way out of it,” he says.
The recent changes in government in Greece and Italy could stabilise markets, in Norris’s view. He says that although Italy’s debt looks unsustainable at present, other countries, such as Belgium, have been in a similar position in the past and have come through it.
While interest of 7% and above is clearly unsustainable, he suggests, if the reborrowing costs were to fall below 5%, Italy would be in a far better situation, and the difference between these two figures, he adds, is dictated purely by market sentiment.
“This vicious cycle needs to be broken. The way to do that is the stabilising of credible governments, and the European Central Bank (ECB) rewarding that by buying government bonds.”
Although some see the whole situation as highly undemocratic, Norris considers the alternatives to be far worse.
While Norris made his name at Neptune running the European Opportunities fund, he started his career with Baillie Gifford in Edinburgh, where he spent four years.
His inspiration to co-found Argonaut with Russ came from uncertainty over what direction their careers would take at Neptune.
“I had a great opportunity to show what I could do at Neptune, but in the end I did not really see where it was going to go from there, so we set up our own boutique with the help of Ignis,” says Norris. The strategy he used in running the Neptune fund continued in Argonaut European Alpha.
As a long-term investor, Norris has a strong reputation among fund of fund managers. François Zagame, a portfolio manager at Skandia, says: “To be a good fund manager, what you need is good insight. This is something Barry has a very strong ability in. He sometimes likes to be controversial, and I am very happy to support him and Argonaut.”
While Alpha is Argonaut’s flagship product, other inclusions were inevitable to fill the spectrum available within European investing. Norris says: “We thought, why do people buy UK equity income, but not from anywhere else? We could find a lot of companies in continental Europe which pay attractive dividends. The European dividend market is also a lot more diversified.”
The firm set up an enhanced version of the income fund, which is different because the currency was hedged back to sterling.
The missing piece was an absolute return offering, according to Norris. “While volatility is scary, products have got to be relevant,” he says. This was why the absolute return fund was launched, but although it has been run for two years, and its performance so far in 2011 has been strong, Argonaut will not actively market it until mid-2012.
“Our aim is to run it for three years then market so we can be sure we are marketing on a significant track record, and so that any issues in the beginning had time to be ironed out,” Norris adds.
Morningstar data confirms that the Ignis Argonaut European Absolute Return fund has had a strong year. The £8.3m portfolio is ranked fourth out of 65 funds in its sector, returning 11.65% to investors over one year to November 14, 2011.
“What has been particularly pleasing is we have achieved these results with volatility that is 20% of the market volatility,” Norris says. “It took 18 months to achieve this, but over the last 12 months we have worked out how to control volatility in absolute return.”
Norris’s other funds have similarly fared well overall. Ignis Argonaut European Alpha is ranked 11th out of 97 funds in its sector over three years to November 14, returning 37.82%, according to Morningstar. Russ’s Ignis Argonaut European Income has not fared as well on paper. It is ranked 80 out of 97 funds in its sector over three years, returning 9.78%.
Against a troubling European backdrop, Argonaut has work to do if it is to avoid the many landmines that will surely present themselves as the eurozone saga continues to develop. Norris takes a stance that he says could enable him to either pounce on opportunities or defend against shocks where necessary.
Meanwhile, the firm’s absolute return fund could be one to watch in 2012 if its impressive track record can stretch to three years and beyond.
Argonaut Capital Partners is a specialist European boutique with a range of alpha, equity income and absolute return funds. It has assets under management of £1.1 billion.