Jean-François Comte: The man with the plan

Hedge Magazine, 2015. Original article p48-50.

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The Man with the Plan

Jean-François Comte is in full London exploration mode still, having moved here a year ago when Lutetia Capital opened its UK office. It takes a while to crack the nut that is London – the city is amazing, sure, but not necessarily the most welcoming – although it helps if you’re a global citizen like Comte. The co-founder and managing partner of Lutetia Capital spent 12 years in New York before going back to Paris to establish his company, whose success in merger arbitrage has quickly ensured its position as a rising star in the hedge industry.

We’re meeting in Lutetia’s Mayfair office, a classic townhouse filled with modern art, where Comte is equally stylish in blue (suit: navy; shirt: powder) and a knitted black tie. It doesn’t take long to realise just how serious Comte is about his work, but his confidence translates into a friendly openness about the state of the business. “We’re now establishing a stronger presence in London. It’s a question for the future, whether we move the gravity centre here from Paris,” says Comte in his crisp French accent. “In the alternative space, you get more visibility in London.”

Screen Shot 2016-02-01 at 17.22.18Things have been progressing nicely this autumn for Comte and his co-founder Fabrice Seiman. M&A activity is now at its highest level since the all-time high of 2007, according to Citi. The Lyxor Lutetia Merger Arbitrage (UCITS) fund has just taken in another $25 million, bringing the total assets to a cool $225 million in just four months since the launch. And Lutetia keeps getting nominated for, and winning, industry awards. What’s the secret?

“What is specific to us, but not unique,” Comte says, careful to be exact, “is that we have a very strong qualitative approach because of where we come from. We come from M&A. … We have the experience to examine the detail of every single deal, and understand the environment, the regulation, the contracts – because we negotiated those contracts when we were on the other side.” There are lots of practical elements that go into it, says Comte, as he tackles the question in a most pragmatic manner – because to run a successful business you have to thoroughly understand distribution too, and not just focus on the part most managers like best: investments.

Lutetia’s M&A arbitrage positions usually work out as anticipated, says Comte, but sometimes the situation blows up – that’s what happened last year with the AbbVie-Shire deal. “We had a relatively small position,” says Comte, explaining that the outcome took a lot of managers by surprise. It was a known risk that the US Treasury was moving to limit the benefits of so-called tax inversion deals, so the reason investors tripped up had more to do with the way the acquiring party handled the situation. “The language and behaviour around the deal had been very positive, until the AbbVie board changed its recommendation.” Usually, says Comte, a manager can tell if there’s an issue by looking at these kinds of things; the business rationale and regulation may be in flux, but the wording and body language can tell you a lot.

M&A can be pretty stressful, says Comte, with things moving quickly and sometimes unpredictably. “That’s when you have to keep calm, analyse the facts, and see what makes sense.” This has been the case with the FedEx-TNT deal, which has been overshadowed by the fact the European Commission had blocked UPS from buying TNT two years ago. “Because of that, a lot of people had smaller positions than they would normally have. Many US managers have become more careful about European regulators over the past few years.” Lutetia decided to keep its position in the FedEx-TNT deal following an in-depth analysis of the rationale behind the regulator’s decision, concluding this deal should reasonably clear. “Sometimes you need to relax – look at the facts and keep your cool – in order to make money.”

Screen Shot 2016-02-01 at 17.22.22Before Lutetia, Comte spent nine years in the M&A trenches at Lazard Frères in New York, while Seiman earned his stripes at PAI Partners. “This has been my life for the past 15 years! I went straight into M&A after law school. I must say, I didn’t see those last ten years go by – looking back it seems like a couple of years,” says Comte. So why did he decide to make the move to the investment side? He thinks about it for a moment. “Some people are meant to be advisors. It can be extremely interesting. Lazard in New York is one of the best possible places to do M&A in the world: you work with extremely smart people, there’s no inefficiencies – you say something once and it gets done!” This may explain why Comte is so methodical when talking about how Lutetia gets its edge: “People can come out of that environment with something of a military thinking – there’s this discipline. In M&A, at that level, there’s no margin for error. One of our staffers used to say to new recruits: ‘The difference between this and war, is that you get to go home’.”

So when Comte went to establish his own company at 35 (he’s now 41), it was because it felt like the right time to try something new – coupled with a careful consideration of the practicalities, of course. “Some people thought I was crazy at the time, leaving my position,” Comte laughs. “But the desire to go to the investment side was stronger. … I truly believe [it’s important to] love what you do, and have fun with it.” Not to mention how this is part of a tradition: Comte comes from a family of entrepreneurs. “It means you have the inspiration to build something, and grow it not only for yourself, but also for bringing people onboard and giving them opportunities.” That’s another reason why establishing Lutetia isn’t just about investments, but also about good corporate culture: “You don’t re-invent the wheel. We consider ourselves to have been in some of the best possible working environments in terms of discipline, corporate culture, and excellence. We have the opportunity to replicate that culture, so that’s what we’ve been doing.”

Screen Shot 2016-02-01 at 17.21.47There must be quite the contrast though, I ask, in essentially running a startup after such a structured environment? Comte has never actually worked anywhere other than Lazard, making for an unusually streamlined career. “Thank you,” says Comte, pleased with this characterisation. “I don’t think it’s good when people jump from one thing to the other every two years. That says something about their thinking process. I’m proud of the fact I was with the same firm almost ten years.” Having said that, Comte also has plenty of observations about the transition to running his own shop:

“I don’t like it when people stop being producers because they’re used to being assisted – when you just give directions and have other people do the work. … It’s critical for senior managers to stay involved in everything, including understanding systems and risk control, because if you get too removed you actually create risk.” That’s why Comte is happy to dig into an Excel sheet once in a while, and change his own office light bulb: “It’s about entrepreneur culture. A lot of people had the idea for social networks, but there’s only one Mark Zuckerberg. He won the execution battle. The idea alone is worthless! We knew going in, leaving our beautiful offices, great assistants and smart analysts, that it wouldn’t be the same. That’s why you have to have fun in the process and be excited about it, otherwise you’re going to suffer!”

So that’s what Comte is doing now: having fun building the London office, while also enjoying living in a new city. He’s more reserved when talk veers away from work, but it’s good to be back in a more Anglo-Saxon culture, he says, having spent time in Paris after leaving New York, which he loves. “I never lived in London before, so it’s exciting. Exploring the culture, finding great places to play tennis, and ride horses – we’re looking to move our horses to England now.” The horses are in France still, and they have jobs: they’re sports horses. Comte isn’t the one to jump them in competitions, he’s quick to add, preferring to ride them at a more leisurely pace. “No, that would be … “ He laughs. “Asset management is a lot about risk management. Horses are quite special, but you have to admit, jumping can be risky.”

Greg Konieczny: The frontier man

Hedge Magazine, September 2015. Original article p50-52.

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Grzegorz ‘Greg’ Konieczny, Portfolio Manager of Fondul Proprietatea and Director of Eastern Europe / Russia Strategy at Franklin Templeton Investments.

Grzegorz Konieczny is in London this morning, tending to Fondul Proprietatea and its new life on the London Stock Exchange. The Romanian fund has done a fair bit of shaping up over the past five years, which is how long Greg (as becomes of Grzegorz in London) and Franklin Templeton Investments have been in charge. Although things may have changed a lot over the years, Fondul isn’t quite like the other funds: this investment vehicle was originally established to compensate Romanians whose properties were confiscated by the former communist government.

That meant a fair bit upheaval during the early days for the Templeton mandate – even a few scandals. One wonders if Konieczny got more than he bargained for when he took on Fondul? Take what happened with Hidroelectrica back in 2012, the Romanian electricity generation company where Fondul has a 20% stake. “They should have been printing money, but they were hardly profitable. When we got the company reports it became clear that there were a few, say, long-term bilateral contracts,” says Konieczny, always diplomatic in his choice of words, “to sell electricity at prices fixed at half the market rates. So these private traders, they were making some €300 million each year, just for re-invoicing!” The Hidroelectrica managers didn’t want to intervene, and neither did the politicians, so Konieczny and his team saw no other choice but to alert the media: “It was in the headlines for three months. A lot of people started asking us how many bodyguards we had.”

