Latest Commentary

Updates from Enhance London

We are delighted to welcome the extremely bright and talented Zac Lu to the Enhance Investment Consultancy team on a full time basis. Zac has been interning with us for the last six months whilst studying and has recently completed an MSc Investment Management at CASS Business School and is now working towards his CFA certification. Zac will be assisting our Head of Research, Dr Ruzhen Li with ongoing manager research. As part of the Enhance Investment Consultancy offering, we are advancing the current capabilities of our platform and developing a more sophisticated research and reporting function. The capabilities of the unique platform will provide our consultants and analysts with broader, more detailed insights into performance trends, risk metrics, news alerts and market updates. Dr Ruzhen Li believes that we need access to the right tools given the intricacy and size of the portfolios that we are now concentrating on in London.

 

Events

Enhance Investment Consultancy and Howden Group hosted a Market Update Roundtable at 12 Hay Hill in September last year. Our Business Development Manager, Zoë Avenell and David Bell of Howden Group organised an intimate breakfast seminar that gave a small group of private client practitioners the opportunity to hear Dr Ruzhen Li’s view on interest rates and how they may be affecting investors. The event proved successful and we were left with some food for thought:

  • Deflation: is it really that bad?
  • Economic boom and bust: can it really be eliminated?
  • Central banks: are they the saver or the destroyer?

We are researching topics for seminars throughout 2017 and welcome client and intermediary input. Please email Zoë Avenell at zavenell@enhancegroup.co.uk with your ideas and suggestions.

 

Office Move

We are now fully settled into our offices on Old Bailey. Enhance Group London decided to make the move from Mayfair to St Paul’s to be closer and more tangible to our intermediaries, and better connected to London airports. As we are gradually expanding in London, we are thrilled to have our own space to grow into. Please update your records with our new contact details: Enhance Group London, 5 Old Bailey, London, EC4M 7BA.

Knowing the cost of everything…

Author: Tom Wiseman, Managing Director, Enhance London

7Enhance_Nov-HRThe total cost of investing is a topic de jour for financial regulatory bodies, and rightly so. It is important for investors to have a proper understanding of the management and operating costs associated with an investment arrangement. However, despite increased industry transparency and the disclosure of an Ongoing Charges Figure (OCF) within investment illustrations, I am yet to come across a common methodology for calculating the total cost of a managed portfolio for private investors that cuts the mustard.

Managed portfolio costs are the sum of numerous moving parts at a particular point in time that cannot all be accurately and reliably estimated. Trading commissions, SDRT and bid-offer spreads are obvious omissions from quoted OCFs, as are performance fees and costs arising by virtue of a client’s individual tax position and investment preferences – the list goes on. Historically, investors were given a ‘Total Expense Ratio’ as a reference point, but this had an equally limited and opaque methodology that delivered neither a ratio nor a comprehensive breakdown of total expenses.

So, what are private investors to do? Understanding the cost of an investment arrangement is a relevant consideration in portfolio manager selection, given that costs are the first hurdle any manager must overcome to deliver positive performance. However, simply hunting down the lowest cost provider using any common methodology in no way guarantees better future performance to the investor. Some investment processes, such as those constructed using actively managed funds, are unavoidably more expensive than others but nevertheless have merit. Some managers will charge a premium fee simply because they are demonstrably better than their peers from a performance or service perspective.

For these reasons ‘Price’ is the last point we consider in our manager selection process, despite the growing industry trend to initially screen investment arrangements by cost. We would argue that this is lazy advice. Not least because cost calculation is so varied and very often used by intermediated advisers as a means to justify investing clients in an arrangement in which their own advice fee can be best preserved. The trend of IFAs switching clients into low cost and simple model portfolios on platforms from more sophisticated managed portfolios is a good example of this.

Rather than focussing on cost, at Enhance we identify suitable portfolio managers from our research universe by first assessing past ‘Performance’ on a net basis along with each firm’s investment/operational ‘Process’ and its ‘People’. This ensures that the managers we shortlist have a demonstrable track record of delivering to the mandate in question after their costs. Our assessment also ensures the firm has infrastructure and talent in place that increases the likelihood of past performance pedigree being repeated in future. We then interview all managers on our shortlist before addressing the matter of ‘Price’ with them.

