When Ian Bailey was young, he promised himself he’d never work in an office, and that he’d certainly never work in finance. He had a more glamorous future planned. However, by his early 20s he was a tax inspector for HM Revenue & Customs and was reconsidering his early choices.
That said, ending up in investment management was entirely accidental. Having moved into tax consultancy for a large accountancy firm, he wrote to Lloyds Bank in 1987, in the hope of joining its tax department.
When he arrived at the interview, Bailey was asked if he’d consider a job in the bank’s investment management division in Eastbourne.
It was just after the Black Monday crash and no one wanted to go near the financial markets, least of all Bailey. But he was offered the job on a ‘try before you buy’ basis. He found that in defiance of his youthful promises, he rather liked working in the office of a finance company.
Bailey says there were some surprising advantages to starting an investment career in the late 1980s – and particularly in Eastbourne.
His early clients were mostly elderly, interested in stability rather than excitement. The markets were horrible, a bear market with high inflation.
“It taught me some really important skills – the importance of dividends, cashflows, yield and understanding risk. It was a time of higher inflation and interest rates,” he says.
These are lessons he believes are valuable in facing the current environment.
“If you’re in your early 40s today, you won’t have managed money through a period of higher inflation and may not have seen the corrosive effects of inflation first hand.
“It’s important to understand what inflation does. While our view is that it will peak towards the end of this year, it will be a shock to the system in the meantime.”
Bailey remained at Lloyds for more than 15 years, before moving to Williams de Broë and then Investec Wealth & Investment.
He has managed bespoke discretionary portfolios throughout that time, with a particular focus on families and trusts. He moved to Hawksmoor in April 2021 and now heads the Bath office for the group.
Bailey’s client base has evolved over time. Today, in contrast to the Eastbourne pensioners, his clients are mostly still in the accumulation phase, in their 50s and 60s, who have made significant wealth.
“They have often taken risks to make their money and don’t want to lose it. We understand that and encourage them to take appropriate risks where they feel comfortable.”
In terms of style, Bailey characterises himself as a top-down asset allocator. He draws on the experience of the broader team to make investment selections.
Hawksmoor also runs a model portfolio service, plus a range of multi-asset funds. Jim Wood-Smith is chief investment officer and head of research, while Richard Philbin runs the group’s investment solutions business.
The group has specialist knowledge in a range of areas. “We have a good research team. It’s not just about size but also about having specialists in specific areas. For example, we have a strong mid-cap team.
“We also do well in investment trusts. We are always aware of the discount to net asset value, buying quickly when there are opportunities and selling when they are at a premium.”
He believes this is a real competitive advantage over some of the larger organisations, where it is increasingly difficult to buy a stock outside the FTSE 250.
The group has an internal asset allocation, set by the investment committee, of which Bailey is a member. This guides the group’s long-term positioning.
“It is very client-driven rather than process driven. We believe that as companies get bigger, too often the client has to fit the process. For us, the process has to fit the client. We’re much more comfortable with that approach.”
That means a high equity weighting, for example, must fit a client’s financial goals, but also their investment temperament.
Bailey adds: “Increasingly, the industry defines clients by a series of parameters, but we avoid compartmentalising them. They are always more than just a ‘medium-risk’ client.
“The industry has moved towards the adoption of centralised investment processes, and I can see why that’s happened, but it only ever suits around two-thirds of clients. A significant minority will want a bespoke portfolio.”
As bigger firms scoop up the two-thirds who suit these more commoditised products, Hawksmoor aims to provide a service for the rest. “It leaves us with a big marketplace,” says Bailey.
The group’s asset allocation is relatively broad, taking in property and other alternatives. Over the past six months, for example, its portfolios have been significantly invested in specialist Reits.
Their ideas are sourced from the research teams, and the wealth managers draw their recommendations together with their analysis of the client to build a portfolio.
According to Bailey, there has been a major shift across the industry in the adoption of benchmarks.