Screen Shot 2015-09-25 at 14.15.03Hiring security never became necessary for the Fondul managers, and Konieczny says he didn’t actually fear for his safety during the Hidroelectrica ordeal. “But we’re not shy. We prefer to discuss privately with companies first, but when we can’t come to an agreement we’ll go the public, or take the legal route. A lot of people don’t like us! But our goal is to unlock value for the shareholders.”

Konieczny’s record proves this assertion, but there’s nothing thuggish about the fund manager sitting across the table from me. In fact, Konieczny comes across as the kind of agreeable person who’ll probably be able to sort things out during the talking stage – at least now that he’s demonstrated what will happen if he doesn’t get his way. But today he’s smiling while telling stories, his almost-perfect English underscored by a Polish accent. He’s wearing a very proper suit and tie, contrasted by a bold sports watch in orange and turquoise. The overall impression is one of a man who enjoys his work very much, maybe even having some fun – this is the frontier of investing! “Yes, Romania is part of the frontier market. But it’s unique to have such a big fund with focus on just one country. The fund is €3 billion – that’s more than 2% of Romania’s GDP.”

At first, the reputation of the Romanian market counted against Fondul as it sought a broader investment base: “The negative perception was: corruption, gypsies, stray dogs!” Konieczny can laugh about it now, as investor education has come a long way over the past five years. Not to mention how Romania has seen improvements in terms of anti-corruption efforts generally, and improved governance within Fondul’s holding companies. “Romania really is one of the fastest-growing economies now, and the potential is huge.” And the rest of the country isn’t a bad place to visit either: “Bucharest was partially destroyed during an earthquake in 1977, and then Ceaușescu continued with the destruction. But it’s a beautiful country. You have the mountains, you have the Dracula story.”

Speaking of Romania’s former life under communism, Fondul Proprietatea still has some ties to its unique past as a restitution fund. The fund is fully private now though, with around 20% of the shareholders being Romanian private individuals. While Konieczny has the same profit agenda as he would with any other fund, the heritage of the original restitution mandate continues to create a slightly different atmosphere. “When we won this mandate, we had no idea how bad the situation was in terms of corporate governance. There was a shock at first,” says Konieczny, who quickly realised this wasn’t one of those mandates where you could just call up brokers to buy and sell:

“We had to be very much a hands-on manager, practically an activist, in terms of engaging with these portfolio companies and the government,” says Konieczny. “The only way to really create value was to be very deeply involved in the portfolio companies. So we sit on boards, we take the legal route when needed, and we lobby for change in market regulation, such as the liberalisation of electricity and gas prices. We also push for more IPOs for companies from our portfolio – all that requires a hands-on approach. […] The aim is to move Romania from the frontier to the emerging market category. It’s been good progress, but it may still take another two-three years.”

Konieczny (44) grew up in Poland, and his family resides in Gdańsk, “on the seaside”. For him to live in Bucharest for work is tough on family life, he admits, although his wife and kids travel together a fair bit together, most recently to London, and before that, to Mexico. His son is in IT and his daughter plans to study fashion, says Konieczny, whose own university years were very different than those of his children, as they coincided with a unique time in Polish history:

“I went to university in 1988, during a time of change of power in Poland – communism was falling. I studied foreign trade and economics, and I remember, in the first semester, they taught Economy of Socialism. Then in the second semester, they taught Economy of Capitalism. That was the change that was happening – so quickly!” The Polish stock exchange was established during Konieczny’s second year at university. Keen to dive in, he started working for a Polish bank and got himself a broker licence. During his third year, he was hired by a bank in his hometown, and worked there for just three years before being hired by Mark Mobius at Franklin Templeton.

Having entered the world of business just at the moment when the Polish market was opening up meant Konieczny found himself in a fortunate position. “It was a huge change. Almost a revolution! Put simply, there were no one with experience in capital markets or market economy. So whatever you gained in one year or two years of studies, or whatever books you read, you really were ahead of the others.” Konieczny admits it wasn’t all plain sailing: “I was very young at the time. But so were the other people who worked for the different campaigns or brokerage houses. Everything was new to everyone, and everyone was trying to make money, but at the same time, we were learning how this industry works.”

Having had this experience in Poland now means Konieczny can bring a lot of experience to the table in Romania. “I was there for the first IPOs in Poland, and then later I was looking at other markets in the region, like Hungary, Czech Republic, Russia. So I’ve seen a lot!” But the challenging part about a country undergoing this kind of major change isn’t so much the regulation, says Konieczny: “The most difficult part, both in Poland and Romania, has been changing the mentality. That takes longer. You can decide to open a stock exchange very quickly. But then for people to really understand how it works, and then to change the way they behave, that takes much longer.”

The sheer size of Fondul Proprietatea means that any change the Templeton team creates in terms of corporate governance often has repercussion for Romania as a whole. But Konieczny doesn’t think about his work in terms of having a change mandate: “I don’t look at it from that perspective. I consider the feedback we get, but to change the country is not my intention. It’s just sometimes a consequence of what we’re doing! We want to run the fund, make money for the shareholders and ourselves, and at the same time be proud and happy with what we do.”

Konieczny certainly seems happy with what he does, at least as long as there’s time left over to play some football at weekends. Asked about his motivations, he recalls an interview with a Polish businessman who was asked the same question: “He said, ‘Every real man should leave home in the morning!’” Konieczny laughs. “I don’t necessarily have to leave home every day, but I need to do something in life. And of course, earn a living at the same time! So this is not bad.”

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Aref Karim: The systematic approach

Hedge Magazine, April 2015. Original article (p48-50).

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Aref Karim, CEO, CIO and founder of Quality Capital Management
For a manager of a quantitative hedge fund, Aref Karim has a distinctly personal approach. “I generally believe that investing is using a combination of the left and right side of the brain. No matter how systematic you are – and we are running everything systematically – the idea generation part of it, that’s all art.”

To be able to blend together these two sides is a major part of the appeal for Karim, who founded Quality Capital Management (QCM) in 1995 and remains in charge of the investment strategy. “This industry is full of great, innovative people who’re all trying to do the same thing: enrich people’s lives, and indirectly, create wealth,” he says, highlighting enrichment before wealth not for the last time during our chat. On that note, Karim could have moved to the US after his 13 years with the Abu Dhabi Investment Authority, but chose London for his family: “In 1995 my three children were quite young, so schooling was important. One of the better independent schools in a relatively safe, green area happened to be in Surrey.” Of course, London is not a bad place to run a business either: “The other reason was from a time zone perspective: London is very well positioned for the business we run.”

Return to form
London is just up the rail tracks from QCM, which is headquartered near Karim’s home in Weybridge. It’s a freezing winter day in the picturesque Surrey town, as we’re sitting in QCM’s offices, sharply decorated in white and red. Karim himself is sharper, in cufflinks, black and white tie, and a handkerchief in the suit pocket. He’s calm and business-minded when talking shop, as 2015 represents “a return to opportunity” for QCM. The firm’s investment strategy is driven by a wholly integrated model that’s mainly long volatility:

“I feel that QCM today is a leaner, stronger firm. We have revamped all our products. A considerable amount of research has gone into it,” says Karim, deliberate with his words. “Yes, we’ve had a blip. But there’s no reason why we cannot come back with more vigour, with an enhanced and streamlined QCM, to move forward in order to serve the investor society in a more meaningful manner.”

This has already started to happen, as the quantitative hedge fund has seen a return to form over the past year. Assets under management now stand at just over US$60 million, after a gain of nearly 13% in 2014. This is still a way from the 2012 peak of nearly US$1 billion though – that’s the aforementioned blip – as the QCM model struggled to maintain its position during the sluggish low-volatility period: “Particularly given our style of trading, we tend to like directional moves, divergences and flows of capital across regions, because it create waves of opportunity,” says Karim. “And so this quiet period, when interest rates were being targeted to virtually zero, it took away those opportunities.” While the post-crisis years were great for QCM’s investment style, the problem came later, when “uncertain conditions” turned to market inertia:

“To navigate through that kind of environment is trickier. We didn’t have the tools to position ourselves correctly. Now we have done an extensive amount of research to better deal with these kind of environments.” The upgrades started in 2013 and finished in 2014: “I wish we’d done it earlier,” says Karim. “We delayed it because we were waiting for the right timing. 2014 was still a good year for us, but we could probably have done a lot better.”

