I’m sitting with Gary Potter and Rob Burdett in BMO Global Asset Management’s London headquarters. It’s my first in-person interview since the coronavirus pandemic hit and the first time I have seen the multi-manager co-heads in the flesh since early 2020.
The reunion is bittersweet. Potter (pictured left) is months away from hanging up his hat from fund management after a 40-year career, leaving Burdett (pictured right), his business partner of the past 25 years, as the sole lead of BMO Gam’s multi-manager team.
On top of this, BMO Gam’s Europe, Middle East and Africa business, including the multi-manager arm, has been acquired by Columbia Threadneedle. Despite coming under new ownership, Potter and Burdett are adamant that it remains business as usual.
The multi-manager team runs around £2bn across the BMO Gam Lifestyle and Navigator ranges. Unlike most multi-asset managers who run money from a top-down perspective, Potter and Burdett start from the bottom up.
The eight-strong team, including senior partners Kelly Prior, Anthony Willis, Scott Spencer and Paul Green, incrementally add value at the margin through asset allocation, but fund manager selection is the primary driver of alpha generation.
“We like to describe ourselves as having a low-ego approach to asset allocation,” says Potter.
The BMO Gam Lifestyle funds are risk-targeted, benchmarked against volatility bands within the distribution technology framework, and have their own specific objective, which means the team needs to have a disciplined approach to running money.
Potter continues: “It is not sort of … wild west, free form; where do we want to go and where do we fancy putting money? It is very rare for us to be neutral to whatever our asset allocation objective is.
“If we find a great manager in Japan that can do fantastic things, we’re going to look at that and not let our asset allocation view dictate otherwise.”
The team has been dialling down risk gradually, not because of the emergence of the Omicron coronavirus strain but due to the inflationary outlook.
“Our view on inflation is it’s not necessarily transitory, it’s becoming a bit more ingrained,” Potter explains.
“There’s this fundamental shift in attitude, which says, well, inflation at 1-2% is fine, it’s now going to be 3-4% and maybe above that for a while and the bond markets aren’t ready for that.”
At the margin, they have moved shorter duration where possible and reined in corporate debt and high-yield exposure.
‘We’re looking for the standouts’
Against this backdrop, the team prefers flexible strategies like John Pattullo and Jenna Barnard’s Janus Henderson Strategic Bond fund, David Roberts and Donald Phillips’ Liontrust Strategic Bond fund and the Twenty-Four Dynamic Bond fund. They have also recently re-invested in Mike Riddell’s £2.8bn Allianz Strategic Bond Fund.
Profits from fixed income positions have been recycled into their absolute return holdings. Here the team prefers market- neutral, single-strategy funds such as Jack Barrat’s Man GLG Absolute Value and Jupiter UK Specialist Equity, which was inherited in the Merian takeover.
A particular standout is the Tellworth UK Select Fund, which is up 12.3% over the past year, not far behind the FTSE All Share at 16%. The average fund in the IA Targeted Absolute Return sector, meanwhile, is up by a meagre 3%.
Co-managers John Warren and Seb Jory bought the fund, and its track record, out of the ashes of the Sanditon collapse in 2019. Performance has been “pretty ropey” until the past two years, Burdett notes, and the fact it has just £55.4m in assets means it is highly unlikely it would be on many fund buyers’ radars.
“We’re looking for the standouts,” says Potter. “We need alpha generation in our portfolios over the long term. It’s no good when you are a fund-of-funds with an extra layer of charging, admittedly, to just have an index plus 1%. It doesn’t work.
In addition to selectively adding to their absolute return funds, the team has also been parking money in closed-ended property vehicles, including the Supermarket Income Reit and the LXI Reit, as part of an inflation protection story. The sector is up about 16.5% this year.
Boutiques for the win
Alongside the Tellworth fund, other boutique gems in BMO Gam’s multimanager range include the Prusik Asian Income and JK Japan funds.
Though the latter was only launched in March 2020, it has had a phenomenal run, with the GBP share class returning 47.1% in 2020 and 14.3% in the year to 31 October 2021.
BMO Gam’s multi-manager team have been long-time cheerleaders of boutique managers, many of whom tend to run their preferred style of nimbler, smaller portfolios with a single focus.
