Q&A with Nick Wood (pictured), Head of Fund Research at Quilter Cheviot, who leads a team with dual research responsibilities for both Quilter Cheviot and the Old Mutual Multi-Asset team. Interview by Ole Rollag, Managing Principal of Murano.
Q: Over the years, Quilter Cheviot has witnessed some impressive growth. What do you think has been the main driver behind that growth?
A: There are a couple of things I would highlight. One is that we’re very lucky in that we are a reasonably well-known discretionary wealth manager and amongst the largest in the UK. We have a lot of long-term clients and a lot of our new business comes from word-of-mouth. We also have a very strong regional presence. All of our clients get direct access to an investment manager to look after investments and I think that’s a service they really appreciate. One survey recently ranked us in the top 2 wealth managers that IFAs look at to move their business and according to ARC data (Asset Risk Consultants), we have consistently outperformed our peers.
Q: How would you say fund selection differs from other investment managers? Once you get to a certain size it’s hard to differentiate products with all those constraints.
A: Talking from a fund selection point of view, it’s always tricky to work out where your differentiation is. We are focusing on providing an institutional quality research capability. I think the quality of the research, the way we approach meetings, the preparation beforehand, all lead to high quality interactions with Fund Managers. Meetings with managers aren’t just a question of turning up and nodding along, asking the odd question as you go. I have never seen a pitch book that’s going to show you the key points and the wrinkles in the product, so it is important to understand the strengths and weaknesses through thorough analysis.
We are a very experienced team with an average experience of over 14 years in the industry. This is important because in my view there are three stages of development for any fund researcher: First, you learn how to analyse an individual fund against an index. Second, after an extended period of time meeting a large segment of the peer group, you start to appreciate who has real talent and edge, and where the differentiation lies, or not. Lastly, a fund researcher gains knowledge of the broader market and drivers, what works and why in any particular region or asset class.
It takes a lot of time to get to that level of experience. We cover a lot of different regions and asset classes, and therefore generate a lot of discussion around the desk. I think having an active (and sometimes lively) discussion is quite healthy. I think it’s helped to engender a mentality of a highly respected research team and enables Discretionary Fund Managers to have the conviction and confidence to be comfortable buying outside of the buy-list.
Q: What is your investment process for selecting managers?
A: There is a defined process, but in terms of research, given we are an experienced group of fund research analysts, everyone has their own way of doing things, so we are not too over bearing in terms of structure. However, we do have a basic framework that we work with. Ultimately, we are looking for a manager that can add value over a cycle, and there needs to be some demonstrable evidence that they have been able to do this in the past or that something about them would suggest that they are going to be able to do this going forward, and that this can be actively measured.
We are all measured in terms of our buy recommendations. Generally we might expect to meet the manager about 3 times before we invest; it doesn’t always have to be in person, but is preferred.
However, once a research analyst comes to a conclusion, the fund is peer reviewed. This is the opportunity for other members of the Fund Research team to challenge the analyst around strengths and weaknesses and here, we rely on the experience of the whole team to determine whether or not this is the right investment.
If it passes the peer review, it goes to a central Investment Funds Committee, which has the final say in terms of whether it gets added to the list. The Funds Committee might also consider whether it warrants a place in a firm wide model. Once approved, we actively monitor the manager, and generally meet every 6 months.
Q: Broadly speaking, what do you look for when selecting a manager?
A: The ability to add value over a 3-5 year cycle. We are very aware that there are managers with different styles and there are occasions where those managers are out of favour. The key question for every manager is, “What is your edge over the competition? What inefficiency are you looking to exploit within the market?” The key question for every manager is, “What is your edge over the competition? What inefficiency are you looking to exploit within the market?”
Most managers struggle to answer this question.
We are in a lucky position where we meet hundreds of managers every year, and it is relatively easy for us to have a good understanding of why we think a manager might have an edge over another one. I find it interesting that about 90% of the time, managers that I meet will cite having a longer-term time horizon as their edge, which clearly not everyone can have. Many struggle to define what else sets them apart.
Q: Roughly speaking, how many managers do you look at on a yearly basis?
A: Over the last couple of years it’s been around 800
meetings per year, albeit some of those will be incumbents who we tend to meet a couple of times per year at least.
Q: How many managers try to see you?
A: That’s a tricky one... I would say 3-4 times the number that we meet with, easily. That might come in the form of unsolicited emails and calls, we regularly get sales people asking for the coffee/sales chat.. Likewise, there are a lot of conferences out there that people want us to attend. Unfortunately we don’t get paid on the number of coffees we have with sales people. However, the reverse may be true: I believe some sales people may be paid based on the amount of coffee they have with us!
You have to be mindful of your time. I have been quite proactive about this recently. More often than not, I will be a bit more selective and prescriptive of what I want out of these meetings – I might say, for example, “Come along with your best 3 ideas.” It is a fine balance; I never want to be rude to anyone that knocks on our door. It’s a tough job out there for the asset managers and we want to do the best for our clients by unearthing hidden talent, but at the end of the day our time is best spent on what we are already invested in.