QCM’s upgrades have also meant adjusting the investment model: “We don’t like to interfere in the actions taken by the models we have developed. We’ve tested these ideas over years of data. […] But because we’d had a setback we were being overly cautious, so we held back on implementing changes.” This was in part because Karim ultimately believes the investment model can read a situation better, working without emotion or bias as it simply analyses the market behaviour. “Can the systems do it better? The answer is, in my mind: yes it can.”

Screen Shot 2015-04-08 at 16.16.14The appeal of futures
QCM offers daily liquidity to investors, an unusual feature for a hedge fund. But Karim’s decision to invest solely in exchange-traded futures came before the downturn put the spotlight on liquidity: ”We started with futures way back, as that was an area of expertise for me from the Abu Dhabi Investment Authority (ADIA). For me there’s no difference in the nature of the exposure: it’s a derivative, there’s an underlying asset.” Another benefit to futures is the nimbleness, says Karim: “We can margin things, so your $100 [exposure] can be funded by only a part. That opens up an avenue to use this strategy as what we would call portable alpha.”

But possibly the most appealing element of managed futures is the “extremely low” correlation to the behaviour of other assets. “That’s the beauty of it: in an equity bull market, chances are we’ll also do well by being likely long on equities and other assets in the portfolios. Where things change completely is in bear markets, as we saw in 2008 when the markets crashed – that’s when these strategies really come into their element by providing a huge risk offset. They do it by going short on equities and long on safe haven assets.”

The sovereign experience
Karim got his start in accountancy, an experience which has followed him into alternative investments: “Accountants are trained to look at micro and macro pictures, which is a good habit.” QCM’s long term investment outlook is a heritage from Karim’s 13 years at ADIA: “Abu Dhabi provided a unique experience. The fund manages the excess oil revenue of the country – it’s huge! And it’s always been fairly low-key. […] I was very privileged to be in a position where they did not have, at the time I joined, an alternative investment portfolio. To be involved in the project at its embryonic stage was a greatly interesting experience for me.” Karim took the hedge fund portfolio from idea to execution, balancing the extreme long-term mandate with proving the merits of alternative assets for a sovereign wealth fund: “This was a huge experience, a fantastic experience.”

QCM represents a scaling down of this same long-termism to “a miniscule level” compared to ADIA: “But it’s fun. We brainstorm investment ideas with the researchers, go through the challenges of running the business, deal with issues and downturns, and then enjoy the upticks.” That Karim cares deeply about his company is obvious from the way he talks, but in any case he’ll say it outright: “I love what we do. If somebody says: ‘What is the purpose? Why does QCM exist? Why are you running the business still?’ It’s because I’m very passionate about it, and more importantly it’s because there’s almost a philosophical and societal purpose behind it.” The capital already invested into the business is one element, but there’s also the firm’s experience: “We’ve navigated good times and the periodic storms. We’ve learned a lot, and there’s no reason why we cannot pass that on.”

Screen Shot 2015-04-08 at 16.16.16The greatest support
This outlook hasn’t changed since the company started 20 years ago, says Karim, who’s now 62: “I could have retired and walked away, but that doesn’t complete my own mission. I get a great amount of satisfaction from knowing I can share this pool of capital with investors.”

The CEO has a wide range of hobbies: literature, poetry, art, culture, travel: “Last year we were in Namibia, which I was fascinated by. We flew over the largest sand dunes in the world, over Skeleton Coast, heading right up to the northern tip of the country. We met this tribe called the Himba, a nomadic tribe who are dwindling, sadly. It was quite remarkable, seeing how content they were with simplicity.” He talks about going to Cambodia with his daughter, where the French have abandoned train tracks near the Thai border: “The kids in the Battambang villages create these roofless carriages for the tracks, where you can sit on a bamboo mat and go through the countryside. They call it the Bamboo Train. Fascinating, absolutely.”

Life in London is pretty good too: “I really love the city: the culture, the diversity, it’s just phenomenal.” And the schools, of course – Karim came to London twice for the sake of education: the first time in to finish university after the independence war broke out in what is now Bangladesh, and the second time for his children: “My eldest outgrew the grade school in Abu Dhabi, and being a single parent, I didn’t want to send her to boarding school. I didn’t like the idea. I spend a lot of time with my children. They are some of my best friends.”

It would seem Karim’s three children appreciate that sentiment, as they all live close by and two of them, Raami and Faaria, now work at QCM. Faaria Kenny, the firm’s director of Business Development & Marketing, admits that working with family might seem a nightmare for some: “But for me, it’s business as usual. The added benefit is having a truly inspirational man as my line manager, incentivising me to work harder for the greater good of the business, clients and shareholders, and for trying to make a difference in the lives of others.” Concludes Faaria: “The greatest lesson I take away is that family offers the greatest support.”

Dixon Boardman: For the love of the game

Hedge Magazine, 2014. Original article (p43-46).

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For the love of the game:
Dixon Boardman, founder and CEO of Optima Fund Management

London mornings are a reprieve for Dixon Boardman’s busy schedule, providing a few hours of unusual calm. “I love being in Europe because the mornings are free, as everyone’s asleep in America So I can get things done in the morning which I wouldn’t normally be able to do.“

One of these things is sitting down with this journalist, although Boardman would never say this outright; the New Yorker is much too polite. Boardman’s reputation as a hedge industry leader precedes him: the founder and CEO of Optima Fund Management has been in the thick of it for 26 years, he knows everybody, and several of those people describe him as a “guru” without irony. What the research doesn’t reveal, however, is how this industry wizard a perfect gentleman with a knack for making you feel at ease, as he punctuates his stories with laughter.

Our luxurious surroundings are those of 5 Hertford Street, the private members club in Mayfair. You gain entry through an unmarked door, rendering the place unexpectedly difficult to find, considering the solid hint in the name. Of course, this is an exclusive place for a certain elite, and simplicity is not a requirement. Privacy, however, most certainly is, so the photographer must wait outside. The hedge fund manager is in a corner room in the labyrinthine building, where paintings and knick-knack cover every wall and shelf, the result being kooky yet curiously elegant. Boardman is equally stylish, in a charcoal suit with a magenta shirt and maroon tie, and tortoise shell glasses dangling from the hand. He tells his stories calmly with a smile, like a man with plenty to say and nothing to prove.

A good reputation
Boardman normally comes to London at least twice a year, visiting with clients and sometimes managers too: “I try and combine business with pleasure. I love it over here.” This feeling goes all the way back to the American’s school days at Stowe, which may be partially responsible for the crisp mid-Atlantic accent with only the rarest Americanism slipping in.

Founded in 1988, Optima Fund Management now has $4.4 billion in assets under management. The company advises on multi-manager portfolio as well as runs its own single manager hedge fund programme. Institutional investors now make up 70% of the client base. Boardman is known for playing a long game: “We’re risk hypochondriacs. We are quality-obsessed, we know our way around the industry so well. I think that’s helped us very, very much. We have a good reputation.”

What this also means is that Optima can get access to funds that may be closed to other investors. This is in part because this good reputation is not just among clients, who enjoy the returns, but among the managers as well. “We’re beginning to see managers who worked in some of the old funds, start their own new funds. Having been doing it for so long, when there’s someone good – we hear about it. It’s awfully nice when [Tiger Management founder] Julian Robertson picks up the phone and says to me in a Southern drawl: ‘Dixon, I got this really good new guy you got to come and meet!’ That’s good, that’s terrific.”

