Henley-on-Thames-based Ian Brady didn’t have to move far from his previous job to join OakTree Wealth Management, as the boutique business he co-founded with Jeremy Arthur is a short distance along the river from the UK headquarters of Invesco Perpetual where he was head of fund of funds until 2008.
Brady’s time at Invesco overlapped with high-profile fund manager Neil Woodford, who left with a fanfare earlier this year to set up his own investment management business.
“When I started at Perpetual Neil wasn’t head of UK equity; it was Steve Whittaker. Neil started as a bank analyst and ran the income fund,” he says.
The aim for OakTree was to carve out a niche combining the “personalised services of an old-fashioned boutique” with institutional fund management capability and financial planning.
Against a difficult economic backdrop they pre-funded the business for three years and, to avoid being a one-man-band on the investment side, they employed two experienced institutional investment professionals, Steve Renton and Ian Cooke, who had 30 years’ experience with such names as Morgan Stanley, Legal & General Investment Managers and Allied Irish Bank.
Now with more than £150m in assets under management, the focus is on private clients, trustees and charities, both international and in the UK, using a broad suite of investment products, which includes an ETF-based fund, ethical portfolios and an international service run by Tony Shah.
A research-driven approach means Brady meets with more than 150 company fund managers and industry analysts each year.
Ground force
“There’s no substitute for wearing down the shoe leather in on-the ground research,” says Brady. He gives an example where this made a big difference, in March 2009, when he was in the US meeting with half a dozen mid to large oil companies.
“Each of them, in their own way, said, ‘look, we’re not spending another cent on exploration or upgrading our facilities until oil gets to $60 (£36) to $70 a barrel’. That day oil was $38 a barrel, so that gave a great insight into the fact that oil was likely to go up.”
In another visit, last January, he went to Asia because of his “very overweight” position in the region.
“I just had a nagging doubt. Everyone said it had less debt than the West and was growing faster, with younger demographics. Every man and his dog knew about this story.”
What he found was that the locals were much more worried than those in the UK about credit growth having become too much. As a consequence, he halved the exposure.
“If it hadn’t been for on-the ground research, we wouldn’t have done that,” he says.
He emphasises that his asset allocation approach is far from static but he does not rebalance automatically.
“We only reverse if we think we’re not going to make money any longer. We also do not have automatic weightings in every sector all the time,” says Brady.
“For example, we have practically no Western government bonds, and that’s because last year at this time it was a mathematical certainty you’d lose money over the long term.”
This has led Brady to have higher cash levels than some of his peers. “It’s not because we think cash is a particularly great investment but we just think it will do better than government bonds.”
He believes the way to get great returns over time, even for growth investors, is to compound the dividend growth. “We have a lot of equity exposure in the growth fund – around 80%. We’ll have it from a variety of companies, countries and regions around the world, but we do not want this to be a fund that’s down 50% when the markets are down 50%.”
Test of time
Another distinctive feature of the way he runs the portfolios is to backtest them over 10 years. “It’s a rough guide as to what the worst drawdown would have been if you’d been unfortunate enough to invest on the very worst day in the past 10 years over three, 12 and 36 months.”
This reveals the risk characteristics of the fund, which he says is a vital job. The other research element is to analyse individual companies using Morningstar software to amalgamate all the constituent equity holdings within each of the funds in the OakTree portfolios, eg Glaxo at 1.5%, BT at 1% and HSBC at 0.7%.
“It’s just another way of making sure the portfolios are tilted the way we want. For example, until January last year I didn’t want any banks or mining companies, and had to make sure the funds I was investing in had none or practically none of these. I’ve since changed that stance slightly.”
Brady holds committee meetings with Renton and Cooke once every two months to talk though ideas, with each submitting their own paper beforehand for use as a discussion forum.
“We reach a conclusion through an iterative process, not consensus. I don’t really think the consensus approach works in investments as it leads you to the easiest decision rather than the correct one,” says Brady.
The meetings are also useful in making sure he is complying with all the parameters, as he has a limit for how much he can have in any one fund and a maximum exposure to any one fund management group.
For the expat growth portfolio, there is a maximum of 85% in equities at any one time, which he says contrasts with the 90% plus a lot of his peers have. Up to 10% can go in to property and for alternatives it is 5%.
Further restrictions mean there can be no more than a 12% starting position in any one fund. There are 16 funds per portfolio on average, but that’s not a hard and fast rule.
In the most recent investment committee meeting with Renton and Cooke, Brady noted that people have missed the fact that all regions of the world except the US and Europe had yielded zero to negative returns since 22 May last year.
“We put some more money into Japan after that review, because we think the underappreciated part of what is happening there is the massive restructuring undertaken by Japanese companies.”
He elaborates that there has been much more M&A activity, firings, rationalisation and cost-cutting across the board, plus the fact many Japanese businesses are still trading at or just above price to book with net cash in the balance sheet.
The decision was also taken to focus on buying large-cap value stocks within the UK.
However, Brady sometimes takes the view that the funds are set up correctly and no changes need to be made. “We don’t make any money at all by trading, so we only trade when we think it necessary. We’ve gone four months without trading at all, apart from when new money’s coming in or out that we had to invest.”
Crisis call
August 2011, when stockmarkets in the US, Middle East, Europe and Asia fell sharply due to fears of contagion of the European sovereign debt crisis, was one occasion that resulted in Brady making key asset allocation changes.
“I went on holiday on 2 August 2011, and all hell broke loose the next day. I had to write two papers from the beach and we enacted two asset allocations.
“We communicate intensely with clients and I write quite weighty tomes, which some clients choose to read and some don’t. It’s our belief that if clients get inside our thought process then that will give them relative confidence as to what we’re doing and why we’re doing it.”
As for the rest of this year, Brady can foresee people getting carried away because he knows that a bull market generates frothiness and excessive optimism.
That could be one scenario for this year, he says, with market sentiment suddenly spinning away from the earnings story, negatively taking on board the prospect of interest rate rises and leading to a big correction.
However, his central thesis is that markets will go up this year in aggregate but by less than the rise in profits: the opposite situation to what has happened in other years.
“You’ll see profits go up and the market up by less, which is because we will finally see the economy coming through, but the markets will be slightly de-rated.
“If the markets go down a lot this year, however, I think they will go up more next year. So, over the next three years, we should average between 5% and 7%.
“People are kidding themselves if they think they know what way it’s going to happen.”
