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Common sense investing

30 June 2020

Gary Potter and Rob Burdett of the BMO multi-manager team have been managing funds together for 23 years. Their longevity and success in the market, they say, is down to a common sense, independent and truly whole-of-market approach. Rob Kingsbury spoke to them about their investment ethos.

This article was first published in the September 2019 issue of Professional Paraplanner.

Gary Potter and Rob Burdett, co-heads of the BMO multi-manager team, began working in the industry in the 1980s. They have been working together, along with two other members of the team, Kelly Prior and Paul Green, since 1996. Hence the team members have invested through several market crashes and the global financial crisis. It is a combined wealth of experience that very few asset manager teams can claim to have under their belts.

Since 1996 they have been running multi-manager funds and currently, with BMO, have over £3billion under management. Their experiences over the years have shaped their investment philosophy and led to the development of a method of investment that they describe as taking “a common sense, independent and truly whole-of-market approach”.

As Potter and Burdett explain: “We have a very clear vision that we’re retail managers managing ordinary investor’s hard-earned savings. In the 1987 crash, when the markets fell 35% in two days, we saw first-hand the stress that people felt in their savings. That shaped both of us. We think very hard about the job we have as custodians of the capital entrusted to us, which often is money that cannot be re-earned if it is lost. So, our number one job is to keep the money safe to the best of our abilities, giving savers the benefit of compound interest.

“This year our funds may be second and third quartile, but the return profiles are between 8.5% and 21%. For clients that is great return but in the eyes of the industry we’re second and third quartile in the sectors in which we sit. While we need to recognise that so advisers and paraplanners will buy into our funds, we’re not managing money for the industry, we’re managing money for real people who want it in a safe pair of hands.”

The team’s investment approach they describe as “traditional, multi-manager fund of funds”. It’s a philosophy they have held since 1996 and, they say, their fundamental process has not changed over the years. “We are buying fund managers,” Potters says. “Fund management is a people business. We don’t think there is a right or wrong way of running money – people find the way that works for them. We need to understand that and be the best informed buyer we can be of that product.”

In achieving those returns, they take a genuine independent, whole-of-market approach, diversifying their funds by seeking out the best managers wherever they may be and not imposing a house view or rules on where they invest.

“One our founding ideas was to use a set of flexible principles applied with common sense rather than rigid rules,” Burdett explains.

“One of the common mistakes we see in multi-manager is where managers impart their own view on a portfolio – expensively.

“We think that the job of the multi-manager is to find great managers and let them run with the money. So we provide an outsourced solution that is a true embodiment of the independent, whole-of-market approach – free of house-style and focussed on the best fund manager talent – which means advisers and paraplanners can use us as such.”

The size of their combined funds, with a focus on all managers, also means they are able to access products that are not available directly to advisers and their clients, such as closed capacity and smaller funds that will not be on typical buy lists.

Fund manager buy-lists, Burdett says, will often require the products to be open to new investment, to be of a certain size, have a track record and a rating. “All of these have nothing to do with future performance. They are past endorsements or ways that make it easier to invest but they are limiting the independence and potential of that product.”

This can lead to funds piling into managers of larger funds, which can lead to liquidity issues, he adds. “There are diseconomies of scale in investment management. It’s common sense that smaller funds are easier to run, and most managers will say that.”

“We prefer a large number of small holdings with individually more exciting managers.”

Another key advantage of their approach they say, is their ability to buy managers who are in the process of establishing a track record. “In our experience funds often perform best in the early years of their life. Our philosophy of buying people means we can invest in managers who are building their reputations, not living off previous track records,” Potter says. “And if you find a good manager you generally want to stay with them, not keep flipping funds over.”

Covering adviser costs

Another fundamental principle agreed on when the team came together in 1996, was that the products “had to make sense mathematically”, Burdett says. “They have to outperform to cover the costs and make money for the client. Where people need advice, that has to be paid for, and in our view the product should cover that through its net performance.”

This is not something they believe the core/satellite approach to investment is set up to achieve, in multi-manager in particular, being, they think, “fundamentally flawed”.

“Core managers tend to have a target of the index plus one. If they hit that two years out of three, that’s not enough to cover manager fees let alone the cost of advice,” Burdett says. “Neither can a fully passive portfolio do that against an index.

“We use active and passive products, there is merit in both, but in our view a product in its entity has to have enough risk and balance to outperform after paying for advice, without taking undue risk with the money.”

Selecting fund managers

By buying managers on their ability to perform going forward, rather than just on their past performance, “which could be luck or judgement or a combination of the two”, the team recognises the inherent fallibility of the process, says Burdett. “We are always looking to improve the quality of those decisions. You need good information input, including analysing the performance of the portfolio in many different ways, analysing the underlying holdings, sending questionnaires with carefully crafted questions, using other types of questions when face-to-face – doing the due diligence on a bespoke basis.”

They describe their research process as a combination of Art and Science. The Art is understanding the management team, what they believe and do and why, and then to score that against key criteria of fund, business, team and process. The Science involves a forensic overlay.

Potter explains further: “We score managers on qualitative criteria across 16 factors, including size of the assets that they run, whether they are happy in the team they work with, how they are incentivised, how they are motivated, who is the number two, who is the CIO and so on. All 16 factors come into play when we are assessing the quality of the management team running the portfolio.

“It’s a dynamic and pragmatic approach. We are constantly reviewing funds and have about 20 per sector waiting in the wings. Because we are willing to invest in new funds we may find something that makes us reassess what we have and whether it is the best for the portfolio. Could there be something better?

“What we’ve seen is that over the years investment has become commoditised and with that has come the trend to buy cheap and to look to the short-term. What has been lost along the way is patience. We have the advantage of being able to look long term and to buy managers we feel are going to perform over time.

“Long term, quality managers work. They may be more expensive to buy but if that produces greater net gains than can be achieved by passives and other funds, that is in the investor’s better interests.”

An important part of the process, he says, “is that we track everything we do to learn from it.”

Burdett adds: “With every decision we make, we are trying to stack the risk/reward odds in the investor’s favour.”

Five principles

The BMO team follow a set of principles which, they say, “keep us adaptable and open to new opportunities.”

  1. Fund selection is fundamental
  2. Invest in people not just performance
  3. Don’t be afraid of ‘new’
  4. Cost counts but value is vital
  5. ‘Time in’ not timing

BMO multi-Manager team

The team now consists of 10 people and is structured as a limited liability partnership. The bringing on of a defined team is part of the transition process for when the elder statesmen of the group may decide to call it a day. “We are a very strong and inclusive team built around an investment process tried and tested over a 23-year track record.”

(l-r) Paul Green, Anthony Willis, Rob Burdett, Wai-Ling Lam, Gary Potter, Adam Norris, Catherine Sauer, Kelly Prior, Scott Spencer (out of picture Rhianna Ford)

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