Asked how he picks managers to invest with, Boardman deems the question “unanswerable”, but he will try: “Sometimes you just know, when it’s such raw talent and such incredible analytical skill. Having been doing this so long, maybe one has an edge in being able to see it? Sometimes one watches them grow in their old firm before they have started their own firm, so that’s a huge advantage.” And recommendations from the likes of Robertson, or Chase Coleman of Tiger Global Management, will of course be an indicator that a new manager is worth considering. “I have befriended many of the managers we have money with. I’ve got to know them well and see them socially, and I know their children. It’s old-fashioned, but I think to know someone really, really well, to know what’s going on in their lives, means you know when they’re focused. […] But let me tell you, we don’t always get it right!” Boardman laughs. “But we get it right more often than we get it wrong.”

The best ideas
Still, Boardman’s experience as one of the very first hedge fund company founders means he has a keener eye than most. “When we started in 1988, it wasn’t even a cottage industry. There were 600 hedge funds and only 100 of them had more than $100 million. Today, in some regards, you could say it’s become the tail wagging the dog, investment-wise. The industry has got some very, very, very, very smart people.”

A commitment to innovation is arguably a key factor in Optima’s success over the years, as the company has, despite its resistance to risk, presented fresh investment ideas at times when few others were doing anything like it. This includes the Japan fund launched with Platinum Asset Management founder Kerr Neilson, and a healthcare fund with David Chan of Jennison Associates, “a super brilliant guy”. The award-winning ‘Best Ideas’ fund gave Boardman’s top managers the chance to execute their number one niche convictions. Now, Optima has established a fund of American farmland, diversified across geographies and types of crop: “Our plan is to actually take it public. People will be able to invest in farmland instead of having that as a different asset class, and not having the disadvantage of it being illiquid. I think that’s an innovative idea.”

Asked if his experience has left him immune to being surprised, Boardman seems to think it has, but he is quick to point to the position the hedge industry is currently in: “The awful blow to the whole investment industry was the Madoff scandal – I would say we’re still not fully recovered from that.” He thinks about it for a moment. After the Madoff scandal people would ask him how the business was doing, and he’d respond by telling them the funds’ gains. “Then I thought to myself: ‘They probably don’t believe me! They probably think I made the number up!’” He cracks up. “It changed the credibility of the industry. Not to be boastful, but if something’s too good to be true, it usually is. We have a whole set of rules before we invest, and it’s really not rocket science. One rule is that we insist that whatever hedge fund we’re investing with uses one of the top accountants to do their audit.” Madoff’s auditors were in a suburban strip mall. “So yes, we knew him. Yes, we looked at it. Yes, we were impressed with the consistency of the claimed returns. Did we invest? Of course not.”

The best managers
In Europe, one of the consequences for the hedge fund industry in the aftermath of 2008 has been an increased focus on transparency and liquidity. While expanded transparency is “universally appealing” and is happening across the board, says Boardman, increased liquidity is an effect felt more in Europe than in America. Boardman points to how the first hedge fund, founded by AW Jones in 1949, only allowed investors to get in and out once a year, in part to prevent them from acting out of greed and fear. “The Europeans have never really liked that, but the American institutions have accepted it pretty well. […] If anything, I would say the trend towards liquidity [in European funds] has calmed down a bit, and if anything it might be changing back to less liquidity.” Boardman thinks for a moment. “The best managers in the world, by and large with very few exceptions, don’t offer instant liquidity. I’d rather be with the best manager.”

While the office is under strict instruction to absolutely interrupt if they ever need him, Boardman does take time away from work on occasion. “I visit my wife’s family in the south of Spain every summer. This year, a friend has a yacht which we’re going to be on, cruising around Majorca. That will be lovely, I’m looking forward to that.” He pauses. “But two weeks is max before I get itchy! I love what I do.”

Part of this passion for the work comes from the thrill of being surrounded by “some of the smartest investment brains in the world”. Boardman is also active in charity, having donated a dormitory to Stowe, his old school. Optima also has a philanthropic foundation that benefits from part of the fees on one of its funds. “It’s very, very nice to give back. But the real honest answer, I just love my work. Love it.”

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The wealth management sector and the pension rule change payday

Square Mile Magazine, 2014. Original article (p84-85).

SM92 wm pensionsThe wealth management sector and the pension rule change payday
Who will look after the baby boomers’ pensions? Now that the Chancellor has rewritten the book on retirement funding, wealth managers are eyeing a rare opportunity to take a sizable chunk of this market.

£12 billion was spent on annuities last year, as regulation meant the guaranteed income scheme was mandatory for many pensioners. As this will no longer be the case, insurers are licking their wounds as the annuity market is expected to fall by two-thirds over the next 18 months, according to Barclays Equity Research, or possibly even become extinct altogether.

“This is a huge change, and the effects on the wealth management industry will be very positive,” says Tom Hawkins, Head of UK Proposition Marketing at Old Mutual Wealth. “Now that the barriers have been removed, there will be a significant rise in the demand for individual advice.”

The effect won’t be immediate for the wealth management sector, as the pension changes won’t come into effect until next April. But reports from leading providers have suggested annuity sales have halved since the news, as people are delaying purchases to review their options in light of the new situation. Bank of America Merrill Lynch estimates the opportunity could be worth £6 billion for the wealth management industry, and this is at the conservative end of the spectrum.

As wealth managers are exploring how to best respond to this opportunity, Hawkins believes we can expect to see innovation in both products and packaging, as providers will be looking at their offerings with fresh eyes. “People may take an added interest in their pensions now that there’s this added motivation [of more choice]. There’s an opportunity to make pensions simple and engaging,” says Hawkins, stressing there will be a strong need to provide proper guidance.

Because the freedom to build our own pensions also comes with hefty dose of risk. “We will see more awareness around how to structure income in retirement,” says Ian Price, Divisional Director of Pensions at St. James’s Place Wealth Management. “But annuities will still remain relevant for many people, because the one thing no one knows is how long they are going to live.” While critics point to annuities becoming increasingly more expensive, they do shift the risk of longevity and investment value fluctuations onto the provider – a feature which will undeniably remain attractive for many pensioners.

Describing the new pension rules as a big surprise to the industry, Price is also optimistic that the new rules will lead to more awareness around retirement funding: “This could increase people’s faith in pensions, and encourage them to think more about their options.” The fact that people are less likely to go straight from full-time work to retirement anymore is also changing the financial needs of pensioners:

“I think building portfolios of assets to live off will become more common,” says Price, adding that this doesn’t have to be just shares and funds, but also ISAs and elements like buy-to-let properties. “People will have more than one income stream to live off in retirement.”

This has already started to happen: only 27% of professionals plan to rely on just on a pension for retirement income, according to a survey by Wesleyan Assurance Society released in May. While two-thirds of respondents admitted to be in the dark about how much their current pension arrangements are worth, over half said they plan to use property to generate additional funds.

Asked whether the new retirement flexibilities will be primarily of benefit to wealthy pensioners, Hawkins said the changes could be positive for anyone preparing to retire because it will encourage more people to seek financial advice. “The more affluent investors will often have financial advisers already, so they will have been aware of their options regardless. The opportunity is now for those with the average pension pot, which is £40,000, to become more aware of the available choices.”

While welcoming the relaxation of rules guarding the extraction of funds from pensions, David Stoll, Board Partner at Partners Wealth Management, is skeptical of the prospect that this represents a major change for industry: “In practice there will probably be little change in behaviour at the upper end of the market, where larger pension portfolios are already managed pre and post retirement without having the requirement to purchase an annuity, as has been the case for a number of years.”

Stoll also points to other factors, particularly in regards to tax, which will effectively restrict choice: “The new regime will not necessarily provide as much flexibility for all as heralded, and individual bespoke advice will remain as important as ever”.

Making sure people properly understand the risks, especially if they choose to take their money as a cash lump sum, will remain a key task for the wealth management industry. Concludes Hawkins: “The wealth management firms who will be successful under the new rules will be those who provide quality advice and flexible options.”


The technology opportunity

Square Mile Magazine, 2014. Original article (p86).

