Ingenious’s Guy Bowles talks succession planning, the risk-reward conundrum and fund fee pressure.
Is a dual CEO and CIO role sustainable at a growing firm?
If we continue to grow at the pace we have been, it’ll be hard to carry on [doing both roles]. Today I’d say the role from which I would step back would be CIO: bringing in the Thurleigh team means we have more strength on the investment management side. We would have to bring in an external CEO if I were to step back from that role, but that is not the case for a CIO.
How have recent acquisitions, such as that of Thurleigh last year, affected clients’ opinion of the firm? Would you consider further deals in the future?
Clients were not necessarily minded to leave, but they became very sensitive to short-term performance. Pleasingly, over the past 12 months we have been up 2 to 4 per cent at a time when the UK market is down a couple of per cent.
A third of our growth has come organically, a third through acquisitions, and a third through strong returns. We would like to do more merger and acquisition activity. None of the people who joined us from previous acquisitions have left.
We are looking at businesses that are of a similar size or slightly larger than ourselves. We looked at Heartwood [in 2013] but weren’t willing to pay what Handelsbanken did. That doesn’t mean it was a bad price, just a very different opportunity for them.
What have been the most significant changes in the industry in recent years, from an investment standpoint?
One of the most fundamental changes has been the focus on benchmarking and what clients actually want. I would say 90 per cent of clients are looking to beat cash or inflation, with 10 per cent having a more traditional blend of gilts and equities.
If you don’t have cash or inflation as your benchmark, you’ve probably got the wrong benchmark.
Given both inflation and returns on cash have been negligible for some time, is there a danger of complacency setting in?
It’s still pretty hard to beat cash and inflation. Historically you could do that with fixed income. Now you can do it with equities, but the other side is how much risk you take and the question of suitability.
[For money that has historically gone into fixed income] we are looking for managers who can generate alpha. On the equities side, the likes of Lindsell Train are great fund firms, but most of its return is going to be market related. Predicting the long-term returns of markets is easier than doing so for fund managers. So what we want is liquidity, transparency, low volatility and funds that are uncorrelated with those we hold on the [equity] side.
Our starting point for any investment is, ‘How can we lose money by buying this?’ We avoid areas where we have concerns about volatility and liquidity. While we have avoided things like life settlements funds, it does [also] mean we can miss out on good things. Brooks Macdonald had an agriculture fund that has done very well [for example].
Where do you see particular areas of growth among adviser clients?
The big success for us is on platforms. Doing that is one of the few times I think everyone benefits. Prices come down, and it gives clients access to DFMs [discretionary fund managers] with sums of money that they couldn’t have put to that use otherwise.
We’re on 10 different platforms, all for the same reason – if an adviser says, ‘I use that platform’.
The other area we have been moving into is bespoke portfolios for advisers. I think that is going to grow. Firms out there want to retain branding and own models, given they have responsibility for suitability.
Do ready-made models for advisers harbour any concerns?
I have concerns over some risk-rated models and their approaches to volatility. This is very simplistic – to get risk into the riskiest model they really struggle: it means buying emerging markets and commodities. We have lots of competitors whose riskiest models do the worst: their first eight portfolios show gradually increasing returns, then the two riskiest perform the worst.
People seem to think if I take more risk I’ll get more reward. That is wrong. We don’t feel we have to take on volatility.
What kind of pressure is being put on both fund fees and your own costs?
Light is being shone on what the total cost of products is. We come under pressure to reduce our fees, and across the industry we are seeing DFMs reduce prices a bit.
The negative is you need more scale to run efficiently on lower revenues. We were loss making for the first five years, and I keep revising up the amount of assets I think you need to reach critical mass. At first I thought it was £300m to £500m, then I thought it was £1bn, and now I am thinking more like £1.5bn.
One area we’re looking at is the transparency of costs. It is easier said than done. It may be that the answer is for the industry to explain every cost, it may be easier if we simplify the way we charge and just say, ‘This is the cost for you, we will pay the custody costs etc out of your fee to us.’
There hasn’t been quite the pressure that we thought [on fund fees]. There may be another leg down when everyone’s forced out of trail share classes. I think [base] fees can go down to 50bps [basis points] from the old 75bps.
Something we do get worked up over is performance fees. One fund recently we looked at, but felt [its fee] was not aligned with what we wanted it to do.
