Regulation, Fee Pressure, Political Noise: CIO Perspectives from Psigma

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Tom-Becket-headshotAs the investment community increasingly turns its hand to producing content, is it always being read by the right eyes, or is it purely for firms’ sales and marketing functions? Kurtosys recently met with Psigma Investment Management’s chief investment officer, Tom Becket, who shares his views on today’s “saturated” industry, his reliance on Twitter as a source of information and offers some sage words for investors as we enter a new year.

With all the external factors hitting the industry right now – regulation, political noise, fee pressure, M&A – how do you remain competitive, both as an investor and as a firm?

Trying to keep your business relevant in a market that is becoming increasingly saturated is quite difficult unless you have genuinely unique factors behind your business that will interest potential clients.

From my perspective, the industry hasn’t really changed much in the 15 years I’ve been working in it; people are still running portfolios in the same way they were 15 years ago – dominated by equities. There has been a switch from direct instruments into funds, but the industry hasn’t moved its elements around that much, in the way that the US funds industry has done.

When we set up our business 15 years ago, we based our business on the American endowment model, using asset allocation as the major focus and managing our clients’ portfolios to inflation-plus benchmarks, which was different to the common practice in the UK wealth management industry at the time, but I’m surprised at how that is still relatively different now and how many people still use irrelevant benchmark indices. From what we can see, so many investors still have portfolios that are very equities-centric and genuine asset diversification is still pretty rare.
I think having something that’s a bit different helps you remain competitive, and we believe our investment process is a bit different, in that we are ultimately trying to create a genuinely institutional investment approach for private retail clients.

Do you have to sound much of that industry noise out?

With respect to the investment management business, we believe the UK wealth management space is under intense pressure from a number of factors, including that margins are being squeezed due to increased regulation and compliance factors, there is less wealth creation in the UK and therefore fewer clients to go after. The industry is extremely oversaturated, with lots of people chasing after the same collection of assets, so in all those regards it is harder for our business and any other wealth manager to grow organically.
Having said that, I tend to try and ignore as much of that as possible; I try to focus on what I can control and not what I can’t control. What I can control is investment outcomes for clients, by running an investment process that can lead to achieving our clients’ investment aims and wealth aspirations. I leave everything else – the growing M&A in our industry, the heightened competition, the continual pressure on fees – to my CEO who is a lot closer to those aspects of running our business.
Do the industry changes and the economic pressures in the UK make life harder? Undoubtedly. Does it make the life of a CIO harder? I would say it doesn’t need to, as long as you maintain focus on those factors that you need to in the investment world.

What can investors expect, going into 2019?

Investment and economic matters are definitely going to get harder to read compared with the last three years, which have been quite easy to decipher.
In 2015, we believed that the world wasn’t as bad as many commentators were making out and took an early view, which was painful and early for a while. At the start of 2016 we were seeing universal pessimism; China was going to collapse, the European banking system was going to collapse, the global economy was going to collapse into a recession, yet none of those things actually happened. That was in part due to the major stimulus efforts of the Chinese authorities and in part because interest rates were maintained at very low levels. Our early call in 2015 paid off as investors realised that they were too defensively positioned and if you look back to that time, valuations were quite cheap so, if you took a medium to long-term contrarian view, there were great opportunities on offer.
In short, throughout the nonsense of Brexit, the advent of Donald Trump and the constant political crises across Europe over the last few years, the best thing to do up until the end of 2017 was to hold your nerve, focus on valuations and stay ‘risk on’.
At the end of 2017, however, we again took a different view to many of our peers, that the improvements being seen in the global economy and the problematic markets were going to roll over in 2018, so being cautious – for the first time in a few years – was now the right approach.

By being cautious in 2018, we have given ourselves the optionality of changing tack should we need to, which is vital as I’m finding it harder to read financial markets and the economy and think that we will need to move proactively and aggressively at various points in 2019.

I think the economy will start to slow this year but markets have priced that in already, to a certain extent, in places like Asia and parts of Europe, such as the UK.
The US is a different matter, because it still looks quite expensive, but if you look at both equity and credit markets, the time to become more cautious was actually last year not this year. The reason I’m confused is because while the economic outlook doesn’t look great, some financial markets are starting to look more attractive again, for the first time in three years.

