Early EMD proponent comes of age

Emerging markets debt funds have helped to drive Investec Asset Management from a small company with a few South African strategies to a player managing $100bn in global assets

FS Beth Brearley 160 byline

This year Investec Asset Management comes of age as it marks its 21st ‘birthday’. The group could be considered somewhat of a child prodigy, pre-empting the current fascination with emerging market debt by launching its Emerging Markets Local Currency Debt fund back in 2006.

Perhaps the group’s draw to emerging markets was to be expected though, given that the asset manager was borne out of an emerging market.

Investec Asset Management was set up by a small group headed by Hendrik du Toit in 1991, and started life with a range of South African strategies, operating autonomously from its parent, Investec Bank. In the late 1990s the asset manager began to spread its wings globally and the group now manages $100bn, which places it “firmly in the top 100 global asset managers on an independent basis,” according to David Aird, Investec’s managing director, UK distribution.

The group is proud of its South African heritage as well as its low staff turnover. Indeed du Toit remains chief executive today.

“There is something very special in a business where the founder is still the chief executive,” says Aird. “The chief executive should drive the strategy and be the leader of people to a common good.”

Investec’s Emerging Markets Local Currency Debt fund, run by Peter Eerdmans, is now £2.1bn, making it one of the largest emerging market debt funds in the market, Aird says. Over five years, the fund has returned 74 per cent, versus the IMA Global Bond sector average of 56 per cent.

“Emerging markets have been in our blood from birth. We really understand the opportunities and the pitfalls of emerging markets,” Aird says.

He adds: “We were invested in emerging market debt 21 years ago in South Africa. We were one of the first groups to talk to people about emerging market debt in 2006. But at the time people were very focused on property and UK equity income. I remember when we first presented on emerging market debt there was lots of sage nodding from the audience and then silence. Now we are inundated by emerging market debt.”

On the UK retail side, Investec Asset Management can be divided into two areas: its specialist funds and the Managed Solutions range. The latter launched earlier this year and comprises a five-strong range of risk-rated funds: Diversified Growth; Diversified Income; Cautious Managed; Multi-Asset Protector and Managed Growth.

Explaining the logic behind the Managed Solutions range, Aird says: “The market is bifurcating into two areas. There is advised business, with advisers who want Managed Solutions off the shelf. They are general practitioners who do not want the time burden of sector analysis, but focus on outcomes.

“Then there are the hybrid buyers who are large enough to have a mix of clients; they have a financial planning process for high net worth individuals and might buy specialist funds to create the solutions themselves. But they might also have a long tail of clients who need light touch, so managed solutions could potentially be part of what they are doing. Then there are the wealth managers who use the expert [specialist] funds. The RDR has forced everyone to segment their clients. Either you do not service all of the segments as it is not economical, or you find a cost-efficient process to service the segments.”

Aird estimates the five funds within the Managed Solutions range encompass all investor needs.

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“We sat in a room for hours looking at what solutions we needed,” he says. “We realised you can take a selection of investors from an 18-year-old to an 81-year-old retiree and everyone in between, and there are only five main outcomes: income; growth; income and growth; protection – where the worst that can happen is you lose 20 per cent, which is aimed at the sort of people who buy life insurance; and protecting capital from inflation. Our parents and grandparents were in a fantastic position where inflation in the economy inflated the price of property so they felt economically richer. Modest inflation is good for stockmarkets, but strong inflation eats into the purchasing power of capital.”

With the RDR deadline fast approaching, fund providers have been rolling out risk-rated propositions as advisers prepare to outsource asset allocation decisions. But Aird warns they could be setting themselves up for “the biggest mis-selling scandal of five years’ time”.

Aird is quick to point out that Investec Asset Management’s risk-rated funds – which have been profiled by Distribution Technology – are rated according to their outcome rather than their aim.

“Distribution Technology have used a rating outcome; the funds are not a slave to their rating. We are unashamedly active, forward looking and allocative. Past performance is no guide to future performance. We are running the [multi asset] funds as we always have done, we are not running them just because of the risk they are taking. Companies which say that within their risk-rated funds, number four is always a number four, are running portfolios to one great master – risk. This is a fallacy – they could lose money.”

So could there not be confusion amongst Investec’s investors if the funds within the Managed Solutions range change their risk rating?

When we first presented on emerging market debt, there was lots of sage nodding

“We looked at our funds going back 17 years and they are actually not volatile at all,” Aird says. “Even if a fund moves from a four to a five, I can live with that. Some providers’ cautious funds could invest 80 per cent gilts, but then there might be a gilt sell off. I completely disagree with backward looking allocation. It is like jumping into a car with the windscreen blacked out and driving using the rear-view mirrors.”

Altogether there are seven investment teams within Investec Asset Management, all of which have been “built from scratch”. They are: Multi-Asset; 4factor Equities; Contrarian; Frontier; Commodities & Resources; Fixed Income & Currency; and South African Equities. Under the Oeic umbrella there are 31 funds, with notable “specialist” funds including Alastair Mundy’s £695m UK Special Situations portfolio, Philip Rodrigs’ £446m UK Smaller Companies fund, and Greg Kuhnert’s £121m Asia ex Japan mandate.

“Philip Rodrigs probably has the best record in the peer group over five years, and he has just been given the chance to run the UK Alpha fund – it was a natural stepping stone for him to take over [from Ken Hsia]. The Asia Ex Japan fund’s performance has also been fantastic. We are now having to manage flows, so we are not taking on institutional mandates or proactively marketing it to clients,” says Aird.

“Alastair Mundy is most famous for being a contrarian investor. He has run UK Special Situations as the named manager for over 10 years and the performance has been outstanding. The fund should be bigger, but there are bigger people ahead in the queue.”

It is Mundy who frequently crops up on fund selectors’ lists. Ben Seager-Scott, senior research analyst at Bestinvest, says: “The firm offers a reasonably broad range of investment products but is probably best known for some of its specialist offerings. One of its better-known managers, Alastair Mundy, is renowned for his highly contrarian style, looking to benefit from unloved companies that have serious turnaround potential – he can often be found in meetings and at conferences talking about picking (metaphorical) fights with old ladies.”

Martin Bamford, managing director as Informed Choice, concurs: “We have recommended [Investec] in the past for their Cautious Managed fund, run by Alastair Mundy who is well known for his contrarian style of investing. Their Global Gold fund has also performed well relative to other commodities funds, offering investors an indirect way to access the price of precious metals.”

Cazenove duo Marcus Brookes and Robin McDonald are long-term investors in Mundy’s UK Special Situations fund. “We have been in this fund for many years as we like Alastair’s value contrarian approach. Back in 2009 when everyone was too fearful he was adding risk via very cheap stocks that were already priced for bankruptcy, yet would survive due to strong management teams and a moderating backdrop.”

The total assets in Investec’s UK Oeic amount to £9.5bn, which places it in 23rd place for assets under management.

“When we started out in the UK in 1998 we had total assets of £280m; at the end of July the UK Oeic was £9.5bn. If we strip out those asset managers which are not independent, such as those which are connected to a bank or a life company, we are the 11th largest,” Aird says.

“It is our long -term goal to be in the top 10,” Aird adds. “In the next two years we can comfortably get in.”