Boutiques come out of the shadows

SVM Asset Management, founded in 1990 by Colin McLean, focuses on British and European equities and global funds of funds. Its fund managers run onshore Oeics, investment trusts, hedge funds and segregated institutional portfolios. SVM has assets under management of £600m.

The age of the boutique asset management company has been declared many times but in the current investment climate there are signs that greater focus centres on smaller players.

The crisis that took hold of markets in 2007 and is still stubbornly refusing to let them free gave a sharp knock to investment management companies, still basking in the luxury of almost a decade of plenty.

Investors stung by the downturn became keen to look at new ways of preserving their capital, a trend that goes some way to explain the dramatic rise of absolute return funds in recent years.

However, it was not simply novel investing techniques that were being examined – the managers who had held up relatively well during the worst of the crisis came into focus strongly. (article continues below)

For SVM Asset Management, the period has offered several challenges but also presented some key opportunities to highlight the performance of funds in its range.

Of the group’s six funds with a three-year record, only one now sits in the bottom quartile. Both the SVM UK Growth fund, managed by Margaret Lawson, and the SVM All Europe SRI fund, managed by Hugh Cuthbert and Neil Veitch, sit top quartile over three years, with the latter top quartile over 12 months as well, according to data company Financial Express.

The SVM Continental Europe and UK Opportunities funds have both produced second quartile performance since October 2007.

“The business climate along with markets have improved a bit over the past 18 months and, particularly for the performance of the range, it has been a good year,” says Colin McLean, the managing director at SVM. “For our UK Growth and European funds it has shown the managers’ strengths.”

Gary Potter, a co-head of multi-manager at Thames River Capital, says the European funds are on his watch list as he has been impressed by Cuthbert.

“Hugh’s done a good job on the European fund, although traditionally it’s not a group we’ve had a lot to do with,” he says. “We’re keeping a close eye on him.”

Potter points to the structure of SVM as one of its key strengths. Each manager has a basic salary and participates in a company-wide bonus scheme but more importantly they each take a slice of the equity in the company. This helps with manager retention but also helps align the interests of the management with the clients, something that is core to the ethos of the boutique.

Its structure has been a central part of its resilience over the past two decades. Since it was established in 1990, the group has seen several difficult markets, from the Asian crisis of 1997-98 to the dot-com bubble early last decade before the current crisis hit.

”The emphasis has very much been swerving away from Britain towards global funds”

Interestingly, while many investors are fleeing traditional markets in favour of faster growing developing markets, McLean says experience has taught him that abandoning domestic markets altogether could be a foolhardy strategy.

“We think there’s a real opportunity globally but it’s important not to overlook the wealth of opportunities domestically,” he says. “Some investors, however, are now looking outside of the UK and it’s important that we have strength in our range to accommodate that.”

While the group’s longer standing products have been delivering some strong performance figures, some of the newer products SVM has launched have struggled. Both the SVM Cautious and SVM Balanced multi-manager funds, launched in May 2008, are bottom quartile over the past 12 months while the SVM Absolute Alpha fund is 38 of 40 funds in the Investment Management Association (IMA) Absolute Return sector over 12 months.

“The last quarter of last year and the first quarter of this year was a tough time for the Absolute Alpha fund but the last six months has been good,” McLean says. “If we can get a good year’s performance we think we’ll see it start to bring in more money.”

The problem faced by relative newcomers to the absolute return theme is the strength of existing products, which at times in the recent past has made the sector appear a near-monopoly.

Many investors who are entering the sector will look for a fund that has a unique investment process or that can show that it is doing the same thing better.

One of the main points of concern over these products is whether the manager has the ability to use shorting to help drive performance and dampen volatility. The often-quoted danger is that whereas with a long position there is a fixed amount of loss that can be incurred on any one position, theoretically shorting can leave a manger open to infinite losses.

Worries over risk management led Hargreaves Lansdown to remove the SVM UK Opportunities fund, managed by Veitch, from its Wealth 150 list of recommended funds in November 2009*. The move was in response to SVM’s decision to give Veitch extra tools to manage volatility within the ­portfolio, which included the ability to short up to 50% of the fund, although typically the short exposure will be less than 20%.