Screen Shot 2014-07-13 at 14.13.38The technology opportunity for wealth managers
We like a good app: it’s such a quick and easy way to access information at any hour. These are features not too often associated with traditional wealth management, but this is changing rapidly as the industry is embracing technology.

Keen to woo the next generation of customers, wealth management companies are taking to apps, Twitter, Facebook and LinkedIn with gusto – some and even use photo sharing site Flickr. As people are getting accustomed to quick and intuitive technology in other areas of life, they see no reason why their wealth manager should require a phone call when an app could do the job, or even an office visit if a video link would do the trick.

“We’re moving away from a time when investment firms would act as gatekeepers to information. Instead we are sharing the information with our customers, making it easier for them to make their own investment decisions,” says Danny Cox, Head of Financial Planning at Hargreaves Lansdown. The company’s apps for smartphones and tablets let users manage their investments at any time of the day or night, and keep up with live prices and new research. On Twitter, @HLInvest handles customer queries in addition to delivering news.

“What clients want is exceptional service. They want technology that enables this great service,” says Cox when asked what features customers are looking for. The key to making technology work for wealth management groups, and not just be “nice to have”, is to make it an intuitive and interactive tool for communication. Today, over half of Hargreaves Lansdown’s new business comes through digital channels, with around a quarter of website visits coming from smartphones.

Wealth managers who meet the demand for easy access may find themselves not just more attractive to tech-savvy new clients, but also receiving more business from existing clients. If wealth managers of the past used to sit down with clients once or twice a year, granting better access today means more informed clients reaching out for more frequent consultations and trades.

“All wealth managers have seen increasing demand from clients for greater visibility on their investments, which is correct. But technology has created an interesting situation, as relatively small retail investors now have access to state-of-the-art investment reporting systems, creating pressure further up the wealth scale for wealth managers,” says Paul Fletcher, Head of Marketing at London & Capital. And this may not always be ideal: “Greater visibility could lead to more indiscriminate wealth manager selection by clients, which is at odds to most of the ‘buy and hold’ investment strategies larger clients tend to adopt.“

Still, 24-hour access and the accompanying transparency is rapidly becoming the norm, and the winners will be the wealth managers who embrace the new tools, says Amit Pau, Director at technology-focused investment and advisory group Ariadne Capital:

“[Wealth management] is an industry steeped in tradition, and the future winners will be those that embrace digital to address the rapid needs of evolving customer needs. Digital, as an integral part of the wealth management, will be a strategic differentiator by driving innovation, improving efficiency, enhancing communication, and prioritised customer convenience.”

This conclusion is supported by research from asset managers SEI, NPG, and Scorpio Partnership. Released this spring, the study found that 92% of wealthy investors are making extensive use of digital tools ahead of transactions. But when large sums are at stake, most clients still view the manager as the lynchpin:

“The research emphasises the importance of a personal delivery in the wealth management transaction,” said Marc Stevens, CEO of NPG Wealth Management. “But it also highlights that for customers to be truly satisfied, their human contact at a firm must be supported by digital capabilities.” Almost 70% of wealth management clients under 40 look at their accounts at least once a month, the research found, while nearly 45% of those over 60 do the same.

Transparency is the guiding principle at Nutmeg, the UK’s first online-only investment company. Granting customers complete access to their accounts is only one feature of this, another being the fact that the company publishes its net performance figures. Nutmeg’s technology-driven business model makes it a different animal than its sales-driven competitors, a fact which CEO and co-founder Nick Hungerford attributes as an enabler of the company’s competitive pricing.

Nutmeg’s do-it-yourself approach, and arguably radical openness, means the company is frequently hailed as an innovator. But Hungerford resists the notion that dedication to communication and convenience should be considered ground-breaking: “All companies in the wealth management sector should be operating in this way. If they were, it would drive healthy competition, transparency of service and, most importantly, better customer experience.”


Simon Ruddick: The village mentality

Hedge Magazine, 2014. Original article (p36-38).

Screen Shot 2014-05-31 at 13.28.11The choreographer
Interview with Simon Ruddick, co-founder and Managing Director of Albourne Partners

There are bales of hay inside the offices of Albourne Partners, providing a surprisingly folksy feel for a global hedge fund advisory firm. The village environment is a heritage from the company’s roots in Albourne, Sussex, where it all started 20 years ago. But in spite of the decorative apples and cows it’s clear we are in Westminster now, and Simon Ruddick has his eye on the world. In the most literal sense, this is: Ruddick is one of the key architects behind the Opera initiative, a global effort to standardise how hedge funds monitor risk.

“I think that’s possibly the most fun part of my job,” says Ruddick, who has frequent meetings with regulators about the Open Protocol Enabling Risk Aggregation, Opera for short. The co-founder and Managing Director comes across as surprisingly casual despite his striped tie and grey trousers, of the kind that seem likely to have a matching jacket left on the back of a chair somewhere. He is personable and cheerful, as his speech turns into a rapid fire when on the topic of his enthusiasms. Because that’s what work is for Ruddick: an enthusiasm. And why yes, he certainly wants Opera to become the golden standard for the global hedge fund industry.

Opera: A date with destiny

“I think it’s not only possible, I am bold enough to think it’s probable: the Open Protocol has a potential to be a unifying language of risk across all forms of regulatory reporting. That would be a huge win-win-win,” says Ruddick. The three winners here are the investors, the fund managers and the regulators – all standing to benefit from a system for streamlining risk information: “You need a word beyond irony if you’re looking for systemic risk, but you don’t ask questions in a systematic way. Regulators have absolutely awoken to this need.”

APRA, the Australian pensions regulator, explicitly references Opera in its proposed regulation. “That was a real breakthrough for us,” says Ruddick, explaining how even though the Open Protocol has no commercial agenda, it’s still unusual for regulators to reference something with roots in the private sector. “But the regulators have a date with destiny. They’re under huge pressure to show they have cracked the challenge of market risk reporting.”

The Opera refuseniks are few and far between among hedge fund managers, with the main split occurring between those eager to adopt Opera, and what Ruddick calls the ‘slow yes’ group. “There’s a marked difference between the enthusiasts and the ‘slow yes’ group,” says Ruddick, who was fascinated to try and find the defining factor whether a company would embrace risk reporting or not. “Was it a question of how big they were? How long ago they were set up? How much in assets? Geographical location? Strategy? But none of those were simple explanatory factors of whether they were early or reluctant adopters. We realised the bifurcation is its own definition: old school and new school.”

New school funds were not only more enthusiastic about Opera, Ruddick found, but they were also lighter in protocol and more likely to produce administrator transparency reports. The punchline: “And they’re more likely to have institutional money!” So if Ruddick’s assessment is correct, the willingness to accept risk protocols could actually be an indicator for how likely a hedge fund will be to attract money from institutional investors. “I think it’s quite a schism, and what’s at stake is secure capital from institutional investors. … What I hope the ‘slow yes’ group will bear in mind is that the institutions will always know who was an enthusiastic adopter, and who was not.”

In the Village: A life of constancy

One place where these sorts of whispers may be shared is the Albourne Village; not the real one in Sussex, but Albourne Partners’ online hedge fund community which now boasts over 80,000 active residents. Asked why the Village is so popular, Ruddick laughs: “It’s free!” It’s interesting to note how the Village’s 2001 launch means it pre-dates the social networks, which have certainly found ways to commercialise spaces where people get together to discuss the things they have in common.

“The reason we launched the Village in first place was that we wanted to collect information that was in the public domain. If we became a portal, people would bring information to us, says Ruddick. “But we haven’t invested hugely in the commercial aspect of it … maybe in the future.” But in that case, any profits from the Village would go to charity: “We will never monetise it for our own gain, because we are very straight: we will make money in just one way, which is providing research advice to investors on alternatives.”

