With a strong heritage running institutional mandates dating back to 1885, Isle of Man-headquartered Thomas Miller uses its extensive experience of looking after assets for charities, mutual insurance groups, pension schemes and governments, to influence the way it runs the private client side of the business.
Former RAF pilot Tom Richards came on board to expand this area as head of private investment management (offshore) in August 2012, after cutting his teeth working for stockbroking and family office-type businesses.
“The airforce offers a fantastic life, but I was looking for other opportunities. Thomas Miller seemed to be at a very interesting stage in its growth, large enough to be a substantial player on the Isle of Man, a reasonable player in the UK, and looking to rapidly grow the private client part of the business,” he says.
Flying the nest
Tom could have joined his parents’ small family-owned IFA business on the Isle of Man after he decided to leave the airforce.
But instead he chose to go into investment management, which appealed to him more than the IFA world or the other route he could have taken on the island, retail banking.
The Isle of Man is geographically close enough to the UK and with an anglicised culture that makes it very familiar to do business with both the UK and international expat community, Richards says, adding that Thomas Miller also has an expanding presence in the Channel Islands.
When constructing portfolios the starting point is to be aware of the private client’s domicile and tax status, which boils down to whether there is a UK or international underlying client.
Approved lists of investments are split into UK onshore and offshore approved vehicles, which cover Luxembourg, Dublin and some Channel Island-domiciled active funds, and exchange-traded funds on the passive side, the majority of which are Irish-domiciled iShares.
Knowing the drill
From here, the challenge has been to adapt the big institutional process that Thomas Miller uses from a very benchmark-constrained world of matching liabilities and a very cautious growth profile, with lots of short-dated UK, US bonds or short-dated cash management, to a more bespoke approach.
“Private clients typically tend to be more growth orientated or they will be looking to do something in real life with a portfolio. One of my favourite analogies is that nobody goes to B&Q just to buy a Black and Decker drill because they want a Black and Decker drill. They go there so they can drill a hole in their wall at home, put a screw in it and hang a picture.
“And that’s the thing we’ve got to bear in mind in the private client world. There is always a medium- to long-term objective on the other side of the portfolio whether it’s capital growth or generating enough income to live off. Perhaps it’s a pension fund that’s in drawdown or an offshore trust with capital apportioned to a remainder man that we need to bear in mind.”
Richards explains that portfolios are built with a “core and explore” approach using sterling, dollar and euro models, which each have six risk profiles covering fixed interest, defensive, conservative, balanced, growth and pure equity.
The core long-term strategic asset allocation is the first focus, drilling down from cash/fixed interest, equity and alternatives to sub asset classes. So, for example, within fixed interest the chosen mix is government treasuries, inflation-linked corporate bonds, and emerging markets high yield.
Global scope
Within equities, the geographical spread is UK, US, Europe and further afield to other developed regions including Japan and emerging markets.
Increasingly some of the global themed equity funds, in areas such as infrastructure, technology, water or timber, are coming on to the radar.
“We tend to be relatively traditional in the way we manage portfolios but we do make up to 10% allocation to alternatives such as single strategy or multi-strategy hedge funds, property, structured funds and commodities."
From that core strategic allocation Thomas Miller then takes tactical tilts as the team see market opportunities present themselves.
Richards says the portfolios he runs have “probably got slightly more in alternatives” than the average Wealth Management Association (formerly APCIMS) type manager.
“But what we do take exposure to is always very liquid and transparent so there’s only a very small minority of clients who have got anything other than daily-traded, daily-listed holdings in the portfolio.”
For an international expat sterling balanced portfolio, Richards starts with a strategic asset allocation model and various bits of internal and external consultant modelling to derive expected returns and historic returns.
The core strategic position for this balanced portfolio would be 5% cash, 35% fixed interest, 50% equity and 10% alternatives. The fixed interest element comprises 10% in government, 15% in corporate and the other 10% evenly split between inflation linked and emerging market high yield debt.
The current tactical asset allocation (see chart) shows a slightly underweight cash position (2%), slightly overweight equity exposure (53%) and fixed interest at exactly the same level as the core allocation (35%).
“So we are broadly neutral with a slightly positive bias towards risk assets, and we’ve added two or three relatively short duration fixed interest funds across the region to the approved lists in the past year or two.”
Last year, positive tactical calls included a general overweight equity stance in comparison with fixed interest and cash; favouring corporate bonds over government; and over-exposure to US equity early in the year with rotation into European in the latter half.
UK lags, US drags
While markets had a fantastic run last year, 2014 is proving more volatile and Richards says the US and emerging markets allocations have moved back to neutral positions. But the portfolio is overweight in the UK, which generally lagged the other developed markets last year making valuations look a bit more attractive.
“The UK has typically been dragged along by the US and as the US pulls its way out of the economic crisis, the UK will follow in the next year or two. We are also overweight in Germany and Japan.”
However Richards points out that Japan is a currency hedged overweight “so where we do take equity exposure to Japan it’s not normally in an unhedged local yen currency fund but in a hedged sterling or dollar fund as appropriate to the client”.
“The authorities will have a model for what the US Fed did in 2004 to 2007 when interest rates went up from 1% to over 5% and the S&P gained something like 40% over that period with fairly low volatility. So if there can be this gradual withdrawal of stimulus with underlying economic growth, I think markets could continue to trend upwards albeit after a pause for breath following the strong returns last year.”
“We are positive on the assets but cautious on the currency.”
When choosing funds, Richards likes to see at least a three- or four-year track history with consistent returns, no surprises on the upside or downside and some evidence that the manager is adding alpha compared to the peer group and the underlying benchmark index.
Sharp focus
A core and satellite approach is used for the active funds, with three or four core benchmark-constrained funds where the fund managers will stick quite close to the underlying index and try to add a bit of incremental value. Focus funds are also on the agenda to boost returns further, and opportunistic funds, such as the SVG UK Focus Fund.
“This fund is looking for a 15% return typically over a holding period and there is relatively high turnover within the portfolio. Assets are just over £200m, which allows it to go down the market cap a bit and to be nimble in its positioning without moving the market.”
The bigger picture for the year ahead, Richards argues, should be seen against the fairly successful management by governmental authorities over the past two or three years in managing the whole deleveraging process with very low interest rates and a fiscal stimulus package.