Q: How many managers did you allocate to out of the 800 you saw?
A: Of the 800 meetings I would say a little more than half would be managers we are already invested with. I am guessing that we may add maybe 10-15 new funds a year across the board for Quilter Cheviot; not a large number. Some of these allocations involve replacing underperforming managers or otherwise gaining exposure to a new area.
Q: How does a manager pique your interest? On a physical and emotional level, is it emails? calls? It’s almost like these guys are trying to sell movie scripts to producers.
A: There isn’t a set winning strategy but if it sounds potentially interesting, I will normally ask for a standard presentation, which I guess is like the movie script. Overly pushy sales people can immediately put you off. There are lots of things that come our way that can be discounted immediately; obvious impediments such as monthly liquidity or charging 2 and 20 for a long-only fund. There are things that we are unlikely to invest in due to our investment process; if it’s too concentrated, or too diversified. I suppose there are a few mental checks I make and once I get past that level I have a good sense of what a Quilter Cheviot client would be comfortable holding. After that, if there is time and interest, we will arrange a meeting. We have no interest in meeting an unsuitable manager multiple times.
Q: What are some of the biggest mistakes managers make when marketing themselves?
A: Knocking the competition – there’s just no point in doing that. For the most part, whenever that’s happened, we probably know the competition a heck of a lot better than they do. I believe on 2 or 3 occasions a sales person has confidently told me something about a manager we own that I know for certain is incorrect; in which case they lose quite a lot of credibility.
Another one that I’ve always found irritating is when bottom-up or other “non-macro” managers spend half the meeting going through macro analysis. If you are a bottom up stock picker, macro is just not your edge. Having pages and pages of macro slides in the presentation and going through them isn’t a good use of their time with us. I think a lot of managers tend to feel they have to put in a lot of those types of slides. Broadly speaking, if you want to talk about Japan and need to pitch about why Japan now – that might be ok. However, most managers should avoid macro altogether if it isn’t their strength.
Q: Is there a 'career risk' issue when allocating to smaller managers? Is there job security when you invest in a large, known asset manager?
A: I certainly have heard that phrase and I very actively disagree with that idea. There are definitely risks when allocating to smaller managers, I would even extend that to lesser known managers. As long as you are aware of the risks, allocating to smaller managers is ultimately part of our edge. Our private clients typically do not want to see just household names. Seeing some familiar asset managers, for comfort, sure. However, lessor known names are a differentiator, so long as they are held for the right reason, and of course deliver the right results.
If I can find an interesting US manager that’s ported the track record to the UK, it will take basic ‘screens’ three years before they take into account the UCITS track record, maybe longer, let’s say five years. If we invest early and it’s a success, that’s a good example of where a good idea might be hiding in plain sight. If we’ve got the knowledge to invest in this manager and are comfortable with the assessment of the new product, fantastic! For smaller managers specifically, we know that all research points to managers with lower AuM generally outperforming larger peers because they are more nimble, so really that should be something that everyone is seeking.
So, if I’m worried about career risk, investing only with the behemoths of the world would probably cause me to miss some great opportunities and that is not in the best interest of Quilter Cheviot’s clients. It’s a bit of personal pride for the analysts if they find something that others haven’t stumbled across; that’s one of the fun parts of our job. I strongly disagree with any allocators that worry about that kind of thing. It just ends up with our industry getting a bad reputation due to poor outcomes.
Q: A lot of fund managers assume allocators buy performance – is this true?
A: This is by far the trickiest part of the job. Good performance leads to confirmation bias. Poor performance and you worry where you often should be allocating more, but you naturally worry because you think that you got the call wrong. I don’t think it’s quite as easy as just immediately buying the manager that outperforms over the period or selling the manager that underperformed over a period. In my experience there tends to be some sort of positive momentum in the short to medium term. Take a value manager who is having a good period and the stocks are working out, he takes a profit and has capital to put to work in another undervalued name. Equally, the reverse is true when that value manager gets stuck in cheap stocks that get cheaper and he needs to find capital to buy more.
We tend to run analysis on a rolling three-year basis, and for every manager there is some sort of cyclical pattern. So back to your question – do we look at performance? I think we have to look at performance to understand whether a manager is performing when you expect him or her to in order to assess their style or characteristics; what is their edge? Buying after a period of strong performance and selling on weakness seems to me to be by far the biggest issue in our part of the industry, getting it the wrong way around. I challenge anyone not to make the mistake a number of times, I know I have. We do our best to avoid it, but it’s not easy.
Q: What do you do for fun?
A: I have two small boys at home, so that’s a whole load of fun in itself, and they keep me pretty busy. Otherwise I’m a runner and ex-triathlete so most of my spare time is spent doing sport. Getting out for a run keeps me sane, and I find it’s a good way to clear my mind after a busy day. There are a few of us in the office that run together at times, and we’re thinking of getting the sales guys to do a five mile run with us rather than the usual coffee – that might cut down the phone calls!
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