As the topic moves to the strategy of Albourne Partners, Ruddick’s chattiness is replaced by a clear, determined voice. Virtual village pubs aside, Albourne provides advice to over 270 hedge funds, private equity and real asset clients, whose combined investments top $350 billion. And proving that transparency isn’t just for for their clients, the cost of Albourne’s service is actually right there on the website, displayed for anyone to see. “We’re very passionate about this: transparency in all things. We also get a little excited about the simplicity of our model in that it’s a fixed price in dollars, not basis points or percentage of performance.” This is where it goes above and beyond, because Albourne has actually never increased its prices. Not even by inflation? “No! In fact, the amount we deliver against the price is constantly increasing, because as the firm grows we hire more analysts who write more research, and the clients get the benefit from our increased scale.”

His colleagues tease him about this, says Ruddick, but he can’t help it: “I’m a huge fan of what we call constancy as opposed to consistency. Consistency is when two things are different but you try to make them similar. Constancy is when you actually try and keep things the same.” The pricing is one example of this, and a low churn of people is another: “We hope this is a comfort to clients and prospects, that they know us as people and they know our price. The best of all is worlds is when they like our service and want to make it part of their long term plans.”

Make Money Not War

As Albourne Partners celebrates its 20th year, Ruddick has maintained the village roots as an inspiration for more than just the decoration: “We’re a bit of hippie commune!” He says this jokingly after telling me about Hedge Stock, a company event a few years back where The Who provided the entertainment. The motto was ‘Make Money Not War’. On a more serious note, Ruddick nods to the company’s “village creed” not just in terms of the transparent pricing, but also the clear rules on how profit is distributed: 50% goes to base cost, 25% to bonuses, 25% to the firm.

The company also equity available to partners every year, and makes a point of avoiding outside stakeholders or debt. Holding around 40%, Ruddick remains the largest shareholder: “I feel intensely wedded to what I describe as the fierce independence of Albourne. I’d much rather my equity pass on to my colleagues; I absolutely prefer to earn less and keep the company fully independent, because I think that in the long term, and in the super-long term, that’s the better business proposition.” The rapid fire speech has gone completely now, as Ruddick stresses that there will be no outside partners: “We feel comfortable, possibly to the point of smugness, with our independence.”

Ruddick’s love for his company is clear to see. He explains at length and in detail how he has gone to great trouble to establish Albourne as a well-oiled machine, one that’s a good place to work while also providing great service to clients. But then there’s that self-confessed “obsession” with industry initiatives again: “I can’t describe completely why it matters so much to me, I just know it does!” He laughs. “I’d love to feel I can do something useful, but when you’ve done Politics, Philosophy and Economics you can’t save a life. Any good I can do can only be indirectly, so if I can make the industry a better place, that’s my personal motivation.”

Does that mean he may one day go and join the regulatory machine? Ruddick answers carefully: “I feel hugely confident that if I step away from Albourne, I know Albourne won’t miss a beat. That’s by design.” But is that the plan? “I’d be really surprised if any regulator wanted someone as opinionated as me!” He laughs. And then: “We’re lucky to have a business model that brings us to contact with a wide range of investors and funds. … There’s a lot of things we can’t do, but the things we can do is try and nudge along various industry initiatives.”

He pauses. “I’m never quite sure, and my wife says the same, whether I work for Albourne or I support Albourne the same way you support a soccer team. … Even if I was less active day to day, I couldn’t detach myself from that emotional investment.” The way he says this makes me think he’s not trying to avoid the question – maybe he genuinely doesn’t know if he can bear to leave Albourne. “I absolutely love it here. I can’t think why would I ever retire when I am having this much fun.”

Not that Ruddick (53) doesn’t have a life outside of work, far from it. Ballroom latin dancing is where it’s at, as Ruddick and his wife both dance socially and take weekly lessons. And sometimes they will put on headphones and dance in railway stations and shopping centres, to the dread of their three children. “We’re mad keen on dancing. And some of the most fun in life is embarrassing your children!” Ruddick laughs. He tells the story of how his wife always loved dancing and he was terrified of it, but ended up learning for her sake and now he may be the one who’s more hooked. Ballroom is the main addiction but the couple also dabbles in salsa, tango and cha-cha, and recently there’s even been a few lessons in Angolan Kizomba. “Later in life you lose your fear of looking ridiculous. Now I don’t have enough fear of looking ridiculous!”


Rory Powe: Playing the long game

Hedge Magazine, April 2014. Original article, p30-34.

poweRory Powe, founder and portfolio manager at Powe Capital Management
“I’m a bruised and battered investor. But life’s all about learning lessons, so I think it’s made me a better investor.” By the time Rory Powe says this I’m halfway out the door, meaning we are off the record. Nice guy that he is, Powe allows the quote anyway, even though he knows it could be taken the wrong way. Because Powe doesn’t want to dwell on the past, is the thing, but to look forward. But even so, Powe is the first to admit that the lessons of the past have played a significant part in shaping the investor he is today.

Nowadays, what Rory Powe is doing is minding his own business. There isn’t much trumpeting from Powe Capital Management (PCM), the company Powe founded after leaving Invesco in 2001. That was the scene of Powe’s first bruising, when his lauded Invesco Perpetual European Growth fund suffered badly in the dot-com bubble. The second battering came in 2008, when the liquidity squeeze forced a roll-up of PCM’s Modulus fund. Since then, Powe has been running the PCM Europe, which is up 80% since inception four years ago. This is ahead of the market, but Powe is clear: “We have no claim to say we are successful. We can only say that in 20 years.”

Because what Powe wants most of all these days is to “observe the beauty of compounding”. We’re in PCM’s office on the second floor of a Kensington townhouse, where freshly painted walls are decorated with art Powe has brought in from home. It’s just an eclectic mix of things he happens to like, Powe is quick to point out, nothing fancy. Dressed in a checked shirt with formal cufflinks but two buttons undone, there is a friendly sincerity about Powe. He is thoughtful as he describes his fund, its strategy, and its holdings, clearly passionate about the work. There’s a weight to the things he says, hinting at the kind of confidence that comes only from hard-learned experience.

Steely concentration
“We are very proud of what we have built here. PCM is now in its fifth year and we are focused on building on the track record. … I look for businesses that are scaleable and ambitious in what can be achieved, who do it in a repeatable and steady way, year in and year out. Inevitably we are going to have bad months, and when that happens we take it on the chin, learn from it and move forward,” says Powe, who is personally invested in the €20 million fund. “We are focused on absolute return, meaning we are not trying to beat an index. If you don’t try and beat the index the irony is you probably will. If you try too hard to avoid volatility, the irony is you will probably create volatility.”

This attitude stems in part from Powe having just 19 positions, which he thinks is about right, even as the portfolio is kept fresh by introducing new ideas each year. As one holding, Ryanair, has been a source of recent volatility, Powe explains how he has stayed the course because he has done the research and believes in the plan. This is the case for all of Powe’s holdings: he does the work himself and knows how the news of the day will affect each company. “My typical day involves researching companies. If i spend a whole day just looking at one company, that’s a great use of my time.”

Half the fund is invested in companies which Powe considers to have “formidable” market positions, pricing power, and competitive powers which will be sustainable for years to come. 30% of the fund is invested in companies in pole position to take advantage of a key trend. “These are growing quicker so they are riskier. One of them is Asos: they are in the vanguard of the shift to online from bricks and mortar, but have done it for long enough and well enough to be in a very strong position vis a vis their competitors.” Powe, never one to leave a claim unbacked, proceeds to list why this is, from the margin projections and all the way down to the free returns policy.

Has he always approached fund management in this careful, meticulous way, I ask, or does this stem from experience? Powe thinks for a moment. “I’ve always been analytical and detailed in my approach, but lessons have been learned. One is to have fewer positions in order to keep on top of them. I don’t want to run a big fund again.” Another lesson is to do the work yourself. “However good the analysts you work with may be, you are still a bottleneck. Here, I am the analyst,” says Powe, whose company now has only three people. “Some portfolio managers are very good at running teams of analysts, but I don’t think I am. I’m much better doing my own work.”

