Christows shows rules can be broken

By investing cash on behalf of other advisers in a range of funds of funds it has set up itself, Christows has broken the rules to which other IFAs adhere – and somehow got away with it.

One of the golden rules of investment is to consider how many mouths you are feeding when you hand over your money. The Victorian or Edwardian rentier simply bought shares or investment trusts, got a certificate, locked it away in the draw and looked forward to the dividends. They were feeding just one person with fees: their stockbroker.

Christows breaks the rules, but somehow gets away with it. It takes the cash from other advisers and invests it in a fund of funds, so there are quite a few mouths to feed along the way. Fortunately, the savings achieved by modern technology permit what would otherwise be a daft transfer of client money from one desk to the next.

I met Dan Kemp, portfolio manager at Christows, last week. Christows has got out of the IFA game, becoming instead a private client stockbroker servicing the IFA community. It boasts that its independent management style allows it to tailor portfolios to meet specific investment objectives without the conflicts of interest that can exist at other firms that also provide financial planning advice.

Christows has set up several funds of funds aimed at those IFAs who want an actively managed investment but do not have the skills or capacity to do it themselves. Personally, if I were a client with 100,000 or more to invest, I would expect my IFA to be able to pick investments without going to another broker for help. But to be fair to Christows, there are a lot of financial planners whose skills are in areas such as pensions, who are just being honest when they hand over the investment side to Christows. Why con the client that you will manage and monitor the investment when it is not really going to happen.

And the Christows portfolios have fulfilled what most financial advisers want when handing a client over to another broker: “don’t mess up”.

I focused on the Worldwide Growth fund, which is made up of a broad spread of unit trusts and exchange traded funds. Over the year to date it is up 6.5%, slightly trailing its sector, although it is ahead of its benchmark, the FTSE World index, converted to sterling. In 2005 it earned 24.9%, compared with 24.6% for the sector and 21.7% for the benchmark, and outperformed similarly in 2004 and 2003, although it had a rather grim 2002.

Kemp is head of fund research at Christows and runs two funds of funds, including Worldwide. In total, the funds have 26m under management, and although on paper they are available to direct buyers, in practice nearly all the cash comes in through IFAs.

The “don’t mess up” approach means the Christows funds of funds are much more diversified than others. Typically, they hold 15-20 funds. “When I look at the portfolios of rivals, they seem to me to be very concentrated beasts,” Kemp says. “You carry a lot of added risk with that approach. I’m much happier having a more diversified portfolio and lower volatility.”

In selecting a fund in which to invest, Kemp is not much interested in fund manager views about markets. “When we meet managers, there is not much point in us asking where they think the market will go in the next six months,” he says. “We start with a quant screen, looking at the standard deviation of a manager’s alpha, and do a lot of performance attribution analysis.

“We start from the point of view that the manager is an idiot. We look for the holes and the gaps in performance. If the quants are not supportive, we won’t even go and see a manager. We do it to avoid falling for the showmanship and stories that so many fund managers are good at. It does mean that occasionally we miss a few good managers. But it also means that we never overestimate a manager.” Kemp’s focus on process also means that Christows is less likely to dump a fund just because the manager has left. He argues that much of a fund manager’s skill is down to the investment process followed by the house – and if the incoming manager keeps to it, returns will continue to be achieved.

Which brings us to Fidelity Special Situations, a fund that Kemp holds. He intends to hold on to the fund, certainly until he knows who the new manager will be, and even if there is a “headwind of redemptions”, he says he is likely to stick with that new manager.

So what are Kemp’s fund picks at the moment? There is a lot of Artemis in his top 10 – Artemis Capital, Artemis Income and Artemis European Growth. He sees Artemis Capital as an interesting momentum-driven fund, and while momentum in the equity market has undoubtedly stalled, he does not believe we are in a new bear market.

There is also a fair bit of Investec – its UK Value fund is the portfolio’s second largest holding, and he has been increasing his holdings recently. He also owns Investec America. One of Kemp’s most revered managers is Nick Train of Lindsell Train. The fund does not hold investment trusts, but with Lindsell Train about to launch an open-ended fund, he is keen to invest.

In terms of asset allocation and geographic spread, Kemp underperformed for a while, as he has been cautious on commodities. His May newsletter, written before the market sell-off, talks of how reminiscent the commodities boom is to the technology, media and telecoms boom of 1999. “While it is not possible to predict when a reversal of a momentum-driven market will occur, it is important to remember that commodity stocks are cyclical and a time will come when prices will fall,” he says.

Earlier this year, Kemp took profits on Japan, having been aggressively overweight in the region during 2005. Today he is keener on the American market – he is a huge fan of Legg Mason and UBS’s American funds – and says that while the markets are flip-flopping around worrying about interest rates and inflation, there is a good buying opportunity. He is underweight Britain – largely because he has been underweight oil and resources – and has been disappointed by the performance of some funds, such as Cazenove Growth and Income.

But meeting on a day when the market had fallen by 200 points, he was remarkably upbeat. “We are very, very bullish. I am as fully invested as I can be,” he says. “What we’ve got here is an opportunity to buy at December’s prices. A lot of stocks now offer outstanding value.”