Chapters Financial provides five in-house portfolios to around 290 clients, tailored where necessary. It also provides outsourced discretionary fund manager (DFM) services to around 60 clients who generally have more than £400,000 to invest.
Director Keith Churchouse said: ‘When selecting DFMs, we want to avoid a manager that essentially uses model portfolios. It’s just a service that suits them and we can do that ourselves. So we look for something more bespoke and specialist: for example, the ability to invest in direct equities and a wider diversity of funds.’
The two DFMs Chapters uses are LGT Vestra, for clients who want a more aggressive tilt in their risk range; and Charles Stanley, for the more cautious. If clients have £1 million or more to invest, it might recommend both to increase diversification.
Chapters’ investment committee meets quarterly and comprises Churchouse, director Esther Dadswell, associate director Vicky Fulcher, and external consultant Steve Williams, managing director of Cormorant Capital Strategies. Williams helps research asset allocation and fund selection on criteria such as charges, performance, and quality of fund manager.
‘Steve’s recommendations are not fixed: we can do anything we like on or off panel,’ said Churchouse. ‘But they are a useful guide.’
The Chapters Financial Balanced portfolio has outperformed the Investment Association Mixed Investment 40% to 85% Shares in the past three years. Two funds supporting that performance are the Unicorn UK Smaller Companies fund, managed by Citywire + rated Simon Moon, and the Baillie Gifford High Yield Bond fund, managed by Citywire + rated duo Donald Phillips and Robert Baltzer.
Moon has shot up the Citywire Discovery rankings in the past year, recording second-decile risk-adjusted performance in the UK smaller companies sector. Over three years, he is in the sixth decile. Phillips and Baltzer have delivered steady second-decile returns over one, three and five years.
‘We’re not shy of using smaller houses, nor of moving funds if we need to,’ said Churchouse. ‘We also stick to our beliefs. For example, post-Brexit vote we could have bailed out of the UK. But it would have been the wrong thing to do.’
The portfolios have halved their exposure to commercial property in the past six months, replacing it with European equities. ‘The post-Brexit moratoriums in UK commercial property funds were unnecessary,’ said Churchouse. ‘All bar one were withdrawn in a short period. But what happens if there is another blip? Will they do that again? It shows a lack of confidence and that they think the prospects are weak. We previously had 15% in commercial property, but reduced exposure to 7.5%.
‘We have not advocated European funds for five years. But we are now, as Europe has a greater capacity to move forward. The US and UK will probably go slow, but Europe will be two years behind that because of its quantitative easing programme.’
The two main European funds Chapters is moving into are the Henderson European Growth fund, managed by Citywire AA-rated Simon Rowe, and the Baring German Growth fund, managed by Citywire AA-rated Robert Smith. Rowe has second-decile performance over three and seven years and third decile for five in the Europe excluding UK sector. Smith is in the top decile over five years; and second decile over one and three years in the German equity sector.
Churchouse is also watching closely for a potential bubble in global stock markets. ‘One catalyst for global recession could be the US mid-term elections in September, if president Trump loses control of either house,’ he said.
Chapters’ portfolios are 95% active. ‘I can see the arguments for passive and active,’ said Churchouse. ‘We have clients who only want passives and we’ll go passive for them. But active management has its place and we prefer paying for something extra.’