Returns seem harder to come by today, but investment outperformance is still possible with the right approach, argues James Hambro & Partners’ Head of Investments, John Langrish.
Some contend that investors have to settle for lacklustre returns in today’s persistent low-yield environment, at least at the levels of investment risk they have hitherto preferred. Yet there are voices arguing that attractive performance is still possible, even at pretty modest risk levels. One is John Langrish, Head of Investments at James Hambro & Partners, the London-based wealth management boutique that launched in 2009.
Investment outperformance (while taking on an appropriate level of risk) is naturally what all investors seek, yet this can be notoriously tricky to “pin down”; given the various benchmarks and performance measures that are in use, making it easier for prospective clients to be able to compare investment performance on a like-for-like basis is something wealth managers are increasingly focused on. Helpfully for confused investors, Langrish is able to offer a very compelling – and simple – point of reference: his firm is 17% ahead of its peer group average.
To expand on this headline figure it is first necessary to give some background on James Hambro & Partners’ ethos and investment model. Conceived to combine an institutional-quality investment process with a boutique level of client service, the firm offers bespoke portfolios built around four strategic frameworks, with Mandate IV holding up to 85% equities. The vast majority (in fact 90% of the firm’s portfolios) sit in Mandates II and III, however, and it is these two categories in which the firm is steaming ahead of its peer group as measured by Asset Risk Consultants (ARC). ARC is a leading investment management research company that takes data from over 50 investment houses to help benchmark performance in four core categories – Cautious, Balanced, Steady Growth and Equity Risk.
Outstripping benchmarks
James Hambro & Partners’ Mandate II was established in June 2010 with a strategic asset allocation of 25% fixed income, 55% equities (split UK/International), 15% alternatives and 5% cash. From launch to 30 June 2015 it has returned 48.8% while the comparable ARC Sterling Balanced Index is up 31.9% – putting James Hambro & Partners 16.9% ahead of its peer group average.
Mandate III has a strategic asset allocation of 15% fixed income, 70% equities (split UK/International), 10% alternatives and 5% cash. It has returned 51.1% since inception on 1 April 2010 to 30 June 2015, putting the firm 17.4% ahead of its peer group average (as represented by the ARC Sterling Steady Growth Index’s 33.7%).
Nor is this outperformance the result of one isolated blaze of investment glory, Langrish pointed out. “We’re ahead of our peer group average for 2010, 2011, 2012, 2013, 2014 and this year,” he said. “It’s not just one year that we’ve had a whizz-bang year – although we did do particularly well in our first year and in 2013. In every rolling three-year period we’ve never underperformed our peer group average – and you can take any period, not just the calendar years.”
So what is the firm’s secret to having achieved outperformance so consistently?
Firstly, Langrish is keen to emphasise that “James Hambro & Partners is not a black box, qualitative investment house; instead, we focus on discipline and buying good companies – ones showing good return on capital and that are sustainable”. This, he explained, combines in-depth analysis of company fundamentals with an acknowledgement of the importance of the human, subjective element of investing. So, the starting point may be a universe of 350 stocks in the UK as well as stocks in the US and Europe, which are then whittled down to only a handful showing the desired characteristics. Further due diligence then follows, which will likely involve face-to-face meetings with management teams, and this kind of access (and therefore insight) is greatly facilitated by the firm’s affiliation with the heavyweight institutional investor J O Hambro Capital Management, Langrish continued.
Stock-picking and asset allocation
In fact, such is James Hambro & Partners’ prowess with stock-picking that the firm is bucking the accepted wisdom that 80% of returns are typically derived from asset allocation (finding the right mixture of asset classes and markets) rather than from the selection of individual instruments. A StatPro attribution analysis of the firm’s performance over the past few years shows that around 30% of outperformance has come from asset allocation and 70% from stock-picking, Langrish explained. This was particularly marked in 2012 and 2013, with some of the biggest contributors to growth over the entire timeframe being names like Blackstone, 3i Group and Visa.
That is not to say, however, that asset allocation is an unimportant part of James Hambro & Partners’ performance track record. In the two years to the end of June 2015, its contribution has been 50% and this year its role has been particularly important, Langrish noted. While final Q3 figures were not yet available, he is confident that clients’ portfolios have been resilient amid the recent market turmoil.
More recently we’ve added more value through asset allocation, said Langrish. To give you an example of that, we aggressively took money out of the market in June and then again at the start of August before the market took a downturn. The firm has put significant resources into the construction and back-testing of its investment mandates, creating proxies so that all asset classes could be analysed for their risk/return and volatility characteristics on a 40-year view (as opposed to the more usual 10). We don’t try to predict the future, but we have looked at returns through 40 years and all kinds of cycles, Langrish continued.
James Hambro & Partners’ investment ethos is as much about “avoiding the lemons” as it is seeking out value opportunities through bottom-up stock selection, Langrish said. On a broad view, the firm has avoided mining stocks, cyclical engineering companies and emerging markets generally; to give a more granular example, it avoided a certain household name grocer which looked attractive to many but subsequently plummeted – simply because the investment team “believed that after meeting senior management there were better opportunities to be found”. “Often the worst thing you can do is to think, ‘I’ve got to do something’,” he said. “At the moment we don’t feel confident to go back into the market. We’ve been focused on being prudent and cutting back risk in the right areas.”
Following the financial crash banks are now increasingly proud to be seen as “boring”, and likewise justifiably cautious investors are likely to find a lot to recommend in Langrish’s slow and steady approach. “We focus on companies in sectors like pharma or telecoms that grind out good results year after year, growing dividends,” said Langrish. (Roughly a third of portfolio growth has derived from dividends.) ARC tells us we’ve added value through adding a little more growth every month. In short, we’ve invested with conviction, but have not bet everything on red or black.
James Hambro & Partners may have only been launched in 2009, but its focus on making steady incremental gains and “avoiding lemons” has helped it achieve very high levels of advocacy from its growing client base, as well as an impressive £1.75bn in total assets under management (as at the end of August 2015). As the industry continues to work on ways to make it easier for investors to compare performance at a glance, any firm that can simply say that 90% of its clients’ portfolios are 17% ahead of an equivalent peer group average – and ahead over any period since inception – would certainly seem to have a compelling story to tell.
About John Langrish:
John Langrish is Head of Investments at James Hambro & Partners, the London-based wealth management boutique that launched in 2009.
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