Offshore operator on an asset hunt

Collins Stewart’s funds arm, based in the Channel Islands, manages £400m, mostly from its wealth management side. Now it is seeking links to broaden its business, writes Hannah Smith.

Collins Stewart has ambitious plans to expand this year and is talking to other firms about possible link-ups, says Neil Darke, the head of fund management and wealth management at the group.

Collins Stewart started life as a stockbroker and this ­continues to be the core part of its business. The group rebranded its wealth management arm and launched a fund management business in 2007, adding to its wealth management portfolios, some of which have a nine-year track record.

Towards the end of last year the firm overhauled its multi-manager range, creating a suite of seven Select funds, which were then redomiciled from Guernsey to Dublin. This has widened access to the products for domestic retail investors. The group is also in the process of registering all its funds in Singapore.

The strongest performer in the multi-manager range over the three years to January 1, 2009, was Select Opportunity, which lost 2.29% against a peer group average loss of 19.2%, ranking it top decile, according to figures from the group.

Money has not poured into the funds since Collins Stewart opened them up to a wider client base, but Darke is not surprised by this, pointing to a market environment that is still tough to navigate.

“Of course I would be delighted to see huge inflows into the Select funds, but that this has not happened is a reflection of current market conditions and the early stage we are at in building our distribution channels,” he says.

Collins Stewart has begun a drive to improve its distribution network, starting with listing its range on the Cofunds platform. Darke says: “It is very early to tell if this has been a success from an asset gathering perspective. But we have to deal with distribution issues in order to grow our funds, so we are looking to get on other platforms, build our relationships with intermediaries and distribute through wholesale channels and life companies.”

This will be a crucial step towards gaining greater recognition in an increasingly crowded marketplace.

Meera Patel, a senior fund analyst at Hargreaves Lansdown, says Collins Stewart needs to do more to raise its profile. “This is a group that built its name from a private client stockbroking firm and then launched a range of funds. I am familiar with the Continental Europe Focus fund and it has decent numbers, but the team really need to get us familiarised with who they are.

“It is about understanding the whole business model as well as the fund management side. They have to show a real commitment to the retail market and do more to make their mark,” she says.

Collins Stewart’s fund management division has about £400m in assets under management, but much of that has come through the wealth management business rather than via external channels, Darke says. “We are at the ABC stage – we have long way to go as a business and this is part of the process,” he adds.

There are plans to push the multi-manager suite of funds in a marketing drive in the second quarter this year. Mark Piper and Justin Oliver, the managers, will take part in a roadshow alongside multi-managers from other groups.

Darke says the consistent performance of the Select funds is what will make the Collins Stewart offering stand out in a crowded marketplace. “There are a lot of new multi-manager funds out there, but if you look at the track record of our funds, we have one of the longest,” he says.

As for the rest of the 14-strong range, Darke says the company’s roots as an offshore wealth management ­business have developed its expertise in the alternatives ­market because it has used hedge funds in client portfolios for years.

“Our funds originated from our wealth management ­heri­tage, which gives us considerable expertise in hedge funds,” he says. “Multi-asset investing has become a vogue-ish term now but we have been using a genuine multi-asset approach for many years.”

The fact that Collins Stewart operates from an offshore base also gives it an advantage because it allows managers to distance themselves from market noise, Darke says. “Our investment process is driven from the Channel Islands, which means we benefit from being away from the crowd. The most successful investor in the world, Warren Buffett, is not based on Wall Street or in Greenwich, which allows him to avoid market noise, fads and fashions and just ­continue to follow his disciplined investment process.

“In terms of our fund of hedge funds, Absolute Return Plus, not being located in ‘hedge fund alley’ in Mayfair
has helped us to think more clearly about the issues
prevailing in the industry without being seduced by the exclusivity and mystique which has now come back to haunt people.”

Over the course of this year the firm wants to build its assets both organically and through acquisitions. Darke says that Collins Stewart will take advantage of attempts by several fund groups to cut costs by closing small vehicles or merging them away.

“There is an industry trend for groups to merge away small, uneconomical funds and we see this as another way for us to grow our business,” he says. “If we acquired some of these funds we would merge them into our own funds so that stakeholders could benefit from econo­mies of scale.”

Darke points to Gartmore, New Star and M&G as examples of groups that have rationalised their ranges through mergers of small funds. He confirms that Collins Stewart has approached several other firms that own funds it is interested in.

The group is also considering joint ventures. “We are keen to attract managers and businesses whose interests are aligned with ours,” Darke says.

“Those with too much debt and not enough cash, such as New Star, need to partner up with a company with a strong balance sheet to get through the credit crunch. We are not a bank and we don’t use our balance sheet to do business. We are not encumbered with debt, we have net cash and we have a clean balance sheet.”

But Collins Stewart will not buy funds just for the sake of it. “We are not fixated by filling in the gaps in the product range and launch-ing a property fund or a Japanese equity fund, for example, just because we don’t have one,” he says. “They need to add something to the franchise.

“We are more keen to pursue acquisitions and joint ventures with businesses and people that can bring assets, given where we are in our stage of development. We need people that can help us along the path to development.”

Darke was instrumental in designing the “Quest” stock selection tool that has been a key part of the stockbroking business for the past 12 years. He expects it to be incorporated into the group’s retail funds.

“Collins Stewart’s institutional stockbroking business franchise built up around Quest. It is a cash flow generation system which uses fundamental analysis to identify which companies look good on a cash flow basis,” Darke says. “Historically it has not impacted the retail fund business but we may look to launch funds, either quant-based or using Quest as part of the investment process of a fund.”

Of the group’s established products, Darke highlights Continental Europe Focus, managed by Rod Sleath, as one of the strongest performers on a medium-term view. It lost 7.89% over the three years to February 16, against a sector average loss of 23.3%, according to Morningstar. Darke says: “Continental Europe Focus is consistently top quartile. Rod is an excellent manager with a super medium-term track record and he continues to deliver the goods.

“We also have a strong fund of hedge funds team. Absolute Return Plus is not quite a retail product and it is offshore, but it has been one of the best-performing funds of hedge funds in a horrific year for hedge funds.

“Various Select funds have also done well, especially Select Opportunity, which is the highest-octane of our wealth management products. We can always perform better, but we do have some talented managers. We now need to work on showcasing these talents.”

Fund of funds managers have paid close attention to Sleath’s European vehicle in recent years. Gary Potter, co-head of multi-manager at Thames River, held the fund during his tenure at Credit Suisse, before he joined Thames River.

Potter says: “Several managers have left Collins Stewart recently, but Rod Sleath is still there. He has had good performance interspersed by periods where the focused approach has not worked and his underlying companies have disappointed. He takes a high quality, deep value approach which works over the long term.

“Collins Stewart as a group keeps evolving and changing. This is not a problem, but it needs to be addressed in the marketplace. Over time there has been change at the fund
manager level and it can be disruptive to the percep-
tion of its stability in the market.”

The group’s outlook for the coming year, Darke says, is largely pragmatic. “You have to hope for the best and plan for the worst. From a ­market view, it is going through a bottoming process – we are 52% off the highs of the market and fourteen months through a US recession. Markets bottom usually four to nine months before economies, which gives us some comfort that we are quite a way through the process,” he says.

“We believe there will be a market recovery at some point and that value is one of the strategies that will do well on the way out of a recession, so we are starting to position our funds accordingly.”

Collins Stewart Fund Management's fund returns over one and three years

Best over three years: Collins Stewart Selected Opportunities

Worst over three years: Collins Stewart Selected Global Div

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. The percentile ranking of a group’s funds are shown relative to their respective sectors.