“When used well, shorting can be an excellent way to reduce a fund’s volatility in the face of falling markets,” Stuart Goodwin, a Hargreaves analyst said in a statement.

“It is a difficult skill, however, and places additional pressure on the fund manager to make the right decisions; mistakes mean that an investment could lose money, even if the market rises. Neil Veitch does not have much experience of shorting, although other fund managers at SVM have expertise from which he can learn.”

Goodwin’s caution, however, has not been borne out in the performance. Since the start of this year Veitch’s fund is up 20.77% against an IMA UK All Companies sector average return of 10.09%.

While it must be acknowledged that these are short- term performance figures, the volatility in the market since the start of the year has proved a challenge for most managers and in that light the performance of the fund has been laudable.

McLean says at present the managers are seeing a lot of opportunities on the short side but much of the pessimism over British equity markets is overblown. In fact, he says, with large cap companies sitting on capital there is a possibility that acquisitions could provide the leg-up for equity markets that investors are looking for.

“The emphasis has very much been swerving away from Britain towards global funds but I think the pendulum will swing back a bit,” he says.

“It’s probably the first cycle I’ve seen where global market movements correlate with the release of macroeconomic data. You can’t pick stocks on that basis so individual company analysis will have to come back in, and large companies that have access to finance will be supportive of M&A activity.”

McLean remains cautious over developed market banks, where he sees some significant risks remaining, but on the macroeconomic climate he is relatively bullish and says America’s Federal Reserve has strongly indicated its intention to prevent a double-dip recession.

Given this outlook, one might expect to be hearing a lot of positive marketing messages coming out of SVM. Bringing its investment message to the retail market, however, has been one area that the group has so far been lacking in, says Thames River’s Potter.

“It’s an interesting group and they’re going in the right direction but they’ve got to be clear about what they stand for,” he says. “It’s all very well having good products but you have to tell people about it. It’s not a group that’s well known outside the large multi-managers and creating that distinctive identity should be a core focus from here.”

That UK Opportunities, the largest fund in SVM’s open-ended range, is now £62.58m in size suggests there is certainly plenty of room to bring in further capital. As some of the recently launched products reach their three-year anniversaries next year, this may provide an opportunity to raise the profile of the products and the group to the wider retail community.

Another aspect that the group might choose to focus on with the advent of the Retail Distribution Review (RDR) is the closed-ended fund range it boasts. These include the SVM Global Fund, the SVM UK Active Fund and the SVM UK Emerging Fund.

Under the RDR, advisers will be required to show that they offer whole-of-market knowledge to their clients. This will include unregulated collective investment schemes, all investments in investment trusts, structured investment products and other investments that offer exposure to underlying financial assets, but in a packaged form, which modifies that exposure compared with a direct holding in the financial asset.

Because of this, greater attention could be pushed onto the closed-ended fund industry as some advisers who have traditionally considered their investment universe to consist only of open-ended products are forced to broaden their scope.

Whatever proves to be the case, SVM is sitting in a solid position but one that it needs to build on in order to make a bigger impact on the retail market. While investors are often reassured that a company is prioritising investment discipline over marketing, the wealth of choice means that quiet achievers can often be overlooked in favour of louder competitors.

McLean appears to be aware of the need to work in partnership with big players in the industry in order to get SVM’s message heard. SVM’s funds are already included in Skandia’s European Best Ideas, UK Best Ideas and UK Strategic Best Ideas portfolios.

“We’re working very closely with Skandia on the European side,” he says. “We also think there’s some money from segregated accounts that might be coming into the UK Growth fund.”

Whether the ambitions of the group are met will largely depend upon the ability of the managers to keep performance competitive and the marketing department’s ability to use solid performance to raise SVM’s profile.

If these conditions are met, there should be few barriers to it continuing as part of the much-heralded boutique age.

* October 25 update. Hargreaves Lansdown reinstated the SVM UK Opportunities fund to its Wealth 150 list of recommended funds three weeks after its removal following a further meeting with SVM.

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