He says: “When we first started there were no benchmarks. The group tended to use the FTSE 100, inflation or interest rates. Today, we are more nuanced. We try and ask, ‘What does good look like?’”
Hawksmoor makes use of the Pimfa benchmarks, which tend to be useful guides, but also base a lot on their risk assessment questionnaires.
“These tell us more about a client than asking whether they are high, medium or low risk. It is about getting clients to define their goals and expectations,” explains Bailey.
He believes clients should understand what they are getting – and that includes costs.
“Wealth managers try and undercut each other, but we find that clients increasingly recognise you get what you pay for. It doesn’t necessarily win you business initially, but it should forge better relationships in the longer-term.”
This open and honest dialogue with clients extends as far as telling them they may lose money in a year.
“We explain this is a tough moment to manage money – and that if we lose money at a slower rate than everyone else, it will be very good in the long term. I won’t have to work anywhere near as hard until we are back in profit.”
The group has a risk point scoring system, allocating risk to every fund, equity or bond bought.
The aim is for the right risk number at a portfolio level for the client. Bailey says he is trying to get close to the shade of grey that suits the client, rather than look at things in black and white.
There are two other investment managers in the Bath office with Bailey.
He says they are a ‘nicely rounded group’, with everyone having individual strengths and weaknesses.
Each has a different way of looking at things and they are able to challenge one another without feeling threatened. They have worked together since 2016.
“We’re all the wrong side of 45 and have seen a fair bit over the years.”
The turning of the tides
Bailey says that a lot of bad news is factored into markets today and the pessimism may have gone too far.
However, that is not to say it won’t get worse before it gets better. He says that while several factors are starting to shift, there is unlikely to be a change in market direction until the end of the year.
“There’s a lot of fear about whether we are in a 1970s-style inflationary spiral. However, we see two key differences. Unemployment is much lower. But there is also the influence of technology.”
The group spots value in some alternative energy options. Bailey says that some ESG areas had become over-hyped. Investors weren’t as critical as they should have been. However, after a reappraisal, opportunities are emerging.
“It needs to be looked at calmly and parts of it have been out of favour,” he says.
Wood-Smith recently wrote: “According to science, the rise in global temperature creates extreme weather events: droughts and floods to you and me. The ice at the poles is also melting, which in turn raises sea levels. This means it is only a matter of time until Fiji, for example, disappears. That matters.
“You may also have missed that the government of Indonesia, the fourth most populous nation, has decided that it cannot defend its capital city, Jakarta (a city of more than 10 million people), from the sea and will need to build a whole new city, on the island of Borneo.
“It is a fair guess that, among other things, this will create the world’s largest construction project. The tides are not going to stop rising just because inflation is 10%.”
Having been underweight fixed income, Bailey believes value is starting to emerge. He says: “When we are reassured that interest rates are peaking, it should be an interesting moment. We suspect the peak will be lower than people expect. Debt is now so big that interest rate hikes have a big impact.”
Across the group’s portfolios, they are trying to remain nimble and alert to changing circumstances.
Hawksmoor is getting bigger, with recent acquisitions of Gore Browne Investment Management and Wellian Investment Management.
It is backed by ambitious private equity outfit Carlyle Group. Chief executive Sarah Soar has stated her ambition to grow assets to £5bn by 2025, recruit more female managers and appeal to younger investors.
Bailey is very much on board. He says: “If I had to make a plea for one thing in the industry, it would be for more women investment managers. It’s the one big thing the industry needs. It still feels a little ‘alpha male’ at times and our clients would really appreciate it.”
Ian Bailey joined Hawksmoor in 2021, bringing with him over 30 years’ experience managing investment portfolios. Having started his career in what was then known as the Inland Revenue in 1983, he joined Lloyds Private Banking in 1988. In 2003, he moved to Williams de Broë (acquired by Investec in 2012) as a senior investment director. Although Bailey has a very wide range of knowledge and experience, he specialises in family grouped portfolios as well as trusts, investment companies and non-domiciled or non-resident clients.
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This article first appeared in the July edition of Portfolio Adviser Magazine