“One of the features of these conglomerates of types of funds is they’re not on most investment platforms, or they have high minimums, so people wouldn’t have them in a model portfolio,” Potter says.
“I was aghast that the Financial Conduct Authority is thinking of having a default list for defined contribution pension funds. The big funds are just going to get bigger, and we all know the bigger the ship, the harder it is to turn around.”
Though boutique funds tend to be more expensive, “if that comes hand in glove with capacity limits, flexibility and a proven use of that, and generally a higher performance target – that we judge as value, not expensiveness,” Burdett adds.
Markets in 2022 will turn from beta-driven to alpha selection
With the concept of higher inflation becoming more mainstream, Potter and Burdett expect equities will also be a tricky place to invest.
Central banks have already begun tapering earlier than expected to counteract rising prices, but the pair believe the move to hike rates will be more muted and delayed because they want to make sure the economy is on the right foot. “My big call for next year is that income investing will be back big time,” Potter proclaims.
The team is neutral on the US, which has benefited the most from the flood of fiscal and monetary policy and has a slight overweight to the cheaply valued UK market.
Headwinds for duration assets will depend on the severity of the pandemic and how disruptive the Omicron variant proves to be.
Certain high-growth areas such as software and automation, which have benefited from remote working trends during the pandemic, should continue to do well. But at the very least, the inflationary outlook means it will be “more of an even fight” between growth and value stocks, Potter and Burdett stress.
“I think the market is going to turn in the next 12 months from being beta-driven to one of alpha selection,” Potter muses.
“One of John Templeton’s 10 investment maxims is if you buy the same thing as everybody else, you get the same return as everybody else. And if that happens to coincide with a drop-off in growth because inflation is back, you have got a pretty stale market.”
Elsewhere, they remain neutral on Europe, which is behind the US and UK in navigating the pandemic and have gone from overweight Japan to underweight following the change in prime minster to Fumio Kishida.
One area where they have been caught out is emerging markets, specifically Asia. Potter says: “If you look at the S&P 500 in 2021, it is up 27%, Asia is up 2% and emerging markets is at 1.7%. It is a massive difference. We have had to acknowledge that. But therein lies a potential opportunity in the future.”
Still plenty of demand for traditional multi-manager funds
During the past several months commentators have been contemplating the future of the traditional multi-asset space. In addition to Potter, former Standard Life Investments My Folio boss Bambos Hambi is also bowing out, and the marketplace is becoming more crowded.
“It was ever thus in a way,” says Burdett. “There is a lot of friction in the market, a lot of change based on financial transactions, takeovers, mergers rather than client demand, should we say.”
Though some have pointed to outflows from traditional fund-of-fund players, Burdett believes there is still plenty of demand from investors. The unfettered fund-of-funds market represents around £70bn of assets, according to data from the Investment Association, or around 6-7% of the UK fund market.
There is no getting around the fact that multi-manager charges are more expensive, but they have been coming down, Burdett notes, and compared with discretionary fund managers’ model portfolio services, they are more transparent.
“The largest fund in our Lifestyle range has an ongoing charges figure (OCF) of around 0.9%, and if you are an IFA of scale, you can access the S-class at 10 basis points less,” Burdett says.
“I just looked at one of the major wealth manager’s fees and charges for their portfolio service, and it is a 16-page document. By the time you get to page 11 you can find an example of £500,000 invested. They assume a certain amount of turnover, ignore capital gains taxes … and it is 2.1% for the roundtrip.
“We have always lived with our costs,” he continues. “Pre-Retail Distribution Review, we were living with an OCF more like 2.5% and delivering a net return of that. That is because we seek managers with enough potential to do that. And if you balance the portfolio, not only do you get the excess return, you get the smoother return of the compound interest.
“It is easy to make sweeping statements about the market, but multi-manager is a huge part. It is by no means the most expensive way to buy a portfolio of funds and it is a gift-wrapped extension of an adviser’s independence in one fund with a capital gains tax and VAT-friendly aspect to it and no discretionary powers required. So, there is a lot a lot to like.”
This article appeared in the January edition of Portfolio Adviser magazine.