London-based wealth management firm Bestinvest is increasingly looking overseas to link with adviser firms that see the sense of outsourcing the investment management part of the business to a specialist.
Its biggest international deal to date is with Infinity Financial Solutions, an advisory firm with offices in six key Asian cities, to exclusively represent Bestinvest’s range of investments portfolios and discretionary management throughout Asia.
The example portfolio, shown on page 38 of the online version of International Adviser, is based on one of the risk portfolios Infinity uses but before looking at this more closely, Bestinvest’s chief investment officer Gareth Lewis sets out the big picture.
Former chief investment officer and deputy head of investment at UBS, Lewis’s background has always been focused on investment strategy and the active management of private client portfolios.
Macro leaders
He says his investment philosophy at Bestinvest is similar to how he used to run money at UBS – very top down and long term in terms of the decisions made. “We’re not really interested in what’s going to happen in the next two or three months, that’s market noise. We are trying to identify where we are in the market cycle and invest clients’ money accordingly.”
Only after a lot of work at the macro level does he go and buy funds. For example, if he has a view on the banking sector and likes equities, but is still worried about the capitalisation issues in the banking sector, he talks to the firm’s team of analysts.
That way he finds the funds that provide the economic exposure without the risk associated with the banking sector.
“We are still of the view that most of what is going on in the world is the devolution of the crisis that hit the banking sector in ’07 and ’08. Although the US banking system has successfully recapitalised, and is in a position where for the first time it has extended credit to the world economy, we do not believe that applies in the UK. It certainly does not apply in Europe and it is probably now an issue growing in China as well.”
Lewis still believes the capitalisation issue around the banking system is the key determinant of all other outcomes. “The reason why you have quantitative easing is all to do with what the banks are doing. The reason why the Fed can afford to taper in the US is because the banks are beginning to extend credit again, and that’s not the case in the UK.”
He takes issue with what Bank of England governor Mark Carney is saying about the direction of UK monetary policy “because he thinks monetary policy can fix the UK economy’s ills and he’s ignored the issue of the banking system”.
Trigger points
The asset allocation strategy following the Federal Reserve’s announcement of QE3 last year triggered Bestinvest to reduce bond exposure in November last year, and again in January and March of this year.
At the same time, Lewis was concerned about what was going on in China, again because of the banking system. “We’ve got big concerns about Chinese shadow banking, about the share of Chinese GDP that’s infrastructure generated and the funding nature of that structure.
“We felt Chinese economic growth was not sustainable at the rates that even last year were regarded as normal, so 7.5% to 8% GDP growth was not achievable in the longer run.”
Lewis is much happier with a growth rate of 5.5% to 6% and, related to this, commodities exposure was reduced as was emerging markets. All that money was then rolled back into developed world equities.
This specifically focused on two big structural positions in Japan and Europe, which stood out as a pretty cheap market on ratings grounds.
“We think that because European banks are not fixed, you are going to get further monetary policy coming out of the European Central Bank after the German elections, and that monetary policy could look like QE. That will be bad for the euro but bullish for European equities.”
The house view also favours the policies coming out of Japan, with the caveat that there are clearly big risks. “We like the reflation story in Japan. That’s bad for the yen so all our Japanese positions are hedged out. And there are stories of what is happening in domestic residential property.
“Prices are going up for the first time, mortgage availability is picking up and increased competition from the Japanese banks are driving funding rates down because the Japanese banks are being recapitalised.”
The asset allocation committee meets every quarter, formed of Lewis, CIO, Bestinvest founder John Spiers, now a non-executive director, two senior investment and research managers and the chief executive.
The Asia story
Lewis Cohen, one of the senior investment directors at Bestinvest whose remit covers the private client portfolios for Infinity, hones in on how the portfolios are constructed for Asia-based advisers.
There’s a full discretionary portfolio for clients with more than £250,000 to invest; for others, there are three model portfolios run on a risk profile, equity weighted basis.
“Everything we do is about finding the right fund managers and I was able to put together model portfolios for the smaller clients,” Cohen says, adding that Bestinvest also runs other model portfolios through offshore bond provider platforms.
During the past 12 months, he says he has improved the funds in the portfolios predominantly because circumstances have changed and “the world seems a slightly better place than it did before”.
Looking for funds and fund managers that meet the asset allocation committee’s view of the world, Cohen started from a smaller selection of funds in US dollar terms than for a sterling investor.
“We’ve not had to do as much overseas investing until the tie-up with Infinity. It benefits the house because we’ve expanded our fund range and gained new opportunities.”
But he emphasises that he did not want to dilute the process for Infinity because the whole point of the venture was that it was buying the Bestinvest model. That was essentially about getting the asset allocation correct, because that is the main driver of return, and then looking for the best fund managers in that space.
Bestinvest has in the region of 14,000 fund manager interviews on record, of which it rates 440 funds currently for sterling investors on the basis that it is “confident that this is the right fund manager at the right time and it has a good quality bias”.
So the obvious route to forming the international portfolios was to see which of the already researched fund providers and funds had an alternative share class already “because we’ve already done that depth of work and why reinvent the wheel”.
Cohen also says the research team is always looking for better fund managers or other fund managers to improve Bestinvest’s offering and then they will filter in naturally.
Adding value
Only when there is perceived not to be enough depth of research or if the fund manager can’t add value then Bestinvest looks for vehicles such as iShares. The States, for example, is one of the most efficient markets in the world and very hard for managers to add value, hence Bestinvest just backs the index in that instance.
Well-known names from fund houses such as Aberdeen, Fidelity, Axa and Invesco make up the Infinity US Dollar Single Premium (Pershing) Balanced Portfolio.
Less on the mainstream radar is the Fulcrum Commodity fund, a small hedge fund with a commodity trading arm, which was chosen because it just happened to suit Lewis’s asset allocation committee view to go short on certain areas.
This was a classic case of buying the right instrument to fit in with the house view, which was very much about how the hard commodity market is going to slow because of the slowdown in China.
As a UK-centric house, most of Bestinvest’s clients tend to have a home-market bias, but Cohen explains that Infinity was offered a specific weighting of 50% Asia Pacific and 50% MSCI world.
The contrast with a UK investor is dramatic as the table (above) shows. If you are a UK-focused investor you would be expected to have nearer 50% in UK equities, but this drops to 8% for the international portfolio.
Returning to the macro view, Lewis predicts there will be a big change in Europe, “more dramatically than people expect because otherwise Europe has got a problem”.
He says the banks are not capitalised correctly so there’s no money flowing round the system and the ECB can’t act as the buyer of last resort in bond markets all the time.
“It has to stimulate credit growth and so we think the ECB will be forced to do something ‘constitutionally’. That is probably our biggest non-consensus view at the moment because we think you will see something like QE in Europe.”