Having assessed ‘Performance’, ‘Process’ and ‘People’ comprehensively, we are less concerned about total costs, as the additional expenses incurred over and above the annual management charge are necessary costs to access each firm’s investment philosophy (although we always evaluate and fully disclose.) Instead, we focus very specifically on the annual management charge proposed i.e. what will our client be paying each manager directly for their expertise? This may also include trading commissions levied. On segregated managed arrangements, particularly, this is an area of overall cost that can generally be negotiated. It is difficult for managers to justify higher annual management charges than their peers unless they are truly outstanding in one way or another and this therefore gives clients leverage and leads to a competitive devaluation of fees.

This said, we are cognisant of that fact that the portfolio managers we work with need to be adequately compensated and incentivised should they be employed. Therefore, whilst we squeeze annual management charges, we do not aim to do so to the extent that the cost savings secured may lead to lower levels of diligence and service from the manager. In our experience clients are more than happy to pay a fair fee for good advice and service, and for a long-term relationship to flourish between all parties. For this to be possible there cannot be unsustainably low fee agreements in place.

Advisers that focus purely on the cost of everything will very often understand the value of nothing.

For more information on Enhance Investment Consultancy’s manager selection process, please see here: http://www.enhancegroup.co.uk/our-process

 

Off-the-peg, tailored or bespoke, Sir?

Author: Tom Wiseman, Managing Director, Enhance London

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Due to the continued and most regrettable expansion of my waistline over the festive period I found myself in the tailors last week to order a new and worryingly larger suit. Upon arrival at my chosen store I was met by an immaculately dressed young chap who, after some social pleasantries, asked me “off-the-peg, tailored or bespoke, Sir?”

Far from being offended I had to chuckle, earlier that morning a similar question of kudos had arisen during a discussion with a friend about the type of discretionary investment portfolio he required. In much the same way as suits, broadly speaking there are three forms of multi-asset portfolio management available to the private investor:

  • ‘Off-the-peg’- A segregated model portfolio or a fund
    These are centrally managed investment portfolios based on a specific risk profile or strategy. Clients that invest in a model or fund receive the same portfolio as all other investors in the product, essentially making it a ‘one size fits all’ arrangement.
  • ‘Tailored’- A segregated portfolio with some flexibility for client preferences

These are segregated investment portfolios that have an overarching risk profile or strategy that applies to similar clients. But with the direct intermediation of a portfolio manager to adjust the individual client portfolio to account for specific preferences such as exclusions, biases and income requirements.

  • ‘Bespoke’- A segregated portfolio built and managed individually for a client

These are segregated investment portfolios that are designed and individually managed for a specific client. The portfolio manager, within the context of the client’s agreed investment policy, has complete flexibility on when, where and how to invest without reference to an overarching risk profile or strategy.

As with tailoring, there is often a degree of associated snobbery regarding the type of investment portfolio one ought to have. Nothing fits and lasts quite like a bespoke suit, so surely our hard-earned capital deserves a bespoke investment portfolio to ensure the best possible fit and outcome? Perhaps surprisingly, the answer to this question in most circumstances is no.

In my experience, bespoke portfolio management is only viable when a client has a multi-million-pound sum to invest. Dealing with larger portfolio sizes enables the chosen portfolio manager to keep client numbers to a sensible level and ensures that sufficient due care and attention is applied to each individual portfolio under their advice.

One portfolio manager and his or her support team simply cannot hope to properly manage hundreds of individual portfolios with very different investment policies at the same time, which would be an economic necessity when managing smaller portfolio sizes unless their fees are exceptionally high. After all, portfolio managers are in the business of making money for themselves as well as their clients.

My friend in question has £2m to invest following the sale of his business. This of course is not insubstantial sum, but in my view, it is too small an amount to warrant bespoke portfolio management. My rationale behind this assertion is quite simple. I firmly believe that smaller investment pots are far better managed in a non-bespoke format where the portfolio manager and support team can concentrate on running a handful of portfolios on a collective, more institutional basis.

When a private investor employs any portfolio manager they are doing so primarily to access the intellectual capital of the portfolio manager and the attached investment house. To extract true value for money it logically follows that one would want to limit the practical constraints that dilute the portfolio manager’s ability to implement their expertise. Client numbers are one such constraint.

