The fund management industry has changed for the worse, according to Ben Conway, the co-head of Hawksmoor’s funds arm.
'The focus on low costs is a misnomer, because they offered low costs during a period in which active asset managers haven’t justified their fees,' he says.
‘But there is far too much lazy investment and lazy promotion of passive vehicles that claim to offer liquidity, which they might not be able to offer in difficult times. People think they can get their money out quickly, but when things are in panic mode, the price at which they will be able to realise their investment is not what they see on the screen.
‘The tool a good active manager has is the ability to choose when to sell which stocks, which passives cannot do.’
The fund of funds manager argues that there are talented managers, but the only way to preserve performance is to cap assets. He believes the fees that active managers charge will be worth paying because the overall returns will be higher.
‘There is academic evidence to suggest the most active managers, with smaller portfolios, run by really talented managers have been performing really well in an era when active management has been difficult.
‘To people who are sceptical: yes, our solution does guarantee you a higher cost, and we can’t guarantee future performance, but I can give you 10 years of evidence that our process can deliver good results.
'The evolution of the fund management industry has encouraged people into these [low cost] solutions and it is a shame.’
Conway’s tip to investors is that they should not only consider the fund manager and the portfolio, but the company they are at and its goal.
‘One of the issues with our industry is the objective of the client can be in conflict with the objective of the shareholder of a company, because that will be growing revenue which will be achieved through increasing assets.’
He points out that while a fund manager will worry about the level of assets in their fund, the shareholder will want the fund to stay open. He believes the best fund managers do not like that conflict, and the only way they can get away from it is to be at an employee-owned company where they can control capacity.
From the sell-side to the buy-side
The difference between the sell-side and the buy-side is like chalk and cheese, according to Conway.
Before a simple Google search led him to Hawksmoor, where he has worked at for nine years, Conway started his finance career on the sell side at Deutsche Bank, which he says he never should have done.
‘It didn’t suit me very well. Being a sell-side broker is about speaking to managers to sell, and your measure of success is the commission you see at the end of each day. Every single day you think about how many trades you got.... I made the decision early on to get together capital, and once I achieved that, I would exit.’
Which is exactly what he did. When he reached the age of 28, in 2008, he decided to move to Sydney, Australia, with two of his best friends. The trio started a consultancy where Conway was head of finance and sales. He says he had a ‘fantastic time’ and it was definitely a ‘success story’, but when he decided to have children, it was time to move back to the UK.
This time around, he knew he wanted to go on the buy side and be based outside of London to have a better work/life balance. He says he used Google to search for fund management companies in the West Country and came across Hawksmoor, the fledgling boutique that had started its life only two years prior.
‘The pace of the work is very different. Now I’ve gone from having as a main objective the number of trades to actually building portfolios that will be sustained for multi-decades; building something that will last generations.’
When he first joined, Conway had responsibilities across private client portfolios, as well as Hawksmoor’s funds. As the business grew, the fund and private client arms were separated, which led to Conway focusing full-time on the funds of funds.
Ahead of peers
The three funds Conway’s team is responsible for are Vanbrugh, Distribution and newly-launched Global Opportunities, which have close to £300 million in assets. The team runs more than half a billion when segregated mandates are added to that.
According to Citywire data, Conway returned has 26.4% over five years, while his peers returned an average of 19% over that time. Despite generating top quartile returns, he and his co-managers managed to restrict annual volatility, and with standard deviation 5.4, it is the third lowest in the peer group.
Conway says 2018 was disappointing for the team, even though they outperformed their Mixed Assets – Balanced peer group by returning -4.7% compared with -5.8%
Last year was unsatisfactory, he says, 'in one sense because our objective is to generate a positive real return'.
'We don’t try to do that over one year, but when we lose money like we did in 2018, it makes it really uncomfortable. And you have to work harder to deliver positive returns over a rolling three year period.’
He points out that the Vanbrugh fund has returned 10% per annum since its launch in 2009, despite being a cautiously run multi-asset strategy that is only a quarter invested in equities.
‘It was difficult to generate positive returns, across Vanbrugh and Distribution. Relative returns were good, but we judge ourselves by the absolute standard. We need to generate a positive real return.
'When we look back at it, we know why we didn’t do better, and we are comforted by the fact that we couldn’t have done better.’
So, what has not worked?
‘In 2018, 90% of all asset classes delivered a negative return in dollar terms. If you want to deliver a positive return, you had to be in T-bills or direct property. Essentially, if you’re a multi-asset fund manager, the only way to make a positive return was to be in dollar assets. But we are always going to be fully diversified.’
Conway says the team actually added more to the poorest performers in the portfolios, such as gold equities, throughout the year.
‘Gold equities really helped us in December. We are very positive on gold, which can be linked to the fact that we think that the way monetary policy is being run has undermined the monetary system. All of the major central banks have debased their currencies in the name of not having a recession.
‘Real rates will keep falling, and that’s a positive environment for gold. Gold mining equities are attractively valued relative to the gold price. We think the gold price will go up over the long term, and it’s a truly diversifying asset in the portfolio. When things are going wrong, it should do well. ‘
The other area Conway has added to is UK equities, though he admits it is not a particularly controversial play.
‘Once we get through the Brexit nonsense, the undervaluation of domestic equities will correct, and we can see a tremendous short term rally. We have 11% in Vanbrugh and 16% in the Distribution fund, which is still actually quite low.’
Going forward, Conway believes the biggest risk is valuations, and he warns that the next 10 years will not be as good as the past 10 were.
‘The answer to the global financial crisis was to increase debt, passed from corporate to government balance sheets, and since then debt to GDP has continued to go up. The motivation in the aftermath of 2008-09 was to avoid a recession by stealing growth from the future. But that has to be paid back at some stage.
'We are now in a world where we’ve been without a recession for a long period, and that’s not normal,’ he says.
‘We’ll do the best we can, but when you’re a multi-asset fund manager, you have to recognise that that was an enormously good return. What we hope to do is to preserve the real value of our clients’ wealth.’