Following its merger with Isis Asset Management in October 2004, F&C is sailing full steam ahead with its growth plans. Christopher Salih discovers if the company is ready to deliver long-term outperformance
F&C Asset Management has been a group in transition. Despite a 150-year lineage, the group has been in its current guise for just 18 months. Its merger with Isis Asset Management was only finalised in October 2004. ISIS itself has a relatively short history - Friends Ivory & Sime and Royal & Sun Alliance joined to form the group in 2002. So, it is of little surprise that the share price has been knocked about. The resulting company is certainly large and diverse - is it now in a position to deliver long-term investment outperformance?
The re-modelled F&C Asset Management is a pan-European business, with six of its seven offices on the continent, and with &131bn total assets under management. It is 51% owned by Friends Provident. The company's heritage is in investment trusts. Its first trust, the Foreign & Colonial investment trust, launched in 1868, is currently at &2.6bn, the largest of its kind.
Nick Criticos, head of retail at F&C Asset Management, believes that investment trusts are core to the business but that is by no means the groups' sole attraction. He says: &Investment trusts are part of the group's DNA but they are only one part of our offering. Our retail book is &25bn of the &130bn - investments trusts account for &6.9bn of that. In addition to investment trusts we offer 42 Oeics and four VCTs that Isis Equity Partners manage. We are also a major corporate bond house with &72bn of assets in fixed income, including the bond funds run by Fatima Luis.&
The groups' philosophy is as an active fund manager, though it has been criticised in the past for being too benchmark-aware. The recent recruitment of Bob Doel and his team from DWS, and the launch of the UK Opportunities fund suggest a stronger backing for more alpha-generating funds in the future. Under the new structure retail fund managers are accountable for delivering performance. F&C currently has no growth or value bias to its investment process.
With retail investors, pension funds and major insurance companies its main client base, F&C has a large book of business to service. Despite its size and stature in the UK and Europe, Criticos says the group's philosophy is boutique-like: &Although our size brings us significant resources, our investment model is 'multi-boutique' which means small teams work on specific products to ensure ownership and accountability and we have a number of ring-fenced business units.&
The group saw net flows into investment trusts of over &450m in 2005 and we launched the F&C Commercial Property Trust and created the F&C Private Equity Trust. Criticos believes the closed-end structure makes sense for illiquid assets such as property, private equity and fund of hedge funds.
Criticos believes any post-merger 'bedding down' has been done: &The merger was in 2004, it bedded down a long time ago and our fund managers have been working together for 16 months. 2005 was the year of integration, products were swiftly re-branded. Rationalisation of the Oeic range was completed in the first half of the year and we launched bold advertising and sales initiatives. We are in a growth mode and reported significant inflows last year.
Product and personnel duplication was dealt with within one month. Criticos says: &Old F&C was far more institutional, while ISIS was more retail so the product sets were actually more complimentary.&
Criticos says of the decision to use the F&C name: &Friends Ivory & Sime acquired Royal & Sun Alliance, which is where I initially came from. We re-branded to Isis, but the European and institutional flavour and the fact that the F&C brand was well received in the adviser marketplace made the decision on brand a no-brainer. We did not want to confuse the market with two brands, which is very expensive, which is why we did not keep the Isis brand on the retail side.&
F&C also has a long standing presence in the multi-manager market with the first fettered funds dating back to Friends Provident in 1987. These funds now tally to over &500m with the group offering four core portfolios as well as the Multi-Manager Investment Trust fund. F&C's multi-manager team, which is headed by Richard Philbin, uses its own Traffic Light Analysis for funds. See the box-out for an interview.
F&C is well-known for its ethical range and the group employs an ethical overlay across all its funds. Criticos views the ethical range as a major selling point for Friends Provident and F&C. He says: &These funds are both the oldest and best performing ethical funds and are an area where we are the clear leader. We have an independent committee responsible for the ethical screening, giving the process integrity and keeping the fund manager focused on the investment issues. It avoids conflict of interest. Companies can come and go from the universe, for example, Whitbread is now accessible because it sold its pubs. The Committee regularly reviews policy and also consults its unit holders.&
The group also has a presence in the VCT market through its Baronsmead range. Criticos adds: &The current tax rules have definitely helped the marketplace and we have been very happy with the demand for the Baronsmead ranges. Since the changes to the tax rules it has been over-subscribed. The private equity team has been very careful to pitch the available investment at such a level where they did not compromise their underlying investment policy as they have to find enough investable companies.&
The former DWS UK equity team arrived in late 2005; the five-strong team became available following the sale of DWS to Aberdeen. The group has launched three new funds for the new recruits - all at the higher alpha end of the market. Phil Doel's F&C UK Opportunities fund is a mirror of the fund he ran at DWS.