Therefore, tailored portfolios or models/funds are very often a better solution for a private investor as these forms of portfolio management provide access to a higher concentration of portfolio manager expertise and attention to the strategy in which one is invested. The trick is to select the best portfolio manager or fund on the market and the most suitable strategy for the client’s requirements.

Tailored portfolios are preferable over models/funds where clients have requirements that diverge from the core investment model, such as ethical or tax considerations for example, and where a personal relationship with a portfolio manager is deemed important. Like a tailored suit, a well-adjusted investment portfolio and service fits every bit as well as it’s bespoke counterpart.

My friend, despite being a particularly flash dandy with a penchant for bespoke suits, has no interest in investment markets nor any investment requirements that necessitate the individualisation of a portfolio. He is simply looking for long term capital growth from a diversified portfolio and so he is best served ‘off-the-peg’ by a model or fund.

Ultimately, every client should be assessed on their individual circumstances, objectives and attitude to risk but this does not mean that investment consultants or trustees need to overcomplicate the recommended investment solution. Many clients are very similar from an investment perspective despite for example, their differences in circumstances and lifestyle. It’s important to first establish the right investment mandate, then find the right people to do the job.

At Enhance our client portfolios include a range of underlying managers, some of whom will run a bespoke strategy for us. Others run models or funds. We are agnostic on the type of portfolio a manager offers if their strategy is appropriate for our client. We are employed to achieve the best outcome, not the best impression.

A year to the day….

Author: Tom Wiseman, Managing Director, Enhance London

7Enhance_Nov-HRExactly one year ago today I joined Enhance and together with Dr Ruzhen Li, established Enhance Investment Consultancy. Our small, London-based team operates within Enhance Group to provide sophisticated investment advice and oversight to ultra-high-net-worth individuals, trusts, charities and the professional advisers that serve them. Our goal at the outset was to offer a personalised yet institutional-calibre service to private investors and institutions that, for one reason or another, do not suit a family office or institutional consultancy arrangement or simply feel unloved by their current investment adviser.

Over the last year much has happened. Significant investment has been made into personnel and infrastructure to ensure that we are in a position to deliver the service we pledge to our clients. Today we are a team of four with offices in Old Bailey. Our most recent recruit, Research Analyst, Zac Lu is a first-class honours student of Mathematics, Accounting and Financial Management. He recently completed an MSc in Investment Management at Cass Business School and is currently studying to become a CFA Charterholder. Zac’s technical abilities complement the relationship management and operational skills of our Client Services Manager, Zoë Avenell, who has over eight-years of client-facing experience in financial services. Together, Zac and Zoë provide an excellent platform for Ruzhen and I to advise clients.

We are now an FCA regulated business* and are fortunate enough to have already gained a number of significant private and institutional investors as clients. To date we have directly advised on over $2bn of investable assets, both liquid and illiquid, on either a project or retained basis. Examples of our recent client engagements include:

$1.2bn Trust – Comprehensive review of existing investment arrangement for trustees

£230m Trust – Provision of ongoing manager oversight and economic research to board

£150m Trust – Liquidity profiling and exit strategy management of hedge fund portfolio for trustees

£260m Charity – Comprehensive review of existing investment arrangement for investment committee

We sense that our positive momentum is due in no small part to the fact that we ‘stick to our knitting’ and focus solely on investment advice, being detailed generalists in our specific area of expertise. We rely on the advice of other professional advisers on legal, tax and structuring matters and passionately believe that clients’ interests are best served by a panel of independent advisers working on a collegiate basis. We also charge sensibly for well-qualified and researched advice, disclosing our fee tariff publicly and quoting a specific fee to each client prior to undertaking any chargeable work. We may not be the lowest-cost consultancy in town but we are certainly transparent and provide very good value for money.

Going forward, we hope to continue to attract varied and challenging work where we can add real value for clients. Our service has been designed to look after no more than 30-40 retained clients, a number that may significantly reduce given the profile of the investors we have been advising so far. We will not compromise the personal nature of the advice and service we provide as this is ultimately what sets us apart from larger organisations. Building long-term relationships and mutual respect with our clients and advisers has always been the basis of our business strategy, after all it is a privilege and not a right to look after money.

 

For more information regarding Enhance Investment Consultancy, please see our website: www.enhancegroup.co.uk

*Enhance Group (UK) Limited is an appointed representative of ProFin Partners Limited which is authorised and regulated by the Financial Conduct Authority (“FCA”)

How big is the universe?

