In a picturesque valley deep in the Surrey stockbroker belt, the former manager of a £5.5 billion fund has just shaken hands with a client whose assets amount to less than a third of the £50,000 minimum threshold.
‘We’re not going make any money out of him,’ Craig Harper concedes, before turning to a six-by-five-feet collage of the residents of Mole Valley hanging on the wall behind him. ‘But this is what it’s all about: helping people in the community.’
It is an exceptional case however, he adds, but only because Harper has to be realistic about the economics of business, having staff to pay.
In a business where the majority are motivated by a desire to accumulate as many assets as possible, one wonders why Harper, the founder and managing director of Mole Valley Asset Management (MVAM), opted to trade the realtively low risks and high rewards of a career in the Square Mile for the trials of launching a start-up into an already clogged wealth industry.
‘Funds are run using a target benchmark, but the risk profile does not match the end investor,’ he explains. ‘People are paying for risk they are essentially not allowed to take.
‘Risk profiles came in when financial advisers took over and got to know the clients and were therefore able to do the risk profiling. However, because the adviser has never run money themselves, that profile often gets lost between them and the fund manager.’It is this gap between conceptual knowledge and an actual ‘feel for investment’ that Harper says often leaves investors out of pocket on a risk-reward basis. And an issue he hopes MVAM can remedy by cutting out the middle man and investing clients’ money directly.
‘People end up getting massively over-diversified, but still pay the costs of taking the risk,’ he says.
‘We look at the individual and tell them that if they take “this amount of risk, you can make this amount of money, but you can also lose this amount of money”. It is as simple as that – helping people understand that they can get returns for taking risk with their money.’
Harper admits it has been a relatively slow start. Established in 2014 with £7 million, the company’s assets under management (AUM) currently stand at £26 million, around 85% of which is dedicated to a single strategy.
‘We tend to cater to smaller clients,’ says Harper. ‘The ethos of the company is that it is for everyone – that is why we give free advice.
‘We want clients to have a relationship with the person who runs their money and know who is making the investment decisions for them – their holdings, manager and performance. While this does affect the scalability of the business, it is something we want to keep.’
Potential clients either walk in off Dorking high street, or are referred by their adviser. If their objectives match MVAM’s capabilities, their money is allocated into a bespoke portfolio containing any combination of between 20 and 35 UK and European equities, and corporate or sovereign bonds – although fixed interest is not currently being employed due to prevailing market conditions.
While the operation itself may be fledgling, the management roster is anything but. Picking the stocks are Harper – whose CV includes sovereign wealth and balanced mandates at Daiwa SBI, what was then Colonial First State and Société Généralé - and fellow portfolio managers Andrew Holder and John Baillie, who draw their collective experience from stints with Berenberg Capital Markets, JP Morgan, SocGen and Cazenove, among others.
Support comes from a four-strong back office team, with sales and distribution overseen by investment director Michael Hart, a former director of Citi and HSBC’s institutional sales divisions.
As well as tailored client portfolios, there are also two models.
These comprise a ‘Best 20’ pan-European equity mandate launched earlier this year and an IHT-efficient portfolio investing in AIM-listed companies. The latter has returned 82.6% in the five quarters since its June 2016 launch – overcoming an 8.6% drop during the Brexit tremors – and Harper intends to launch three more portfolios in the next 18 months, with one possibly having an income tilt.
But despite the strong performance, he emphasises that MVAM knows ‘nothing more than anyone else about picking stocks’. While the team conducts the usual fundamental analysis and meetings with company managers, Harper’s strategy instead relies upon strict position sizing, trend identification, and finally, ‘letting our winners run’.
‘Position sizing is the most important factor in portfolio performance. While you could pick 20 poor stocks and have them all go wrong, the equity market is still tilted in our favour,’ he says, citing a 2013 Cass Business School study which ran 10 million randomly picked ‘monkey’ portfolios.
‘Something like 90% of them outperformed. This is because monkeys have no concept of risk, whereas fund managers will cut their winners. You need to let your stocks run.’
To accurately quantify when a ‘runner’ can be let loose, Harper admits, is more a case of having market experience than mathematical diligence, and this is where allocation comes to the fore.
‘Boohoo is a good example. We bought it for our investors at 25p, which we let run to 75p and then sold because there was another online retailer we liked and we didn’t want too much risk. However, we bought it for the IHT portfolio at 50-55p, and it is now around £2.20 [199p at time of publication],’ he says.
'If we’d looked at the fundamentals we’d have sold, but we want to keep shares in the portfolio for a 12-month minimum, which we can then rebalance annually and redistribute the winners across the other shares. It is about how long the market takes to reflect new information. We are not crystal ball-gazers; what we do know is portfolio construction and how the market works.’
Harper says it all comes back to MVAM’s desire to be paid for its performance while taking fund management out of the Square Mile’s bubble and putting it back into the community.
In keeping with this disdain for what he believes is the City’s habit of handing its managers ‘monopoly-like returns’ while effectively short-changing clients, MVAM’s revenues are generated largely on an incentive basis.
Starting at a 1% per year base rate on the first £75,000 and 0.75% on anything over, including VAT, the firm charges a 15% performance levy above a 5% net of fees annual hurdle, as well as a 0.3% plus £5 administration charge on each trade. If, however, you decide to invest in the AIM IHT portfolio specifically, annual rates are 1% flat plus VAT.
This paid-for-performance approach has gathered investment from 100 clients with portfolios generally ranging from £50,000 to £2.4 million – although there are exceptional cases such as the aforementioned £14,000 man – in addition to ISA and Jisa money.
And, having just turned its first annual profit, the firm is ready to capitalise, with Harper targeting £100 million in assets as the launchpad from which MVAM will expand across the UK.
‘We want to attract people with similar experience who want to set up branches around the country and really know their clients,’ he says, highlighting Cheshire and the North East as interesting prospects.
‘It is essential that the money is managed locally – we want the asset management business to be a part of the community it is in,’ he says.
‘Also, what we need to get it really going is distribution, and we are forming those channels with local advisers and accountants.’
Back in the Home Counties, MVAM is currently engaged in negotiations for an acquisition deal which Harper says would triple the firm’s AUM if it goes through.
Nevertheless, he is wary of slipping into the ‘backwater’ hazard of operating outside of major cities, an issue he has guarded against by ensuring that MVAM carries no legacy technology and is now ‘as close as we can be’ to regulatory soundness.
Looking ahead, Harper is wary of the ‘slow-motion car crash’ looming over UK plc, and he forecasts that sterling could yet plunge a further 20-30% in the next few years – a prediction which has seen MVAM’s European exposure rise from 25% to 35% over the past 12 months.
Still, as is his stated ethos, the City big shot turned Dorking community investment manager is uncompromising regarding his gloomy outlook.
‘What we are trying to do is just be honest: we will mess up, and when we do clients will lose money. No one says that, but we don’t mind.’
An 86% run-up should soften the blow.