The art of diversifying on a traditional theme

Dane Halling, founder of Arcturus Investments, tells Simon Hildrey about his firm’s services and strategies.

Q. What is your background?

A.

I have been working in the investment industry for more than 20 years. I was an institutional broker and research analyst focusing on the American market for 15 years. This involved advising institutional investors, pension funds, wealthy private clients and banks. I set up and ran a small operation in London for a large American firm in the latter five years of my institutional career. In 2004 I set up a company to offer investment consultancy services and this led to me establishing Arcturus Investments in 2006.

Q. What services do you offer?

A.

I provide general financial advice but my main focus is on investment advice. I have three tiers of investment services. I am the only adviser at Arcturus and I have two part-time support staff. Therefore I have to carefully manage my time and the services I can offer. The aim is to have an independent view about markets, investment strategy and asset allocation. The other side of my work involves fund research and selection, creating model lists of funds, as well as selectively researching individual equities where I feel there is significant value.

I may recruit another adviser in six to eight months’ time if I am reaching my capacity limits. The other option is to enter into selective partnerships with non-investment orientated financial planners. I have been discussing this idea with a few financial planners and may seek an alliance with one or two. It will involve me referring clients to them for general financial advice and them referring clients to me for investment advice.

Q. What are the three tiers of service you offer clients?

A.

I provide the same comprehensive investment review to all clients irrespective of how many investable assets they have. I draw up an asset allocation to meet client objectives and in accordance with their risk profile. I use all a client’s assets to draw up the asset allocation. For example, most investors own a house and some have buy-to-let investments. This raises questions over whether they should invest in property funds. I am also cautious about the use of hedge funds because of the question of transparency. With all clients, I agree a fee upfront.

I divide clients into three groups. They are clients with less than £100,000 investable assets, clients with between £100,000 and £250,000 and clients with more than £250,000. The only difference between the first two groups is that I use a larger number of investment vehicles and asset classes for clients with more than £100,000. For clients with more than £250,000 to invest, I am able to use more sophisticated tools and techniques, such as hedging, as it becomes cost effective.

Given the amount of time I spend on reviewing client investments, asset allocation and portfolio construction for clients with less than £100,000, it is not always optimally profitable, but the idea is to grow the business with these clients as their assets and needs grow.

I tend to favour the traditional asset classes of equities, bonds and cash. I do have an orientation towards equities. Among the vehicles I particularly like using are investment trusts and exchange traded funds (ETFs). With the proliferation of ETFs and their low total expense ratios (TERs), I am surprised they are not used more often by some IFAs. Within a network, there are cases where advisers are not allowed to recommend ETFs to clients.

Q. Is active asset allocation a key part of your service?

A.

Diversification is central to my investment process. But I am not interested in diversification for its own sake. There is little point in buying property funds if a client already owns a house and buy-to-let investments. Within a diversified portfolio, I undertake active asset allocation with clients.

Supporters of diversification across all asset classes point to Yale [university in America], which has a long successful performance record. But there are equity investment strategies that have done just as well but people have never heard about them.

Q. How do you attract clients?

A.

Clients have come through the internet, contacts and referrals, including referrals from financial advisers. The market is divided when it comes to IFAs outsourcing investment advice and management. At both ends are advisers who already outsource and those who do not want to outsource investment management. The group in the middle are considering whether to outsource and it is this group to which I am offering my services. I can provide investment management to their clients, including fund selection, portfolio construction and asset allocation.

Q. Can you offer the same investment management service as larger IFAs?

A.

I believe I can offer clients several attractive features. I have been working in the investment industry for the past 20 years. I have spent most of my career tracking managers and trying to understand what makes them tick. I am not distracted by new fund launches or marketing campaigns but focused on researching funds and equities.

Investing is not complicated. It is about finding great assets, buying them at the right price and assembling them within a portfolio in a logical and diversified manner. But it takes hard work, time and experience.

I believe in the importance of linking the selection of funds with an understanding of the macroeconomic environment. My macroeconomic views are influenced by independent consultants and economists. Without a macro framework, I do not see how you can have an asset allocation plan.

Q. Does this mean you are cautious about such vehicles as 130/30 funds?

A.

It all comes down to the fund manager. Ucits III has potentially provided fund managers with greater powers. What is most important is the experience of the manager, how canny he or she is. And, crucially, does the manager hate losing money? Managers need to understand how brutal markets can be if they get it wrong. 130/30 funds allow you to have 160% gross exposure to the markets. That is a lot of exposure.

Q. Should IFAs outsource investment management and should it be to multi-managers?

A.

Whether IFAs outsource investment management varies from case to case. It depends on the expectation of the client and whether it is a general IFA. I am cautious about multi-manager funds because they are not bespoke and they add another layer of charges. It is ironic they have prospered from the fact that fund managers have been switching asset managers.

If I were to use a multi-manager, I would look for a minimum of five years of strong performance. The team at Jupiter are good at what they do. Some of the boutique funds they invest in such as Findlay Park US Smaller Companies are not open to outside investors so in this case you can justify the higher fees.

ARCTURUS INVESTMENTS

was founded in 2006 by Dane Halling to provide investment advice to private clients. Halling, who has worked in the investment industry for more than 20 years, has clients in London and Hampshire. He works with financial planners who want to outsource part or all of their investment and asset allocation.