Author: Tom Wiseman, Managing Director, Enhance London

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There are several hundred Discretionary Fund Managers (DFMs) serving the UK fiduciary community. If this is extrapolated to other jurisdictions where the use of Trust structures is widespread then one can reasonably expect the number of relevant DFMs to multiply. How then can any Investment Consultant, let alone a Trustee, hope to rationalise this ever-growing universe and ensure that the advice they provide to clients on manager selection is truly ‘whole of market’?

This is a problem for which there is no practical solution. DFMs are complex entities with portfolio products that, unlike Mutual Funds, are not publicly traded and so there are simply too many in the market for any individual or firm to track comprehensively. Unfortunately, fee levels simply do not support research of this scale. However, there are some helpful independent peer group studies that offer respectable market coverage such as STEP Trustee Managed Portfolio Indices (TMPI) and ARC PCI

Such studies are funded by participating DFMs through annual subscription fees to provide the fiduciary community with a common platform for their due diligence. In many respects it is a marketing levy on DFMs – those that pay to participate achieve greater visibility with their client demographic and implicitly gain credibility for their commitment to industry transparency. The consultancy firms behind these studies are remunerated for their intellectual capital and the infrastructure required to provide the service.

Enhance Group powers one of these peer group studies, STEP TMPI. This is a free STEP member service with a universe of over 40 DFMs that submit real client portfolio data across three core risk profiles and several base currencies. Manager subscription fees are tiered to be as inclusive of the DFM community as possible with its study output and related tools such as the TMPI Focus List provided to STEP members for free. It is proving to be a very efficient conduit between DFMs and Trustees and is a helpful source of revenue to an important fiduciary governing body.

Like fiduciaries generally, Investment Consultants often refer to such studies as part of their ongoing manager research process and Enhance in London is no different in this regard. However, it is important to note that the TMPI universe is not representative of the broader universe of DFMs that we research to select our approved managers for consultancy clients.

Our ‘approved list’ for consultancy is an independent matrix of managers that we have identified from a far broader sample of DFMs, amassed over our 11-year history in the oversight industry. Our monitoring business provides a richer pool of DFMs for us to review, with real client data now received from over 700 investment offices worldwide. Performance is one of the four headline criteria we assess against DFMs, so receiving so much real client data through our reporting client base is an excellent way for us to identify outperforming DFMs for further due diligence.

We rely on our industry experience in senior investment management and research functions to quantitatively and qualitatively assess DFMs against other criteria: process, people and price. We do this through due diligence questionnaires, onsite manager visits and the use of third-party databases and analytical systems. Our approved manager matrix is our intellectual capital and this can only be accessed by our consultancy clients. Approval is not bought, it is earned by the DFMs we select and we stake our reputation on our manager selection prowess.

Our consultancy fees are paid solely by our clients, therefore it is in our interest to select and monitor the best possible DFMs on our client’s behalf. This cannot possibly be achieved through the TMPI universe alone because the market coverage is too thin, although it would be disingenuous to say that such studies are not useful industry proxies or that they could exist without a manager subscription model.

As long as appropriate measures are carried out, such as the Chinese Walls and additional independent research that we undertake at Enhance, clients can rest assured that they are getting and uniquely informed advice for their fees.

For more information about our manager selection process please refer to: http://www.enhancegroup.co.uk/our-process

Updates from Enhance Singapore

September marked the first anniversary for our Singapore office and a lot has been achieved in the short time since its launch. All around the Singapore central business district new skyscrapers have been springing out of the ground with stunning and inspirational architecture. Growth in the jurisdiction has continued in the fiduciary sector with a number of new trust licences being issued in recent months taking the total to 58 and corporate activity continues apace reflecting the evolution and globalisation of business activities.

With change comes opportunity and businesses that Enhance works with in other jurisdictions continue to follow the trend of entering and/or expanding their activities in Asia.

Some of these businesses happen to have particularly close ties with Jersey, where Enhance has its headquarters. Kensington Trust Group, which has a strategic alliance with JTC Group, is among the organisations that recently received a Singapore trust licence. Towards the end of last year Bedell acquired a majority stake in Singapore Trust Company Pte Ltd. At the time of writing it is understood that there are also additional firms with Jersey links applying for a trust licence and others that are looking to complete on mergers and acquisitions.

