Professional partnerships are frequently built on a shared worldview. As pop culture has gone to some lengths to inform us, the truly great duos – Starsky and Hutch, Mulder and Scully, Tango and Cash – are formed from oil-and-water, odd couple combos of contrasting personalities, however.
Newscape Capital’s chief investment officer (CIO) Charlie Morris and its head of portfolio construction James Hutson count themselves firmly in the latter category.
‘If you were to split us apart slightly – and they jokingly call me ‘the robot’ here – I have a very much spreadsheet-driven, systems-driven approach,’ says Hutson of his quantitative tendencies.
‘Whereas, Charlie moves around all over the place much more fluidly than I do. So he will come up with a buzzy idea and I will look at how to implement it in more of a systems-based world.’
The two hail from similarly contrasting professional backgrounds, with Hutson squarely positioned in wealth management having held senior positions, including CIO, and later managing director, of both Rowan Dartington and Arjent. Before those he spent 10 years running the numbers on the financial sector as an equity analyst at Société Générale and with Keefe, Bruyette and Woods.
Morris, on the other hand, spent 17 years at HSBC Global Asset Management, where he was the firm’s head of absolute return, managing a multi-asset fund range with assets in excess of $3 billion (£2.2 billion). Before joining the investment industry he spent four years in the most senior infantry regiment of the British army, the Grenadier Guards.
In addition to his duties as CIO, Morris is also lead manager of the Newscape Diversified Growth fund, co-manager of the Newscape Emerging Markets Equity fund, and senior member of the investment committee, giving him a steering role across the company’s investment strategies.
Morris has seen a lot of change in those 17 years, but he says the biggest and most fundamental change of his career is the increasing centrality of costs and fees to decision making. Had he known a decade ago that active management would ever get as cheap as it is today, he would have found a discipline with greater price making power, he laughs.
He adds that the Financial Conduct Authority can deliver a useful jolt from time to time – such as the stinger in its long-running asset management study, which concluded that fund pricing remained uncompetitive – which is important to breaking people out of their complacency.
But he says that in many respects the industry is much less cosy than it has been given credit for.
‘I feel we are living in a fiercely competitive market. Maybe, there are other actors in the chain that are sitting in a more comfortable position but this doesn’t feel like a world of low competition to me – it’s highly competitive.’
He added that he sees it as a shame that the revolution which has taken place in distribution during his career has not necessarily resulted in costs savings for the end investor, with the cost of platform fees on top of management fees rapidly adding up, as well as the cost of an adviser, which he sees as ‘the expensive bit’.
Despite ever falling fees, Morris sees a hard limit to the reduction in costs. ‘We have mechanised all the bits that can be mechanised and we have indexation, but to actually get someone to put their money over the line takes a sale.
‘The first thing I was told when I joined James Cable in the late 90s was: “investments are sold, dear boy, they are never bought”.’
He says distribution, administration and marketing costs are approaching the lower bound of what businesses can spend before they enter managed decline.
When Hutson came to Newscape in 2016, he saw that the firm had been offering actively managed portfolios since 2009 and a blended approach since 2011. He felt that something was missing.
‘The passive approach is something I bought myself in 2016,’ Hutson explains, saying the firm’s passive portfolio mirrors asset allocation in its active manager portfolios, but with more limited security selection.
This turned out to be perfectly timed, putting the business near the forefront of the curve as the total committed to passive funds has gone through a sharp step change.
US data compiled by Moody’s showed total passive assets climbed $563 billion (£414 billion) last year to $3.1 trillion, as active funds shrank by $325 billion down to $3.6 trillion.
‘One thing I think is very important if we look at last year: 2016 was a rising tide all boats floated and we definitely saw outperformance in our blended and passive options. But what we have seen in 2017 is very much an active market,’ Hutson says
Morris adds: ‘If you look at the FTSE private client indices, the big drivers behind them in the last two years have been a weak pound, a booming stock market with cheap credit and falling bond yields. Every component of that portfolio has done well and better than it should’ve done by any measure.
‘But this is likely to change, if we see a strong pound – because the pound is structurally undervalued – and you have wider credit spreads – because they’re too tight – then you have expensive equities, because [stock market] valuations are very high.’
Morris does not think it is a great time to be invested in a traditional 60/40 portfolio. Instead he is opting to add to weightings in precious metals and commodities, and skew towards value orientated equity strategies.
This is something that has clearly carried over into Hutson’s thinking, as over the last year he has been cutting his fixed income exposure, to a current figure of just 22%.
‘Over the last year, in fact almost a year ago, we totally cut our exposure to UK gilts. We actually took down our whole fixed income allocation significantly, and looked for alternative investment opportunities,’ says Hutson. Where Hutson found these opportunities was in robotics, a theme that both he and Morris got behind. ‘It’s a bit fashionable and it’s a little bit of an odd term because what is a robot? And there aren’t very many pure robot manufacturers,’ says Morris.
‘But basically it’s been the sort of way of playing the job loss theme with anything to do with artificial intelligence or mechanisation.’
Morris sees the robotics theme alongside those of social media or biotechnology – which he points out have already run pretty hard. However, he says robotics was ‘a little late to the party’ in terms of how far it had run at the start of the year.
‘We were early adopters of the Pictet Robotics fund, unfortunately, that closed soon afterwards because it was such a success,’ explains Hutson.
‘So to continue that theme we used the iShares robotics fund and also the ETF Securities robotics fund as well.’
Among Newscape’s active strategies, the balanced portfolio has returned 10.76% year-to-August, compared to the IA Mixed Investment 20-60% return of 5.61%. The strategy, which was launched in 2009, is up 76.12% since inception, compared to the IA’s 62.72%.
On the other hand, the blended style balanced portfolio, which uses both actively and passively managed funds, is up 8.69% year-to-August.
Since inception on December 2012, the portfolio has returned 54.72% compared to the IA’s 35.98% return.