Anything a private bank can do…

…7IM reckons it can do better and more cheaply. To add to the financial planning services it prides itself on providing, the firm plans to start offering loans and taking term deposits

Cherry Reynard 160 byline 2012

7IM is not quite a fund manager nor it is simply a platform, and it does more than discretionary management. It combines elements of all three and as such -although its logo comprises roman numerals – it is a thoroughly modern business, built for the post-RDR era before the FSA had even thought up its new regulatory strategy.

Its founding premise in 2002 was straightforward: The seven directors could not find an investment management company they would trust with their pension money, so they built one. A number had come from the private banks and had grown disillusioned with the poor service they offered. Chief executive Tom Sheridan brought experience from fund supermarkets and marketing director Justin Urquhart-Stewart brought more traditional stockbroking expertise. The founders included technology, client relationship management and investment experts and the resulting company, now £4.5bn under management, became a confluence of those skills with a range of multi-manager funds, a multi-currency platform and some discretionary management services.

The group is now striving to offer more ‘private banking’ type solutions. In May of last year it announced that it would start taking deposits and offering clients loans through its platform. Urquhart-Stewart says: “We are introducing term deposits. What is the difference between a good financial planner and a private bank? Financial planners tend to offer better service and they are cheaper.” For the group’s new deposit business it will evaluate banks, and then use its institutional clout to get stronger term deposit rates. A financial planner gets more of their clients’ assets under their control.

Urquhart-Stewart says that quality financial planners should also be moving into other areas previously dominated by private banks such as the family office market. To do this, planners may have to adopt the concierge services that have differentiated private banks in the past, but this is relatively easily done. As he says, “it is an unregulated service for which advisers can charge.”

The group is also looking more closely at the personal injury market. Urquhart-Stewart says that this type of person needs very specialist advice: “Someone who has been left as a quadriplegic simply cannot afford a high risk portfolio, but they need a portfolio that still has some growth capability within it. I have not seen these types of portfolio in the retail market at all.”

The group now has a designated personal injury fund, comprising just over 60 per cent bonds, with a further 15 per cent in equities and the remained in cash and ‘other’ assets such as hedge fund and commodities. The bond exposure is evenly split between global bonds, gilts (including an allocation to index-linked) and corporate bonds. Almost all exposure is direct in the case of bonds, or through exchange traded funds and other passive instruments.


The fund is one of a range of four ‘specialist and opportunity funds’.  The others are Income, Sustainable Balance and Unconstrained. The Unconstrained fund was launched at the start of 2012, sitting in the Unclassified sector and managed by Alex Scott with input from the rest of 7IM’s investment team. However, in common with many of the other funds in the group’s range ‘unconstrained’ is not what many would commonly understood by the term. It aims to deliver inflation plus 2 per cent on a three year rolling basis, rather than anything racy.

The fund also highlights the group’s focus on the cost of investments, it discounts the fees when performance is down. It reviews performance quarterly and if it is level or up on the last 12 months at each quarter end, then the fee stays the same, but if it is down then the group moves to a discount performance fee, 25 basis points lower.

The other two fund ranges run by the group are the four AAP (Asset Allocated Passive) funds and the Multi-Manager funds – each with Moderately Cautious, Balanced, Moderately Adventurous and Adventurous funds. As the name suggests, the AAP funds are constructed entirely from passive funds, while the multi-manager funds will blend in selective active funds. The asset allocation will be almost identical on both the active and passive version of the Balanced strategy.

In every case, the active funds have marginally outperformed the passive funds, although usually only by 0.5-1 per cent over one and three years.  In practice, the portfolios look similar and the group only use active funds where they believe they can add significant value. For example, in the multi-manager Moderately Cautious equity range there are eight active funds out of 18 equity holdings.

Performance is steady if unexceptional on the majority of the funds, with most of the group’s range second or third quartile in the Mixed Investment sectors over one and three years. More recent performance has been helped by a shift into Europe last year. However, the group cautions against looking at the funds purely in terms of quartile rankings. Urquhart-Stewart says: “We strive for a very controlled risk profile. We aim to chart a middle course through the different asset classes.”