With such a wide spectrum of business activities, Singapore has excellent conferences and seminars. Richard Sayers has been kept busy presenting to the Singapore Trustees Association, The Chartered Institute for Securities and Investments and will be representing the business at the Society for Trust and Estate Practitioners (STEP) Asia Conference, which is taking place in Hong Kong in November.

Since arriving in Singapore there have also been some economic headwinds; the first 4-months saw the crude oil price fall from over $50 to below $30 per barrel, having been over $100 for the preceding few years. It has now recovered to nearer to $50 again but this has had an impact on the sector. Shipping, another important sector, has been under pressure due to the global economic environment and specifically lower demand for coal and iron ore from China and India.

The recent Singapore Trustees Association Conference; “Trustees in Transparent Times” focused on the impact of the Global Account Tax Compliance Act (GATCA) and the Common Reporting Standard (CRS), which have had a dramatic impact on financial service activities. Meanwhile the fintech sector continues to grab headlines as Singapore races Hong Kong to become Asia’s leading fintech hub while the regulator considers how best to deal with the rate of evolution.

One of Asia’s leading financial service institutions, the Bank of Singapore has supported the new Trustee Managed Portfolio Asia Indices and the service will be expanding to provide a powerful resource to the private client sector in the region.

You pay peanuts…

Author: Tom Wiseman, Managing Director, Enhance London

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In my world, offering good value for money is achieved through the provision of sound advice, exacting service and delivering positive long-term investment outcomes for clients net of all fees charged. It isn’t rocket science and I’ve always found that clients are prepared to pay fairly for personalised, professional advice.

However, I have reviewed a number of potential client engagements recently and had to dismiss them out of hand when their fee expectations came to light. The fees proposed barely covered the overheads of running such accounts, let alone the associated advice liability or allowing for a small profit.

Fee pressure is firmly downwards in the investment industry and investment consultancy is no exception. Advancements in technology and an increase in the number of market participants are partly to blame, but I can’t help but feel that consultants have inadvertently contributed to this skinny fee environment.

I have already waxed lyrical in this blog about some of the shortcomings of Investment Consultants, particularly the provision of a posh reporting service dressed up as consultancy, which enables firms to charge handsomely for their reporting whilst avoiding the costs implicit in providing well researched and qualified on-going advice.

I believe that this has created a distorted perception in the market of what proper consultancy is and the fees it should command. For this reason I have decided to publish Enhance’s fee tariff quoting both an hourly rate for project work and a tiered percentage fee subject to a minimum annual charge.

This tariff has been constructed on the basis that my team will adhere to the highest professional standards, employ the best research and reporting tools available on the market and with an acceptance that we can look after no more than 30-40 retained clients, perhaps significantly less.

Larger consultancy firms may benefit from economies of scale to a certain extent, but there has to be a profitable and sustainable baseline and we are prepared to publish ours in the hope others in the industry are equally sensible and embrace such transparency. After all, providing value for money and being cheap are two very different things.

For more information please see www.enhancegroup.co.uk/fees

The Benefits of Delegating Investment Oversight: Reduced Risk, Improved Performance

Author: James Painter, CEO, Enhance Jersey

James-Painter

In today’s low interest environment, it has become increasingly challenging for trustees to preserve and enhance the value of trust funds under their duty of care, as few asset classes currently provide a low risk solution that will likely outpace inflation and annual fees. Also, due to the need for consideration of the interests of both present and future beneficiaries, it has become almost impossible to generate acceptable returns without taking some risk. This creates a dichotomy that can be tricky to balance, as protecting the trust’s value in the present could potentially jeopardise its future growth. Getting this balance right requires successful navigation of the complex range of investment opportunities in today’s market, which is why many trustees are increasingly turning to discretionary portfolio managers and consultants for expert advice and assistance.

Donald Trone, former President of the Foundation for Fiduciary Studies, made the following observation, which summarises the position of the fiduciary in relation to investment activities rather well:

“The legal and practical scrutiny a fiduciary undergoes is tremendous, and it comes from multiple directions and for various reasons. It is likely that complaints and/or lawsuits alleging fiduciary misconduct will increase…. Fiduciary liability is not determined by investment performance, but rather on whether prudent investment practices were followed.”

