Jupiter's Philip Gibbs sees interesting opportunities for fund managers in hedge funds
Jupiter Financial Opportunities manager Philip Gibbs is wary of asset manager firms with a star manager culture and a heavy emphasis on long-only equity investing.
Yet despite falling markets, Gibbs still sees plenty of potential investments in the fund management sector.
He has special praise for hedge funds, calling them 'the real silver lining for the fund management sector at the moment,' because the disarray in the conventional sector is leading people to go into hedge funds and that is an interesting margin opportunity for the fund management groups.
'Some asset managers are very contemptuous of hedge funds but I believe they are an interesting opportunity,' Gibbs said. Gibbs himself manages a hedge fund for Jupiter called Hyde Park.
Fund management groups have become increasingly vulnerable not only to fee pressures but to star cultures, he added.
'You are actually buying individual fund managers and they can move around easily,' Gibbs noted. 'This is why I like the idea of investing more in fund of funds businesses, especially in the hedge funds sector.
'The fund of funds sector is not nearly as vulnerable to star individuals and people are not going to be able to invest in individual hedge funds the way they can in unit trusts. They are going to need somebody to hold their hand, whether it is pension funds or the individuals.
'That is why I particularly like the fund of hedge fund businesses.'
Gibbs stressed the overall financials sector is extremely diverse. He noted fund manager groups that specialise in bonds could do well in the present environment.
'One of the points I tend to make to people who might be thinking of investing in the financials sector is just how varied it is,' he said.
'There is usually something that is doing well and for the moment I would say it is the insurance underwriting cycle.'
Another key theme for Gibbs is that small, or smaller, is beautiful. As a financials sector example, he cites nimble, mid-sized property companies.
Gibbs said: 'Property companies have historically found it difficult to create any goodwill and effectively it is just an asset play.
'But I believe there may be an angle for them to create some goodwill in the future if they can move into property management.
'This is something they have been very slow at taking up, but it is a very interesting idea.'
He described property companies as being typically too eager to grow and often suffering from growing beyond their capabilities.
'It should really be like managing, say, a hedge fund, which turn away money when they get too big,' he said. 'Life companies are getting too big and should give money back. If they are getting too big to manage their assets properly, they should stick to a lower amount of assets and be more specialist.'
Gibbs also warned investors to be wary of less nimble big players, drawing comparisons between ICAP and HSBC Holdings and between Anglo Irish Bank and Abbey National.
An investor who bought £100 of HSBC shares at the end of 1998 would have turned it into £126 by the end of 2002, said Gibbs, whereas the same amount invested in ICAP would have risen to £432.
The returns for Anglo Irish and Abbey National were a £249 gain on £100 and a £58 loss respectively.
Describing HSBC, Gibbs said: 'It is a legacy of the bull market in terms of the way it was rated because, no matter how solid it was, it was all part of the idea that you have got to stay in the big stocks. It was all a terrible mistake.
'Why not get into something like ICAP, which was only capitalised at a couple of a hundred million, had a P/E of about five times back in 1998, was run by somebody who had an immense personal interest in it, and still does, and had a very nice specialist business benefiting from increased volatility in markets.'
On the Anglo Irish and Abbey National comparison, Gibbs said: 'You would have been told that you would be mad to invest in Anglo Irish at the end of 1998, rather than Abbey National, but Anglo Irish was on about half the P/E and had a far more motivated and focused management.'
Gibbs drew similar lessons from a £100 investment comparison in the insurance sector between Jardine Lloyd Thompson and Royal & SunAlliance. These would have turned into £371 and £17 respectively.
He said: 'This is an extraordinary comparison. One has just mismanaged its balance sheet totally, the other has not really had balance sheet problems, it is just a fee-based and commission-based business and has benefited from the growth in insurance rates.'
According to Cicero report
Adds 24 staff, three offices and £275m AUA
Launches Junior ISA and retirement accounts
Schroders tops 2019 list
24 companies wound up