Urquhart-Stewart describes the group’s approach as having ‘institutional discipline’. There are three levels to the group’s asset allocation decision. It builds its long-term asset allocation in consultation with Ibbotson. This will look at data going back 50 years to provide an idea of the likely performance of asset classes in the future.

He says that the group then builds a tactical asset allocation, adjusted quarterly, with reference to its asset allocation committee: “We have consultants such as John Hatherley, formerly of M&G, Richard Hughes, formerly of Barings and economist Gerard Lyon, who come in for our asset allocation meeting and decide where are the good and bad areas. The over-riding rule is do not lose money – we are always on the lookout for the whales!”

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Cost is a recurrent theme with the group constantly readjusting the portfolios to squeeze costs lower. Urquhart-Stewart estimates the group has taken 0.75 per cent out of its overall costs over the past year. For example, it sold out of £110m of ETFs in the second quarter of 2012, replacing them with futures, in a bid to keep its expenses down. The sales focused on the Eurostoxx and S&P 500 ETFs and were designed to shave 0.2-0.3 per cent off the total expense ratios

It has also meant seeding a number of ‘alternative passive’ offerings. In May of last year, the investment tem put £30m into an emerging market fund run by French house Tobam, and also provided seed money for an Asia Pacific offering. Tobam is a specialist in asset class funds, which are passive funds that seek to circumvent the usual problem of passives – that they are based on market capitalisation-weighted indices and are therefore biased to ‘yesterday’s winners’. The group’s indices weight different risk factors to reduce concentration on certain stocks.  

Urquhart-Stewart says: “We now have £4.5bn under management and it means that we can do deals. We can seed new ETFs, we can trade around the world to lower costs, we can bring in derivatives. It is all just part of the controls in the institutional world, but it needs to be brought to the retail world.”

He says that the investment team will ‘fight against the popular view’ all the time, bypassing trackers. “There is more and more pressure on costs, so we would ask, well what is your answer to it? We can offer investors the ability to buy at institutional rates.”

This drive to push down costs has occasionally necessitated new expertise. For example, as part of the move out of ETFs and as part of a drive to start using futures and options to hedge risk, the group brought in specialist quantitative expert Chris Darbyshire in May last year. The 7IM team will also back active managers where they see value. For example, the group invested £33m into products from Dimensional in April 2012. It also joined forces US firm Pzena, seeding a new US deep value product.

Francis Klonowski, director at Klonowski & Co, uses both the multi-manager funds and the discretionary services. He says: “We tend to use the model portfolios for clients with less than £200,000 to invest. The same investment management expertise goes into those funds that goes into the discretionary funds.

“I chose 7IM because I liked the simplicity of what they did. There is strong and robust research backing all their portfolios. Cost was a factor – and the costs on the passive portfolios are very attractive – but it is not everything. In general, I also find them very easy to deal with – by phone, website or in person.”

Steve Taylor, partner at Taylor Oliver, says that many groups look fairly similar on costs, but 7IM scored highly on its predictability and service. He says: “Most groups cost around 0.75 per cent to 1 per cent and most have got a strong research capability, but we wanted someone who could speak English to our clients and whose service was quick and efficient. Our clients understand what their managers say.

“I also like the way they approach risk. Their idea of ‘balanced’ is not 85 per cent equity, but nearer to 50 per cent equity and 50 per cent to other asset classes. We do not use them where a client needs specific tailoring – they are much more about strategic models than tailored solutions – but many just want a stable, plain vanilla service and that it what they provide.”

The team has come a long way. It started, as its name suggests, with seven people. It now has 140. The majority of its staff engaged in the platform’s maintenance and construction, but – as Urquhart-Stewart points out – this is the glue that binds all the other parts of the business together and the group’s investment team is growing.

The group is happy for its funds to appear on rival platforms. For example, it recently put an additional four of its risk-rated portfolios on the Succession platform. Although the group is currently just a fund provider for Succession, it plans to introduce a model portfolio format as well. 7IM at heart sees itself as a service provider to advisers – it is a modern approach to fund management, well-adapted for the post-RDR world.