So how are you positioned, in light of that?

We took a more cautious stance at the end of 2017, and have been adding risk tactically and tentatively over the last few months of 2018. Any attempt to do that so far has been premature but I think you will see a counter-trend rally at some point from risk assets as we move into 2019.
Therefore, we reduced some of our hedges in October, taking down our outright negative bets on equity markets. On the flipside, we started to add to value equities, through specialist value funds, which may be too soon to deliver right now, but we believe at some point in 2019 that will pay off.
While we turned cautious in late 2017, and have been paring back some of that caution, everyone else seems to be just starting to become quite cautious right now (end of December 2018).
I think UK equities look attractive, though the time to buy might be when the lorries start to back up on the M20 because of a hard Brexit, and this could be an asset class that may offer some upside surprise in 2019, although they will be volatile.
Similarly, Asian equities look promising; everyone hates them, valuations have moderated to some significant degree, and there may also be some upside surprises, if we see any fiscal stimulus from the Chinese authorities.
My advice for investors this year would be to not to panic, be patient, focus on valuations and do the opposite to what most people are saying – I think that would hold them in pretty good regard.

You are fairly proactive with your marketing efforts, compared with much of your peer group. How do you divide your time?

I tend to work long hours, but it is more about maximising efficiency of time, so being incredibly organised and not repeating myself very often; so repurposing internal communications for a blog, for retail and institutional audiences, for instance, have made the most of my prolific amounts of writing.
I was the person at the firm who initiated the blogs, as writing comes quite naturally to me and I was keen that we ensured that we consistently had messages in front of existing and potential clients. While we still do plenty of written communications, the switch from written to video format has been instrumental in terms of getting our message out there and making more efficient use of time.
Doing a video blog and researching it – using research you would do anyway – and spending 10 minutes filming it (we never do second takes, we only ever just use the first take to make sure it is genuine), is a really efficient use of time, to maximum results.

We have learnt that people don’t necessarily want to spent 15 minutes reading a written blog, they want to spend 3-5 minutes watching our commentary on their iPhone on the way into work, as an example, and we are taking all that into consideration when producing our content.

As you are using more innovating ways to communicate, are you finding the managers doing the same, when they target you as a recipient?

I rarely read or watch anything from the industry, in all honesty. I tend to have 30-40 very important investment relationships that I maintain. By focusing on those contacts, I can actually find out what I want from the manager face-to-face or over the phone, rather than hearing what a compliance officer or marketing manager thinks that I should hear.
The process is helped by the fact that we only have 25 funds on our buy list and with around £3bn of assets under management, so we probably have an average of £75m in each of the funds that we own, which gives me instant access to the people that I want to speak to.
I personally do a lot fewer initial manager research meetings than I used to, but my team probably does one new meeting with a fund manager every day. Unless I am looking at a specific area in which to invest, such as Asia Pacific equities, for example, then I will go to those meetings, or if it’s a specialist research trip.
I also have someone working with me now who does a lot more of the initial marketing meetings. I tend to focus on the bigger presentations, the larger client relationships that we might have, and only going out to pitch for large or strategic new pitches. Splitting the load like that helps with how I can manage my time.

With the rise of technology, social media, new digital tools etc, how are you evolving your process?

I tend to be very selective. Twitter is the only ‘modern’ one I use, and I use it obsessively because it gives you a great filter for investment research. I can find out very quickly what people think, read several independent points of view without reading whole papers, see immediate reactions to market movements, and also gauge the sentiment or the mentality of the people actually operating in the market place. Twitter has become a very important tool in my own personal investment process.
I don’t read anything that is placed content, because I’m not finding stuff that I want to read, I’m finding stuff that people think that I should read, and typically I find that to be pretty pointless.
With regard to social media, I honestly haven’t seen it used for good, in any way, shape or form, and has not been a useful way to keep up with investment news.
I have a LinkedIn account but I don’t manage it myself, I’ve not found it to be particularly helpful but our sales and marketing guys use it prolifically to keep in touch with their contacts and think it is useful. But I never find anything out from that that I couldn’t find from a tailored look at someone’s websites.

sam shaw

sam shaw