Is your fund manager gambling your cash on companies he doesn’t understand?
Woodford was. Now meet the man who performed a multi-million pound U-turn to avoid the same mistake
OVER the years, I’ve spoken to hundreds of investment managers and quizzed them about the funds and investment trusts they run. For the most part, it’s been both enjoyable and educational. Most have been pleasant, some impressively eloquent, a few ferociously intelligent. But some have been either downright arrogant or seriously underwhelming – more like Tom Hanks’ self-regarding financier in the hit film The Bonfire Of The Vanities where he sees himself as one of the ‘masters of the universe’.
Their views have formed the basis for many an informative article – and along the way helped readers enhance their wealth (that’s what we’re here to do).
Yet these conversations with some of the leading investment experts in the country are not always easy. Invariably, it’s not just them I am interviewing because they usually come with their own marketing people and public relations advisers in tow, or patched into the phone call. People with corporate agendas to pursue – namely to ensure that the fund manager and investment house come across in the best possible light.
As soon as the manager goes a little offpiste by saying something controversial – maybe about a rival manager, the funds industry, or the heady state of the stock market – they are instantly reined in and the conversation suddenly either stops or goes ‘off the record’ (I can’t report it). At the end of the day, investment management groups are in business to make profits for themselves. That means an emphasis on sales and marketing – not on necessarily telling the total truth.
But sometimes, this gloss does not get painted. An investment manager comes along who is prepared to speak his mind. It’s wonderfully refreshing when it happens – as it did last week when I was given the opportunity to speak to Kartik Kumar, lead manager of an investment trust called Artemis Alpha.
In a nutshell, his view is that most mainstream investment houses – none more so than his own – should stick to what they are good at, which is running equity portfolios on behalf of investors. They should not be dabbling in specialist investment areas such as unquoted companies that are more complicated to analyse and require an altogether different skill set. These specialisms, he said, should be left to investment houses set up to invest specifically in private equity.
He said: ‘At the end of the day, Artemis has built a reputation for being an equity investor. That’s what it should do and how it should move forward.’ Kumar has just spent the past 20 months unravelling a big unquoted position in Artemis Alpha that he inherited when he was asked to manage the trust in April 2018. A holding at odds with everything Artemis stands for.
His thoughts are apposite because they come as investment house Schroders gets to grips with sorting out the mess that was Woodford Patient Capital.
This is an investment trust that was launched by Neil Woodford in June 2015 to provide funding for early-stage companies, most based in the UK and unquoted (private businesses, rather than public and listed on the UK stock market). At the time, all rather meritorious and enthusiastically welcomed by investors. Some £800 million poured into the trust, making it the biggest ever launch of an investment trust (since usurped by Terry Smith’s Smithson Investment Trust that raised £822 million).
But today, Patient Capital’s share price is a third of what it was it at launch, it’s got a new name (Schroder UK Public Private) and Woodford is nowhere near it. Woodford failed quite spectacularly. Why? Because for all his success at Invesco in the 2000s, he didn’t have the skill set to manage a portfolio of unquoted investments.
As Katie Potts, veteran manager of Herald Investment Trust, told me last week in between meetings in New York, running an unquoted portfolio is ‘a completely different proposition’ to managing a fund investing in companies listed on the stock market. She said: ‘With shares, the market determines the price you can buy and sell them at and the skill is buying low and then selling high.
‘But with an investment in an unquoted company, it’s about assessing how much to invest and at what price, then closely managing the investment on an ongoing basis without having a share price to follow, and understanding that you can’t necessarily get out when you want to. This all requires tremendous resource.’
For the record, the £1billion Herald invests in smaller quoted companies – it doesn’t dabble in unquoteds. Woodford Patient Capital, she said, was more about ‘marketing a brand’ than providing investors with access to investment expertise in unquoted companies. In other words, it was doomed from the word go. Back to 29-year-old Kumar who joined Artemis eight years ago – an investment house with £28 billion of assets under management whose strapline is the ‘profit hunter’.
Last week, I had a long chat with him about his key role in overhauling the portfolio of Artemis Alpha, a £135 million investment trust primarily invested in the UK stock market. A reconstruction that has resulted in the trust disposing of most of its unquoted holdings – down from a quarter of assets in April 2018 to 7.5 per cent today. This percentage will come down further as a ‘tail’ of unwanted unquoted holdings is disposed of. He’s a confident young man, keen on doing his own research into companies, and probably destined to go far in fund management.
Eton educated Kumar was asked to undertake the strategic review in early 2018. This followed a period of sustained underperformance for the trust against its peers and its benchmark, the FTSE All-Share Index. In the five years to April 2018, Alpha Trust’s share price had risen by just under 10 per cent, compared to an increase in its benchmark of nearly 38 per cent.
Kumar was not backward in coming forward. He proposed that the trust’s portfolio be revamped – with the number of individual company holdings reduced. He also stated the trust should be less focused on smaller companies and unquoteds, while having the opportunity to invest some of its assets overseas. His reward for being so bold was to be appointed co-manager of the trust and implement the strategy he had recommended. ‘Artemis is
renowned for being an equity investor,’ he told me. ‘Artemis Alpha didn’t properly reflect that expertise. It had gone too far with its illiquid, unquoted holdings. Indeed, outside of the trust, Artemis had no exposure to unquoteds, so it made sense to reduce the holdings.
‘The result is a portfolio that is far more liquid, making it easier for me to make portfolio changes. It is also more diversified in terms of its exposure across the market, embracing large and mid-cap stocks as well as smaller companies.’
Today, the trust has 44 holdings instead of the 86 it had in April 2018, while its exposure to large cap stocks – the likes of Sports Direct, Tesco and Barclays – has tripled. The biggest overseas holding is German food delivery company Delivery Hero, a top ten position. He now runs the trust with oversight from John Dodd, one of Artemis’s four founding partners and a big personal investor in the fund.
Reducing the unquoted holdings, said Kumar, involved some ‘tough medicine’, resulting in the value of the trust’s assets taking a big hit in 2018. But the medicine seems to have worked. In the past year, the trust has outperformed both the FTSE All-Share Index and the average return recorded by its immediate peer group. He is confident the trust’s future is a lot brighter than it was some three years ago.
A few days ago, broker Numis issued an interesting paper on the lessons to be learnt from the collapse of brand Woodford. Among the many points it made was one on the vast resources required to run effective portfolios investing in unquoted companies. It said: ‘Investing in unquoted businesses is more complicated than quoted equities and requires significant resources for due diligence, transaction execution and monitoring.’ Exactly the point Herald’s Potts made in her phone call from New York.
Woodford didn’t have the required resources although he never once let on. It remains to be seen whether Schroders (and its private equity subsidiary Adveq) can now resurrect the fortunes of UK Public Private (Patient Capital).
Artemis doesn’t either which is exactly why Kumar has taken the steps he has with Artemis Alpha. It is now what it should have been all along – a profit hunter.