Is that realisation part of the reason he left Invesco, I ask; Powe departed shortly after his charge, the £1.8 billion European Growth flagship fund, lost half its value in the dot-com crash. In fairness, Powe can look back at a 379% return over the decade he ran the fund, even including the crash. “Yes, I left because I wanted to have my own business, and be completely focused on fund management and run a smaller fund,” he says. But Powe resents any implication he abandoned Invesco Europe at a weak point: “It was not done in a hurry. I restructured the fund after the sell-off and left it in very good shape. It was very blue chip oriented, it was away from tech, it had a good cash position. What they did with it thereon was up to them, but I had taken action to deal with poor performance.”

Now, Powe has a rule of avoiding leverage when investing in smaller companies. PCM Europe keeps 20% in cash, and “is liquid enough to be converted to cash within ten days”. This lesson presumably stems from the Modulus Europe fund, which Powe had to liquidate just as the recession started. “The problem I had in 2008 was that the majority of my investors wanted their money back around the same time. That was quite a shock, but it was a reflection of what was going on, which was a flight to cash,” says Powe. “It was very clear to investors we were taking a liquidity risk, as we had a disclosed stake in a number of companies.” The decision was made to liquidate the fund: “Albeit stressful for our investors and for us at the time, it was the right decision.” But, adds Powe, let the record show: the Modulus fund provided a 57% return to over its lifetime.

Ploughing on
All these lessons are now being funnelled into PMC Europe, which is trotting along quietly but solidly. It seems Powe prefers it this way. Would he rather they’d never called him a star manager, I ask. “Did they actually call me a star? Such language usually ends in tears!” Powe laughs. Then: “Well, Invesco Europe was consistently among the leaders of its peer group.” But, I press, was that a good or a bad thing? “A bad thing probably. It ended up with that fund being very big. People either overestimate you or they underestimate you. It’s better to be underestimated.” So is that what’s happening now then? Powe answers carefully: “Yes because we have kept a very low profile. We are just doing what we do in a steady way. I think we have managed expectations well with our investors, and we just want to be boringly steady.”

Powe, now 50, comes across as someone who genuinely enjoys what he does, to the point he’d certainly recommend fund management as a career for his children: “Absolutely! I think it’s a brilliant industry. It’s a very privileged occupation, because you have a front-row seat on what is going on. You are always learning about new things: yesterday it was low-cost carriers, tomorrow it may be research antibodies, then it may be online luxury. It’s fascinating and carries significant responsibility.”

Living with his wife and their two teenagers in Cambridge, each workday is sandwiched by a train ride: “I’m one of these people who enjoys commuting as it’s a great opportunity to read and think. It’s a very valuable time for me.” Powe sits on the boards of a few charities, but generally, most of his free time goes to his family. “I want to make the most of the time with the children before they fly the nest. We travel a lot as a family, we recently went to San Francisco and down the coast. It’s good to open our eyes to the world.”

Powe enjoys following sport: “My son’s very much into his rugby. I’m fascinated by what makes teams win and the ingredients to success, and sports is a very good example of being competitive and looking to win, but also how to come back when you lose.” Powe pauses for a moment. “Invesco Europe and Modulus had very strong track records, but reputationally it was damaging. I’m determined to learn from that experience and apply the lessons learned to run PCM Europe a lot longer.” Having run Invesco Europe for 10 years and Modulus for six; Powe would like to run PMC Europe for at least another 20, health permitting. “I’m fascinated by how sports people, and business people, deal with setbacks. If you see a team that’s successful, can they sustain it? Can they repeat it? A steadfastness of purpose. Just ploughing on.”


A real alternative

In Shares Magazine, November 2013. Original article.

Screen Shot 2014-03-01 at 16.03.08A real alternative
Wine, stamps, gold bars and other real assets have historically kept their value well amidst economic turbulence and inflation. And they have never been easier for private investors to trade.

At first glance, it seems a Picasso would have been a better investment than the FTSE100 over the past decade. Art as an asset class grew by 183%, compared to a 55% rise in the market in the ten years to July 2013, according to the Knight Frank Luxury Investment Index. In fact, most so-called real assets such as wine, stamps, vintage cars, jewellery and physical gold, all beat the market in this period, providing a decent hedge against economic instability and inflation.

Once the purview of specialists only, alternative assets are becoming increasingly accessible to retail investors. Custom trading platforms are making the process more transparent and streamlined: GoldMadeSimple and BullionVault are online investment services where investors can buy and sell gold bars that never moves from a secure storage location as ownership changes. Liv-Ex and Wine Owners provide similar services for fine wine, while Stanley Gibbons enables investors to build and trade portfolios of stamps.

The passion investment
But just because stamps as an asset class grew by 255% in the past decade, that does not guarantee all stamp collectors saw a positive return. Real assets are high risk, with the lack of regulation, poor liquidity and high commissions. And then there’s the specialist knowledge: knowing the difference between a Bordeaux and a Shiraz is no longer just about complementing dinner, but knowing which will be the moneymaker in the cellar.

“It is not as simple as the FTSE100, where anyone can buy in and pay a moderate fee. Wine, stamps, and collectibles are investments of passion, so if you are not going to enjoy them, do not buy them,” says Andrew Shirley, head of rural research at Knight Frank, the property consultancy. Shirley compiles the Luxury Investment Index for the annual Wealth Report.

Motivations tend to be mixed, however: while coins and stamps come with the pleasure of ownership, they are also an investment. “There has been a lot of interest in some of these assets in recent years from emerging markets, in countries which have seen a lot of wealth creation. Asian investors have been spending a lot of money in the art world, and especially Hong Kong and Chinese investors have been buying a lot of expensive wine. It has all had an effect on pricing,” says Shirley.

A liquid trade
Most wine investors will at least start from a point of view of personal interest, says Nick Martin, founder and executive director of Wine Owners, the portfolio management and trading exchange. “The wine market is a steady, relatively old fashioned, market. It is full of people whose motivations are mixed between interest and investment. Perhaps three-quarters of them have a pure investment outlook.”

Established in 2011, Wine Owners aims to make it easier for private investors to trade wine by providing price charts and research, as well as the ability to trade online while the wine is safely stored in specialist warehouses. “This is something that has not really existed for private investors before,” says Martin, explaining how wine trading has traditionally been reserved for wealthy investors. Maybe they got around to looking at their portfolio once or twice a year, by making some calls to contacts to see which vintages were worth selling and keeping. “But now we have more information available, meaning it is not a major event to review the portfolio. This is bringing new liquidity to the market.”

The Wine Passport is Wine Owners’ push to improve transparency in this market, by attaching complete records of source, movement, inspections and other details relevant to each bottle. This is reassuring for an asset where one dodgy transport could see the product ruined by being left in the sun too long. “Top wines have a pretty long shelf life, and will keep from 20 to 70-plus years. But they are a living product and will hit a plateau of maturity,” says Martin. HRMC classifies wine as wasting chattel, meaning private investors are exempt from capital gains tax.

The value of wine as an asset rose by 182% over the past decade, according to Knight Frank, however Martin stresses that wine is a volatile asset: “It is a market prone to small but fairly significant bubbles.” Often performance is tied to economic events: the wine market dipped in 1997 after the Asian crisis, and again around 2000 during the dot-com bubble. Most recently, prices spiked due to demand from Asia: “A handful of top Bordeaux wines went from around £1800 a case to £15,000 in about 2.5 years. That came down again in 2011. Clearly that was a bubble, caused by a new and relatively immature market opening up.”

Rarity is king
Having gained 430% in value over the past decade, vintage cars owners were the winners in Knight Frank’s index. But more obscure assets can also be surprisingly profitable: for instance, the 40 most sought-after autographs have gained an average of 13.6% per year since 2000, according to the PFC40 Autograph Index from Paul Fraser Collectibles, the specialist trader of investment-grade collectibles including stamps, wine and coins.

“The traditional staples of stamps, coins, autographs, classic cars and art are always popular,” says Daniel Wade, news service editor at Paul Fraser Collectibles. “But it is important to remember it is only the rarest, most desirable collectible items that have true investment potential. These are the pieces that collectors fight over, pushing prices higher. It is far better to buy one stamp worth £10,000, than ten worth £1,000.”

