The ‘extreme’ growth of regulation and heightened stock market volatility due to increased macro trading are the two biggest industry changes Stuart Mitchell has seen since striking out alone.
His eponymous boutique, SW Mitchell Capital, passed its tenth anniversary late last year and now has $2 billion (£1.4 billion) of assets under management, up from $700 million at launch.
‘Looking at how the business has developed over the last 10 years, it has pretty much followed exactly how I thought it would,’ Mitchell said. ‘We could arguably be a bit bigger, but no-one expected the near-collapse of the banking system.’
He added: ‘One big surprise has been the whole growth of regulation. We outsource our compliance, but we still have three people checking it, including our own general counsel.
‘We’ve perhaps gone over the top and gold-plated it. It will have to swing back though or it will make the industry significantly less competitive. [The previous Financial Conduct Authority chief] Martin Wheatley went so extreme.
‘The Americans do it much better, they do whatever they can to protect their “golden industries”, financial services and defence.’
While the regulatory burden is onerous for smaller firms, Mitchell has witnessed first-hand the value destruction that can occur when traders do flout the rules.
Mitchell joined Morgan Grenfell from university and was later tasked with taking on the now disgraced manager Peter Young’s three European funds, after an internal investigation by the firm uncovered a string of fraudulent trades.
‘We took out all of the problem stocks and Morgan Grenfell was extraordinarily generous, putting about $1 billion in. It bought them out at cost and took the sector average performance for the period and compensated the fund,’ Mitchell said. ‘I was left with a weird portfolio, which I had to restructure.’
He went on to head a team of around 32 investment professionals that oversaw $24 billion, some $6 billion of which Mitchell ran personally.
He moved to Jo Hambro Investment Management, now Waverton, in 1998 where he launched a European long-only fund as well as a long/short equity hedge fund, Charlemagne, which he still runs.
Mitchell set up on his own in 2005, taking with him the hedge fund and a number of long-standing managed accounts he ran for personal clients.
‘Like everyone else at the time, I wanted to set up my own business and do my own thing,’ he said.
Over the intervening years, the firm’s headcount has grown eightfold from just two to 16 currently. Its fund range has also grown, with his flagship SWMC European, which was launched in 2011, subsequently joined by the group’s Small Cap European, Emerging European and UK funds.
The outlook for Europe
Despite concerns about the future of the EU, as borders across the Continent close to try and stem the refugee crisis, Mitchell remains upbeat.
‘We think the risks [of the EU failing] are negligible,’ he said. ‘Even in Greece, 75% of the electorate wanted to stay in the EU and support for the euro has barely wavered over the last 10 years.
‘The pro-European status quo parties are not under threat yet, the National Front stuff is just a protest. The broad assumption we make is that Europe remains politically stable and the cost of business is the same wherever you are in the bloc.’
Looking closer to home and with the EU membership referendum looming in the UK, he said: ‘Brexit is not going to happen. It would be madness, and to do such an act of self-harm would be stupid. There will be some face-saving deal, a kind of compromise, it’s been worked out already.’
Top sector calls
Citywire A-rated Mitchell’s SWMC European fund is up 35.3% over three years to the end of December, compared to a 24.4% rise by the average manager in the Citywire Long/Short Equity sector. Big sector calls have proved beneficial.
‘We’ve had nothing in mining, metals, oil and luxury goods. We sold anything China-facing two and a half years ago,’ he said.
‘Our best holdings have been British housebuilders, which we have had for four years. Our view is that this cycle is different, 350,000 people are expected to come to the UK through immigration this year and will need 250,000 new houses at minimum.
‘We now have an oligopoly with the biggest companies in the sector accounting for 70% of the market, up from 30% previously. It means that the cost of land is not moving.
‘There is a lot of upside and the sector can have another good year.’
While his top-down calls have added significant value, he notes that the rise of macro traders have resulted in heightened volatility in the stock markets.
‘Now there is a much greater proportion of macro players, short-term it makes it more wild and unpredictable,’ he added.