What this means is that effective monitoring of both investment portfolios and investment management providers is more important than ever. Whereas settlors fifty years ago may not have been financially astute, today’s beneficiaries almost certainly are. The majority of beneficiaries today have a good understanding of the investment returns their trustees should have earned, bringing into focus not just how the manager was originally chosen many years ago but the monitoring that has since taken place to ensure the manager was continually up to the job.

This growing awareness on the part of beneficiaries has also contributed to a significant increase in investment related litigation. This litigious era is also a consequence of the fiduciary industry reaching maturity. It has become apparent that when trust funds pass to beneficiaries in today’s climate the duties carried out by the trustees, perhaps over many decades, come under scrutiny. Increasingly this has led to beneficiaries seeking legal recourse where they feel investments have underperformed reasonable expectations.

A further issue for trustees of this development is the unwelcome publicity that inevitably ensues when the courts become involved. Although the majority of cases pertaining to investment performance have been settled out of court, there remains a reputational risk for both companies and jurisdictions.

As a consequence outsourcing arrangements appear to be a current topic across international regulators. As an example, the following extract came out on 27th July 2016:

“The Monetary Authority of Singapore recently released outsourcing risk management guidelines putting a strong focus on conducting due diligence on service providers and materiality of outsourcing arrangements. The new guidelines, which took two years to finalise following a public consultation in 2014, replaced the old guidelines and have already taken immediate effect.” (Source: Bovill 2016)

The GFSC also alluded to the need for due diligence on service providers with its informative Thematic Review 2015 “Fiduciary Decision Making in Respect of Assets Under Trust”. In the introduction it states “Trustees are expected to ‘manage the investment and custody of trust assets professionally and responsibly. Common sense and good intentions are not sufficient to demonstrate that a trustee has appropriately discharged their duties in relation to trust assets. Furthermore, good corporate governance dictates that comprehensive documentation should be maintained, which in turn can reduce the risk of future litigation.”

To mitigate the associated risks and meet regulatory requirements and expectations it is clear that professional fiduciaries need increasingly robust processes for appointing service providers and investment managers. Whilst this can be done internally, the cost of doing so means that many trustees are considering delegating this to a trusted advisor.

Delegating this function to a reputable firm has two distinct advantages over the establishment of an in-house department:

1. Cost savings – The costs involved in running an in-house investment services function are considerable. The smallest team will require one senior qualified personnel, one junior qualified personnel and a data processor. Specialist systems are also required, including a market information terminal such as Bloomberg and a specialist review platform. This can bring the headline cost of such an internal function well in excess of £200k per annum.

2. Conflict of Interest – Providing investment services from a fiduciary business creates concerns over the targeting of retrocession, which can be perceived as a conflict of interest, interfering with a fiduciary’s independence and thus objectivity. By using a delegated function, this is completely removed as the initial decision to promote an Investment manager will be made external to the Trust. Furthermore, commission agreements have been abused in the past with IFA style arrangements such as 5% front-end fees being applied to initial investments. As a consequence, the use of commission arrangements between financial intermediaries has become slightly tarnished.

By leveraging delegation in the right way, it is possible to efficiently implement an investor services function in a cost effective manner without the need for complex systems or recruitment of specialist investment personnel.

For the beneficiaries, this means:

• improved potential for superior performance
• access to a broad spectrum of investment managers that are continuously monitored
• unambiguous objectives detailed in an Investment Policy Statement
• objectives that are matched with investment manager pedigree
• user-friendly, regular monitoring
• peace of mind

For the trustee the benefits include:

• the elimination of a cost centre within the business
• access to specialist, experienced and qualified resources without incurring costs
• A reduced risk of litigation due to improved strategy suitability
• robust processes for the regulator
• peace of mind!

An intelligent delegated arrangement drives up standards while reducing costs, delivering a positive outcome for all stakeholders in a fiduciary structure.

Too many cooks

Author: Tom Wiseman, Managing Director, Enhance London

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How many multi-asset Investment Managers to employ in a single client portfolio is an obvious FAQ for Investment Consultants. Most people, myself included, believe that some degree of manager diversification is sensible – but at what point do too many cooks spoil the investment broth?

