Spicing up service and performance

Justin Urquhart Stewart, marketing director of Seven Investment Management, talks to James Teasdale.

Q: Why was Seven Investment Management set up?

A: To provide an investment management service to financial advisers, planners and intermediaries and give retail investors access to institutional-type investments, both in terms of asset allocation and charges. We believe investment management should follow a number of basic principles. Fees should be based on the value of portfolios rather than on commissions. Investors need disciplined, effective asset allocation, backed up with low fees. We offer seven different asset classes: equities, bonds, index-linked bonds, cash, commodities, private equity and property. We also take the regulatory responsibility for investments away from intermediaries. Our aim is to reduce costs and improve investment discipline and structure.

Q: What products can investors access?

A: We have our own range of funds of funds in an Oeic structure that clients with over 1,000 to invest can access. For investors with over 150,000 we provide a discretionary managed service. We bundle together individuals’ money and wrap it to access institutional managers. There are no entry or exit charges. The annual fee of 1.4%, which includes 0.5% trail, covers everything. Tax wrappers are provided for free, including Isas, Peps, self-invested personal pensions and small self-administered schemes. We don’t have our own tax wrappers, but link into other providers. Separately managed accounts are offered to those with over 750,000, where we define individual mandates and find institutional managers for them. This squeezes the total expense ratio and clients get the same treatment as large pension funds.

Q: What fees do clients pay to invest in your funds of funds?

A: Our funds of funds have charges similar to manager of managers products. We are not aiming to be the cheapest, but to be absolutely transparent. Total expense ratios start from about 1.6%.

Q: Why should intermediaries use your service?

A: Because of low charges the higher-end intermediary can now start winning business directly from private banks and stockbrokers. Some advisers don’t take trail and their clients only pay a 0.9% annual fee for the discretionary managed service. The fact there are no initial charges and investors can access institutional-type investments should also be attractive to many.

Q: How are investments chosen for the discretionary managed service?

A: We have no in-house fund managers – everything is third-party and clients invest into fund of funds portfolios. We do the asset allocation and Investment Manager Selection picks the funds. Clients’ attitudes to risk are assessed with their advisers and a risk profile is chosen, from cautious to adventurous.

Q: How does the asset allocation process work?

A: We take a core and overlay approach to asset allocation. The core of the portfolio will include a number of actively managed funds reflecting the appropriate risk level. Each risk profile has a strategic asset allocation, but tactical positions mean allocations can move up or down by 15%. Tactical adjustments are made based on our view of the markets and may include investments in exchange-traded funds. ETFs offer the opportunity to take strategic positions at a low cost. So for a balanced portfolio with 50% in equities, 35-65% can be held in the asset class.

Q: What percentage of assets are invested within institutional share classes of funds?

A: About 70% of assets.

Q: Where have you generated business?

A: About half of the business has come from stockbrokers and private clients, and half from traditional IFAs. The best hunting ground has been through stockbrokers, where clients have suffered from poor asset allocation and service with active investments that have let them down in the past.

Q: How would you describe your typical clients?

A: The discretionary managed service makes up the majority of our business, and clients typically have about 500,000. We offer a discretionary service for the whole family by incorporating both the husband and wife’s assets. The end-game position is to provide clients with a family balance sheet incorporating all assets. This is what we believe a true wrap service should offer. I am concerned about companies adding more layers and more costs to investments. If a service can’t add value and reduce costs, it shouldn’t be there. Typical investors into our funds of funds have about 30,000 to invest.

Q: How do you market your service and what type of risk profile is currently most popular?

A: We meet with a lot of financial adviser firms and market via seminars. Most money goes into our balanced fund. This reflects current attitudes to risk, but there are no charges for switching risk profiles. We will live and die by performance and service. We aim to be second-quartile every quarter but not shoot the lights out.

Q: What is the split of assets between the discretionary managed funds and those investing in the Oeic?

A: We currently have just over 650m of assets under management, with about 480m through the discretionary managed service and 170m in the funds of funds. The Oeic is growing at about 4m-5m a week and the discretionary side at 2m-3m weekly. The funds of funds can be bought through Capita Financial Management and the Zurich and Cofunds platforms.

Q: What other services do you provide intermediaries with?

A: Our website is still developing, but clients and advisers can access online statements showing their holdings and value of portfolios, which are updated daily. We also produce monthly market updates for our clients. Clients’ portfolios can be electronically linked to packages used by intermediaries, including 1st Software and Quay Software. The whole service can be white-labelled for intermediaries so they can use their own branding on valuation statements and literature.

Q: What are your three main aims for the next year?

A: Our first is to become profitable – we should break even in about 12 months. The big wrap operations will have to generate millions before breaking even. We also want to finish off the wrap structure so advisers can carry out their own trading, and our eventual aim is to provide clients with a comprehensive family balance sheet incorporating other assets including life company policies and with-profits bonds. Finally, we may introduce some extra funds in the future, possibly with a more adventurous mandate. We have built good processes, structures and disciplines – let’s also offer people more spice.

seven Investment Management was set up in January 2002 to provide a discretionary investment management service designed specifically for professional financial intermediaries. In 2004, the company launched a number of funds of funds in its 7IM Oeic. The firm, which employs 34 staff and has over 650m of assets under management, is a division of stockbroker Killik & Co.