According to Criticos this was simply too good an opportunity to turn down. He says: &This was an unusual opportunity resulting from the sale of DWS that enabled us to acquire a fully functioning and highly regarded team. It really was too good to miss. Combined with the likes of Ted Scott on F&C UK Growth and Income we believe this transforms our retail UK equity proposition.&
Looking to the future, Criticos says that improving relationships with the main advisory firms is very important to the group, as are third-party links. He says: &We are on all the major fund platforms and have recently added a number of our funds to life links, for example the Canada Life onshore and offshore bonds.&
F&C has come a long way in the past 18 months, advisers will now have to wait and see whether the group can build from here.
richard philbin, head of f&c multi-manager
Richard Philbin, head of F&C multi-manager, runs four funds - Cautious, Balanced, Distribution and Growth, which range from between 30% to 100% equity. He uses a traffic light analysis system. He talks to RealAdviser about his process.
How did you come up with the Traffic Light Analysis?
I started managing fund of funds portfolios in 1994 after I left university. I did a degree in financial services and three modules of the degree that had a profound impact on me were quantitative techniques, risk management and portfolio construction. But, the biggest influence on me was my first chairman. He called me into his office and told me that I had to imagine there were 99 other competitors in my arena, and he was going to measure me over a short time period. If I ranked 49 or better then I wouldn't get sacked. He would then measure me over lots of other short term time periods: Once again, if I were number 49 or better then he wouldn't sack me. Over the long term, he said if I achieved that he couldn't sack me because my overall rating would be higher than 49 because the 48 competitors above me in each of the short-term time periods would not be the same 48 and thus by default I would move up the tables. This obviously led me to look at discrete time periods instead of cumulative. If I could deliver consistency to my clients, I needed to buy consistent funds.
Can you explain how it works?
Traffic light analysis looks at in excess of 80 different discrete time periods and analyses like-for-like funds (UK small cap with UK small cap, UK equity income with UK equity income, Asia Pacific ex-Japan with Asia Pacific ex-Japan and so on). It splits the funds into thirds. Top third get green, bottom third get red, all others getting amber over each of those 80 odd time periods. We do this research eight ways: total return, capital return, income earned, volatility, maximum loss, information ratio, correlation and alpha
We look for funds that display consistency in these fields. In essence, green, amber and red relate to buy, hold and sell. If we can highlight a fund (out of the 20,000+ in our universe) that can display high levels of performance matched with low levels of volatility or maximum loss for example we get interested. Ideally we would like 0% turnover and to outperform. Ultimately though we do not want surprises - either on the upside or the down. It has been in development since 1994 and continues to be refined.
Would you describe your approach as cautious or aggressive?
We aim to deliver boring, dull, repetitive consistency to our unit holders. Sure, in the underlying funds within our portfolios we have one or two exciting names, but in the main we want to be considered a core holding that is dependable. Compared to the legislation and a number of our peers, we are much more conservative. The rules state a maximum in any one fund to be 20%. We state 10%. We make sure that we have, at all times, at least 15 holdings, and no more than 25. Our portfolio turnover is very low.
Does your way of managing funds lend itself to a certain type of investor?
I think fund of funds is an excellent offering to the market. It should be considered, in my opinion, as a core position - for Sipps, Pep/Isa consolidation, with-profits alternatives, trust business and many other markets. It offers professional outsourcing, a dedicated management team with in excess of 20 years of managing fund of funds portfolios, defined risk/reward objectives and a robust investment process. The F&C Multi-Manager funds also offer the unique advantage of 'Investor Protection'. Should a client invest more than &5,000 into one of the four funds in the service (Multi-Manager Distribution, Cautious, Balanced or Growth) then they automatically receive a whole of life insurance policy on their investment (assuming the client is below the age of 80). Should the client die and the value of the portfolio is less than the initial investment, then the policy steps in to the tune of a &150,000 shortfall.
What are the most significant trends you are finding in the market at the moment?
Income, income, income and property seem to be the hot topics. Income from not just fixed income, but from equity, from international equity and different asset classes such as structured products and property. Property provides both diversification, in terms of asset class, volatility, and capital. There are not many new launches going on at the moment except in property where we are seeing bricks and mortar funds, as well as property share funds being launched. Another area is high risk - BRIC funds - Brazil, Russia, India and China are starting to gain a whole lot of recognition, although the jury is out at F&C on them in the short term. One area we have noticed of late is the whole 'fund capping' debate. In the main, we are happy that it is happening.
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