Assuming each manager is given a similar multi-asset class mandate, rather than a specialist role within the portfolio, my view is that far fewer managers are needed than are usually employed by clients and their advisers. Irrespective of portfolio size 2 managers is usually more than adequate, rising to 4 for particularly large or counterparty sensitive cases.

What is important is not the number of managers, but that the managers employed have different investment processes and styles. Two decent managers with contrasting styles, such as a ‘top down’ paired with ‘bottom up’ manager, should deliver similar results over the long term but with slightly different investment journeys. The net result is usually a better risk-adjusted overall return for the client.

The more managers employed, the more likely the overall portfolio is to perform in line with the peer group. There are only so many top quartile performers out there, so even the most robust research framework will fall short when trying to consistently select a large number of outperforming managers for a particular mandate.

Add to this a number of home truths about the investment industry and you have even more support for the thesis that concentrated manager selection is better:

1: Larger investments secure preferential fees
2: Higher fee paying clients enjoy better service
3: Scale provides a wider investment universe

At Enhance we prefer to work with a relatively small number of managers on each client portfolio. Through our detailed research process, we are confident we can select a small number of outperforming and differentiated managers per mandate. On request we can select more, but this is normally performance dilutive.

By working with a handful of managers on each portfolio, we can achieve better fee terms (the first barrier to performance), work more collaboratively with our chosen managers to ensure compliance with the prescribed mandate and act more decisively on manager changes when required.

Ultimately we do not feel the need to justify our existence by investing with a larger number of managers and rely on our consolidated reporting capabilities to show value. Our clients pay us to ensure that they achieve their long-term investment objectives – our aim is to do so in the most efficient way possible.

More information on how we select our managers can be found here.

To DIY or not DIY, that is the question…

Author: Tom Wiseman, Managing Director, Enhance London

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I was asked a particularly poignant question by a private client solicitor over lunch recently that I thought I’d share more broadly;

‘Tom: when so many Investment Managers nowadays are similar in terms of style and past performance, why should I pass on the cost of an Investment Consultant to my client when I could make a reasonable fist of a beauty parade and portfolio oversight myself?’

It’s a very fair point and a hot topic in the fiduciary community. After all, it doesn’t take Warren Buffett to identify four or five household names in the investment management industry and invite them to a beauty parade to flaunt their wares to a prospective client.

The UK, in particular, is a very well regulated financial services market and it is not unreasonable to assume that established investment management houses with demonstrable track records will do a perfectly adequate job for clients without the need for any intermediation from a consultant.

Add to this the very helpful tools available to fiduciaries such as STEP’s TMPI Focus List and similar peer group studies, and most Trustees can discharge their fiduciary responsibilities and secure a safe pair of investment hands for their clients following some sensible due diligence.

After a manager (or managers) have been selected for a client, their portfolios can be monitored via an inexpensive independent reporting service against appropriate benchmarks (such as STEP’s TMPI) and an annual review meeting between all interest parties to assess ongoing suitability.

My response to my lunch companion’s question was that Trustees should only use an Investment Consultant where they can add a layer of investment expertise and value that exceeds the fees they charge. A consultant is particularly helpful where clients require one or more of the following facets of service:
– A primary, independent strategic investment adviser for their global affairs
– Portfolio construction that accounts for ethical, structural and tax considerations
– Research based manager selection, diversification and implementation
– Consolidated, multi-account performance reporting with detailed analysis
– On-going monitoring of adherence to a defined Investment Policy Statement
– Fee negotiation with various counterparties

This is not an exhaustive list of potential service requirements, but it does outline key areas where consultants add value to client investment arrangements. The overarching benefit of consultancy is that clients have an independent, well researched investment professional on their side of the table, acting in their best interests. The probability of better risk adjusted performance is increased.

If we do our job properly, a ‘beauty parade’ of household names turns into a tender process of well researched and suitable investment managers for a sensibly constructed Investment Policy Statement. Fee negotiations go from a standard retail tariff to institutional rates, given our intermediated economies of scale. Ongoing oversight changes from manager performance reporting to detailed independent analysis, delivered in appropriate language to the client by a well-informed investment professional.

My hope is that if Enhance only engages with clients that we genuinely feel we can add value to, then this should lead to mutually beneficial long-term relationships with the Trustees we serve. If there is a strong argument to DIY for a client, we will tell you.

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