'Employ cynicism at all times, because you are sold to your entire career,’ is the one piece of advice Rathbones’ David Coombs gives young fund managers.
The multi-asset boss, sitting next to assistant fund manager Will McIntosh-Whyte, explains: ‘I have been sold to by fund sales people, fund managers, CEOs, investor relations departments, everyone is selling to you throughout your career. If you don’t think you’re being sold to take yourself out of the room for five minutes and slap yourself. Because you are. We are the ultimate buyers.’
He says that with every investment a fund manager buys, ‘you are buying into someone’s story’ and he adds: ‘These people are not your friends, however nice they are. They’re selling to you and never ever forget that.’
Citywire AA-rated Coombs and McIntosh-Whyte have been working together on Rathbones’ multi-asset range for almost four years now, although both joined the company back in 2007.
Coombs started his career in 1984, working for Hambros Bank in Guernsey as a bank clerk. He says that because he ‘was rubbish at it’ the bank transferred him to the investment department. Five years later he moved to Barings to run its custody division.
‘It was quite interesting because it was the late 1980s and I set up their emerging markets custody network and I was seeing investments from the other end and how difficult it was. While custody wasn’t going to be my future, it was an interesting time to be in it.’
Coombs left Barings in 2007, having seen first-hand the collapse of Barings Bank in 1995. He says witnessing the company unravel so quickly was a learning curve for a young fund manager, and still informs his decision-making today.
‘I saw the mismanagement, and the mistakes that were made and people didn’t question management. To see a company lose all of its cash in 24 hours was a massive learning curve for me to see what can go wrong very quickly.’
Coombs then joined Rathbones’ private client arm and was tasked with building a multi-asset business, while McIntosh-Whyte joined the company’s charities team. McIntosh-Whyte had left university the previous year, after which he spent some time carrying out research for a shipping company.
He stayed with the charities division until 2015, when he found out Coombs was hiring for his team.
At the time, the multi-asset strategies were undergoing a period of change as Coombs had decided to switch from investing in funds to gaining direct exposure to the underlying asset classes.
‘The business knew it wanted targeted return-type strategies, but didn’t quite know what to do with them once it had them. Fund of funds was the way I had to manage them. It was my multi-asset view, but I had to execute that via funds. Then, at the back end of 2013/14, I decided that now that Rathbones had started to grow its research department, I had more resource available to me.
‘I was getting frustrated with the fund of fund approach. I wasn’t able to back my convictions. You don’t have total transparency on what you’re holding. You’re outsourcing some of those decisions to other people. So I wanted to move back to direct investing, which I had done at Barings.’
After running a parallel strategy for a year to prove to management that it could be done without giving up performance, the new versions of the funds went live in October 2015. The whole multi-asset range now has just over £1 billion in assets.
Last year the company also launched a managed portfolio service for clients with over £15,000 that invests in Coombs’ funds. The range is only available through Rathbones, which was a conscious decision so they can invest without the constraints of third-party platforms, but is also why there has been a push back from some IFAs, Coombs says.
‘But that push back is now going to come back our way. We think Mifid II is helpful because we know the clients. If we had to do a 10% [notification of loss] letter we can send it to them direct.’
After all this time, the pair are adamant that investing is still about people, whether you are investing in funds or companies. As an example, Coombs recounts the story of why they decided to sell Colgate.
‘We came out of a meeting in New York and sold the stock. Not because they gave us any information that we didn’t get from the sell-side. But when I understood the way they were thinking about how they were going to sell into China a premium toothpaste, I didn’t believe it. We came out from a Q&A and we just focused on one part of the meeting and it completely changed our view on the whole sector of consumer staples and how you sell into China,’ he explains.
‘Sell-side brokers just want to give you buys. They’re tellers of stories. For us, going to that meeting and coming out with a sell, that was the most important meeting of that trip. After that we not only sold Colgate, but we sold Henkel and Johnson & Johnson and some other stocks. The reason was we felt the China story wasn’t as clear we thought it was.’
The Multi-Asset Total Return and Strategic Growth funds were the first two launched in the range and are coming up to their 10 year anniversaries. From the end of June 2009 to 31 January 2019, the funds have returned 57.45% and 96.25%, respectively. This compares to Libor GBP 6 month +2% return of 30.41% and the CPI +3% rise of 61.77%, respectively.
The pair spent the last year building up a basket of defensive instruments, buying gilts, Treasuries and Australian government bonds.
Coombs says that for the first time in his career he also bought Japanese government bonds, as well as some gold. He points out that although there was some negative performance in 2018, the put options they had on the S&P 500 helped protect the portfolios.
McIntosh-Whyte says they also made changes to the currency hedging in the portfolios and are now hedging 75% of the dollar exposure.
Coombs adds: ‘In the equity portfolio, we are trying to run a lower risk strategy. My definition of a lower risk equity strategy is quite different to others ― ours is probably rather expensive growth stocks at high multiples. We see significant risks and volatility in the markets over the next five, 10 years. Therefore we want to own companies that have high visibility of future growth.’
Examples of such companies, which encompass e-commerce, artificial intelligence and disintermediation, include Amphenol, US Bancorp, Amazon and Alphabet.
‘We want to be exposed to the US consumer and Chinese consumer. Commerce strategy is not just about developing an app or a website. It’s a full on strategy. Price visibility is everywhere now, it’s very hard to compete on price,’ Coombs says.
‘It’s really important that companies understand the threat of disintermediation, AI, VR, all the other technologies, and embrace them, but also provide an alternative that customers value.’
Fund management itself has been significantly affected by technology over the years. While the pair agree that certain advancements help them in their day-to-day management of funds, Coombs says it has also affected his decision-making in a negative way.
McIntosh-Whyte says: ‘I imagine 30 years ago if you wanted to know about a company you relied on other peoples’ reports and sell-side analysts, and they don’t always give you a great overview of what a company actually does. So things like company websites take away your reliance on the sell-side.’
For Coombs however, there is now too much instant information and that is making markets more volatile.
‘It’s made the job harder in some respects. Information is out there so quickly and everyone has it. It has made trading more volatile. You have high frequency trading, you have the rise of passive investing. That’s altered the way markets trade, the way stocks behave.’
He gives the example of Campari, which has performed well, but is now making the pair nervous ― not because of stock specific issues, but because of how the market will react to macro and political news from Italy. As it is such a big part of the benchmark, it will underperform if people pull money out of the index.
As we end the interview, McIntosh-Whyte shares his one piece of advice to newcomers: ‘Understand the risk of everything you invest in properly. It’s great to hear the bull case but you always have to consider the bear case. If you get hit by a really obvious risk you didn’t think of in time, that’s the most frustrating thing in the world. We build a bear case for everything. We make sure we’re getting paid enough for that ultimately.’