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Investing with the stars: how Furnley House searches for hidden gems

Picking out attractive funds that fall under the radar of rivals is key to the investment approach of Stefan Fura of Furnley House.

Investing with the stars: how Furnley House searches for hidden gems

Leicester-based Furnley House has delivered three years of outperformance in its in-house portfolios. The firm’s Active Model Portfolio 5 beat the Investment Association Mixed Investment 20%-60% Shares sector in 2015, 2016 and 2017. And its equity share was mainly towards the top of that range.

‘We also benchmark against our risk profiler Distribution Technology’s default asset allocations, as our portfolios are a tactical overlay of them,’ said senior partner Stefan Fura. ‘The analysis shows we’re adding value in our fund selection and asset allocation.’

Innovation is one of Furnley House’s business values. In investment, that includes looking for ‘hidden gems’. These are typically funds that have not yet reached the conventional three-year period, or amount of funds under management, that most quantitative filters pick up.

‘We uncovered the TwentyFour Dynamic Bond fund around 2014,’ said Fura. ‘Then, when it hit all the filters, people start investing in it. But those already in got good value. The Jupiter UK Smaller Companies fund, with up-and-coming manager James Zimmerman, is another gem we’ve supported.’

This fund ranks third out of 50 funds in the UK smaller companies sector for one-year total returns. But, on a risk-adjusted basis, Zimmerman sits in the third decile, according to Citywire Discovery.

Close control

To find its gems, Furnley House works with consultancy Asset Intelligence Research. ‘The head of research Robert Love and his team meet fund managers daily,’ said Fura. ‘But lately we’ve developed the approach further with Robert. This is because we chose a fund last year that did not work, as it didn’t give us the style we wanted. There are risks to the approach, so we do it in a controlled way.’

Furnley House’s best performing holding in 2017 was the Old Mutual North American Equity fund, managed by Citywire AA-rated trio Amadeo Alentorn, Ian Heslop and Mike Servent. The team have top-decile, risk-adjusted returns in the US equity sector over one, three, five and seven years. ‘We like Old Mutual’s quant-based approach,’ said Fura.

The Lindsell Train UK Equity fund, managed by AA-rated Nick Train, is another top performer. Fura, who likes to mix styles, favours Train’s high-conviction approach.

Staying in Neptune’s orbit

One fund retained through some underperformance was the Neptune Japan Opportunities fund, managed by Citywire + rated Chris Taylor. Taylor has delivered top-decile, risk-adjusted performance over 10 years. But he saw a significant dive in relative performance in 2015 and 2016, and then a subsequent recovery.

‘We like the manager and understand the reasons for that underperformance were related to the Brexit currency situation,’ said Fura. ‘It’s come back well.’

Furnley House has also reviewed its asset allocation. ‘Distribution Technology had what we considered a significant over-allocation to UK equities,’ said Fura. ‘So, in October, we reduced UK exposure by 2% to 3%, reallocating to Europe.’

The firm has three client segments. Foundation-level clients typically have a pension solution from Royal London or a model portfolio service from Parmenion. Premium clients have Furnley House’s in-house model portfolios, with active or passive options, as well as quarterly reviews and rebalances. Meanwhile, bespoke-level clients may get an in-house portfolio core with extra satellite holdings.

For bespoke clients with specific needs, such as a corporate mandate or a specialist investment, the firm may use external discretionary fund managers. These are often Parmenion (for clients with ethical needs) or Psigma (for mandates designed to complement clients’ existing portfolios).

Active adaptation

Love chairs the investment committee, which has nine members in total. Seven are from Furnley House, while Love and another member are from Asset Intelligence. Fura said they are thinking of adding a client representative to the committee.

He said the firm is agnostic on active versus passive management, although its investments are 80% active. ‘Much backward-looking research around passives covers more conventional periods than we live in now,’ said Fura. ‘Active can adapt to the new environment.’ The firm is also considering adopting smart beta alternatives.

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