With that in mind, Wade believes the market need not necessarily be all that risky. “If you are trying to get ahead of market trends, say by buying an emerging artist, then there is large risk attached. Yet the prices of many collectibles sectors are underpinned by a large and knowledgeable collector base. There are 50 million stamp collectors worldwide, preventing major fluctuations in price.”

Wade warns potential investors to watch out for fakes, and not to be impressed simply by certificates of authenticity. “Buy from a dealer who offers a lifetime money-back guarantee of authenticity. This will give the assurance that what you are buying is the genuine article.” And do not be afraid to ask lots of questions, concludes Wade; after all, wine buffs and stamp geeks love to talk about their favourite investments.

Golden attractions
As the world’s largest investment service for physical gold, BullionVault now services 50,000 people globally who own more than 32 tonnes of metal between them. Trading takes place 24 hours a day. “We plug you into the wholesale market. That means whole bars, so think ‘The Italian Job’, think ‘Goldfinger’,” says Adrian Ash, head of research at BullionVault.

Investors will unfortunately not be handling their bars like a Bond villain, as their metal is kept in specialist vaults in Zurich, London, New York, Toronto or Singapore. “The choice of location is important. If the economic situation deteriorates, or a government tries to bring down the shutters on capital flow, this is one way of keeping some of your wealth outside of that,” says Ash.

While the appeal of the yellow metal as a hedge against turmoil and inflation is well-documented, companies like BullionVault have made it much easier for private investors to tap into these benefits directly. “Gold is an incredibly deep, liquid market in a way that fine wine is not. Gold is gold, it is a chemical element that does not even rust. It requires very little care,” says Ash.

Investors who joined the party earlier this year, encouraged by a decade of price increases, will know there are price risks to this steady asset. However Ash believes physical gold is becoming increasingly natural for many investors to have as part of their portfolio: “People tend to buy gold for insurance.”

Traditionally, those hoarding gold bars may have been of the more anxious persuasion, with gold funds being the mainstream choice. “But we may be wrong to assume we are smarter and cleverer than our predecessors, or that the world is a safer and easier place where people do not need to resort to metal,” says Ash, pointing to the events of the past few years. “They call gold ‘the barbarous relic’ and that still applies, because the world can be a barbarous place. We have not refined our systems to perfection. People will turn to what is a very simple, very transparent investment.”

Robert Kosowski: Taking an alternative view

Hedge Magazine, 2013. Original article (p30-33).

kosowskiRobert Kosowski, director of the Centre for Hedge Fund Management and professor at Imperial College.
“History never repeats itself, but it rhymes.” Mark Twain said it first, but hedge fund researcher Robert Kosowski knows it’s true: “History is full of patterns that repeat, and unfortunately the financial services industry doesn’t necessarily learn. Things get given new labels. But if you look at the various crises, going back to the 1930s, there are a lot of similarities to the current crisis.”

This is partially what Dr Robert Kosowski, Associate Professor of Finance at London’s Imperial College, wants to teach his students. He has two mugs from Lehman Brothers in his office, left by an old colleague: “They always make me laugh. It’s an interesting reminder of the historical context. I intend to keep them.” We meet in an airy, modern lobby of the Business School, where Kosowski has an office across the street. As director of both the Centre for Hedge Fund Research and the Risk Management Laboratory, both students and industry professionals look to Kosowski and his research for insights into the cutting edge of hedge funds. But who has the best questions – the students or the fund managers?

“I think it’s a mixture of the two. There’s a lot of synergy between the academic work and the practitioner work,” says Kosowski, in his analytical, somewhat reserved manner. “Ultimately we try to educate students so they are prepared for the real world. We also want to produce research that’s high quality but also practically relevant. It’s absolutely fundamental to get feedback from executive education buyers, and from students and consulting clients.”

Real life academia
Kosowski’s research into trend-following funds and momentum strategies is a good example: this is not only academically interesting as it relates to return-predictability, but it can also deliver practical strategies for investors. While clients often want to hear about the latest academic insights into portfolio construction and return-generation, the key questions Kosowski faces are as you’d probably guess: how to recognise which hedge funds will do well in the future, how to distinguish good from bad funds, how to construct a sound portfolio, and so on. But if hedge funds remain an emerging field, how predictable can these factors really be?

“One of the strong predictors is fund flows. People tend to rush into things, and then those things eventually become overpriced. The more informed people enter first, then the less informed rush in later. That’s human psychology and that’s not going to change,” says Kosowski. But, he stresses, the reasons why alternative strategies generate returns can be traced back to both behavioural and rational explanations. “Rational explanations mean, if I ask you to hold a certain risk, you ask for a premium. Behavioural explanations may mean that there are genuinely some opportunities where there’s no compensation for risk.” Sometimes investors may find themselves on a winning streak without being able to fully understand why, which sounds like it should be frustrating for a researcher. But Kosowski doesn’t seem overly concerned about the anomalies: if a fund manager hits on a pattern that creates results, why shouldn’t he or she exploit it? “Now what we try to do, of course, is to rigorously analyse why something works. Because if we don’t have an understanding why it works it may just be statistical fluke, it may be temporary, it may just stop working. And there’s a very large amount of examples of that happening.”

Proven alpha
Kosowski has published research demonstrating that the hedge fund industry delivers annual alpha returns of just over 4 percentage points, while only 1.32 percentage points worth of returns are down to beta – proof that the industry at large generates “statistically significant performance over long time periods”. But he’s not so willing to go along with the idea that the hedge industry has a PR problem. The last few years have been more challenging for the industry, he concedes, before pointing out that this happens to all asset classes so it’s nothing special for hedge funds. “Picking out one or two years to say that there are questions to be asked about the industry – I think it’s just spikes. But the same goes for picking out the best years and saying things will continue forever at the highest levels. I think this mean reversion is normal, and what’s important is to look at long time periods.”

Kosowski first started his research activities looking at mutual funds, but found this to be “intellectually restrictive” due to the regulatory restrictions. “And when you look at the whole universe of alternative strategies, it’s so much richer, much more interesting. It seems there’s a convergence of the traditional and the alternatives on this tree. I think the alternatives industry is becoming increasingly relevant, and there are still a lot of interesting questions to study,” says Kosowski, pointing out how the latest innovations are often considered alternative until they become traditional. “So it’s intellectually very interesting to work on that intersection, at the cutting edge of research.”

Current projects include research into trend and momentum funds, alongside Nick Baltas, and the related issues of capacity constraints. Another research topic is how to correctly measure alpha, and how this relates to leverage; “We’ve pioneered a new method to distinguish true skill from luck, and this has generated quite a bit of interest.” So are luck and intuition dirty words in the world of research? “Experience is certainly helpful, and intuition means you probably apply the thought process that you’ve gone through many times, just more quickly and almost subconsciously.” Kosowski thinks about it for a moment. “It all goes back to understanding what drives the returns. If we can’t trace it back to experience, if we can’t trace it back to a model or to superior information, then it may not be real.”

Doctor, swimmer, skipper?
Outside of work, Kosowski is drawn to the water, having initially excused invisible goggle marks on his forehead following his morning swim. While work keeps him very busy, the international nature of the research community means he does a fair bit of travel, having visited Australia last year and New Zealand high on the wish list. “I really like sailing and wind surfing, and I hope to get a skipper license this year. Last year I had a chance to take a sailing lesson in Airlie Beach near the stunning Whitsunday Islands. At one stage I was concentrating on the sails, when my sailing instructor pointed at the water and asked whether I had seen the dudong. I’d never heard of a dudong. It turns out it’s a large marine mammal, similar to the manatees found in Florida, and one has to watch out for them since they move so slowly.”

While Kosowski confirms that yes, he does get asked this a lot, I can’t help but want to know: why is he not a hedge fund manager? “It’s a fair question. My colleagues and I do apply our research through advisory work, some which may also be for firms that manage assets. The synergy between research and consulting is most interesting.” So it’s not because he doesn’t think he’d be any good? Kosowski laughs, before delivering the understated answer: “Since I get asked repeatedly to do consulting work which clearly is used in investment management, I guess I must be somewhat good at doing that work. But I like doing other things too. So my main position is at Imperial College.”

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