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By Laura Dew, 4 December 2014
In the lead-up to a rebrand as Sanlam FOUR, boutique asset manager FOUR Capital Partners is continuing to gradually expand its offering to clients.
In its capacity as an equity specialist, there are still gaps in the market for FOUR to fill
Since launching with a single UK equity fund in 2006, FOUR’s product offering has been extended to include multi-strategy, global, and Europe ex UK funds, and the group plans to launch a US fund this month. Chief executive Derrick Dunne founded the company with UK equity fund managers Tom Carroll, Chris Rodgers, and Ted Williams, whom he knew from dealings with Schroders.
This was his second turn at running a business, having set up Attica Asset Management in 2000 with Guy Davies. In 2005, the firm was renamed MM Asset Management and Dunne sold his holding to American Express before departing to launch FOUR Capital Partners. “The idea was always to have a firm with a deep-seated investment culture and multiple investment strategies managed by the best investment teams available,” Dunne said. Funded privately with three years’ worth of capital, the first fund was launched in 2006. Dunne said a crucial lesson he has learnt is “never burn bridges” – one of the firm’s first backers was Russell Investments, where Dunne began his career as an office junior in 1990. “I have been an employee of the firm, competed against the firm, and now it is our second-largest client. It invested £200m at a time when we only had £20m and performance has been good. That is a nice payback for them for taking that chance.”
According to Dunne, persuading investors to take a risk with a boutique firm is one of the biggest challenges smaller firms face, particularly when trying to gain institutional assets. This was one of the initial factors which attracted FOUR to partner with Sanlam International Investments (SII) in 2009.
“We funded the company privately at first but, as the credit crisis unravelled, it became clear it was going to be a challenge. It would have been a stretch for trustees of pension schemes to take a risk investing in a new privately-owned company. Lots of people liked the idea of using a boutique, but there were very good reasons for them to go for a tried and tested fund,” he explained.
“Sanlam is a very solid company, and the name helps with the reputation, so people know we have that backing behind us.”
SII first took almost a 30% stake in FOUR in 2009, and recently increased this to just below 90%, in a move which will see the firm rebranded as Sanlam FOUR. The move will see an increase in total assets under management and allow further assets to be allocated to the existing FOUR funds. It has also meant an increase in headcount, with seven SII staff moving to FOUR’s Farringdon offices.
Having received Financial Conduct Authority approval this month, SII will be dissolved and both companies will initially operate under a holding company before becoming a single regulated entity, while the FOUR funds will be rebranded Sanlam FOUR next year.
It has also been announced SII’s Fund Solutions division will take over fund research responsibilities from Sanlam Private Investments, following the departure of SPI’s head of managed funds Paul Surguy in November.
Since launching the UK equity fund, FOUR has developed its range to include a Europe ex UK fund in 2009, managed by Dino Fuschillo; a global equities product the following year, managed by Colin McQueen; and a multi-strategy offering in 2012, managed by Mike Pinggera.
The firm has strict capacity limits on its funds. It runs £1.4bn across segregated mandates and its retail funds, though no strategies are in danger of reaching those limits as it stands.
“We are always open to new ideas, and can accommodate further teams. We made a conscious decision at the start to avoid having a consistent investment process so each team can work on its own individual merits,” Dunne said.
FOUR’s most recent hire is Adour Sarkissian, who joins from ING where he ran a $1.7bn US High Dividend fund for seven years. Rather than searching for a US manager, Dunne said the firm was approached and, having met with Sarkissian, decided there was a gap in the FOUR range for a US product.
FOUR is now launching its own US Dividend Income fund for Sarkissian in mid- December, seeded with $100m from Sanlam. This will be split into two pots: $75m in a segregated mandate and $25m in a pooled fund for retail investors, and will be run along similar lines to Sarkissian’s former ING fund.
Dunne said FOUR Capital’s unusual ownership structure is a significant attraction for new managers wanting to join the business. As well as a base salary, investment teams own 30% of their own business line and all employees own 11% of the business. This approach is unchanged by the SII deal.
“This approach allows us to get airtime with very good people, and also motivates managers to achieve good performance. We do not suffer from a lack of choice when it comes to hiring new managers.”
While Dunne disagrees the burden of regulation represents a particular challenge for smaller firms, he dislikes the increased involvement of politicians on issues such as bonuses.
“Asset managers are not bankers, it is a completely different space, but it looks like they are trying to apply the same rules to us.”
Two specific regulatory issues he highlighted are the changes to UCITS rules and the Consumer Panel’s proposals for a single retail fund charge. Under new UCITS V proposals due to come into force in 2016, fund managers must take half of any bonus payments in units of their own funds. Dunne said fund managers at FOUR do hold allocations to their own funds, but that the proposed rules are too prescriptive.
“This seems a political move in many aspects,” he said. “Funds are not governed by limiting a manager’s salary or making them invest in their own fund. It can also be unfair on the manager, if it is a young person managing a cash fund, for example. It is very prescriptive, and trying to protect against a risk that does not exist.”
He is similarly doubtful about the Consumer Panel’s proposals on fund charges. This would see myriad fund costs replaced with a single investment management charge representing the cost charged to the end investor.
“We are big fans of transparency, but putting a single price on one fund is taking things too far. People could stop trading in order to avoid generating fees. There is nothing to stop people being told how much a fund has spent on dealing at the end of month, but it is very difficult to come up with a single price ahead of time.”
However, like many asset managers, Dunne can see opportunities presented by the changes to pension legislation which will come into force next April. This will see retirees no longer all-but forced to buy an annuity, but able to consider other options instead – such as income funds. It is in this space where Dunne thinks FOUR can benefit.
The US fund will be the first dividend-paying fund the company has launched and Dunne noted clients are desperate to receive an income, “often to the detriment of anything else”.
FOUR is also considering adding an enhanced income share class to certain funds. It is also hoping its closer link with Sanlam will increase awareness among retirees. “Through their financial advisers, Sanlam is looking at decumulation strategies, and anything with income would be good for that as retirement can be a long time. They think [our] Multi-Strategy fund is an interesting option as it offers definite downside protection, as is the new US fund, which will have a dividend yield of 4%.”
Dunne is full of ideas for the new Sanlam FOUR business. In its capacity as an equity specialist, Dunne feels there are still gaps in the market for FOUR to fill. Sarkissian’s US fund is due to launch in mid-December, and Dunne’s next target is opportunities in the areas of Asia ex Japan, which he has been considering for a while, and global listed property.
In five years’ time, Dunne said he would like to see the same investment teams in place managing money, having achieved their client objectives and reached their stated maximum assets under management. Highlighting that a boutique firm does not necessarily have to mean a small firm, he can see plenty of areas for development ahead of FOUR Capital.