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Profile: the continuing story of jonathanfry, minus Jonathan Fry

Profile: the continuing story of jonathanfry, minus Jonathan Fry

It had gone a bit quiet at Gale & Phillipson since its merger with multi-family office jonathanfry in 2015, as the firm turned its attention inwards to develop its proposition.

But now it is time to open that up to the rest of the industry, as the firm, previously called Easby Gale & Phillipson, seeks growth through acquisitions without compromising organic targets.

Investment director Peter Griffin, who joined jonathanfry in 2010 to develop its cash management business, moved across to Gale & Phillipson following the deal and began working to develop a model portfolio service (MPS).

‘The driver for the merger was that Gale & Phillipson had a lot of distribution capabilities through its IFA network. Discretionary fund managers, including jonathanfry, which I worked for at the time, did not have a lot of distribution,’ says Griffin.

Now, after a loss of £548,000 in 2016 as it absorbed the cost of the merger, it is easing back into the black, posting a modest £31,000 profit in the year to May 2017.

With the base now in place, plans are afoot for expansion and the company received a £700,000 strategic investment from the venture capital arm of South African wealth manager Genesis Capital (UK) in November.

As part of the arrangement, Genesis founder and managing director Lewis Bloch has joined Gale & Phillipson’s board as a non-executive director, with Genesis taking a significant, but undisclosed, stake in the business.

The cash will be used to fund acquisitions and further extend its distribution in the near future.

‘We plan to grow through both acquisition and organic growth,’ says Griffin. ‘We are very fortunate that our IFAs are a strong mix of older, experienced IFAs, and younger IFAs who are just starting out, meaning we have room to continue growing as our adviser base becomes older.

‘We are looking to acquire businesses with two or more advisers, with over £100 million under advice and that are reasonably priced, scalable and RDR compliant. Typically they will be advisers that are looking to retire.’

He adds: ‘We expect some deals to complete in the coming weeks or months.  Nothing we can name or discuss yet unfortunately for obvious reasons.’

The jonathanfry deal saw Gale & Phillipson take over its bespoke portfolio management service, the personal managed portfolio (PMP), which had been running since 2010.

Griffin says that by launching an MPS, the company could hugely broaden the market it services by targeting financial advisers who outsource their investment management.

With the service now having a three year track record, and the MPS overtaking the bespoke service in terms of assets for the first time in April this year, the company can look to expand further by upping the number of platforms that it is available on.

‘The way we plan to make the MPS more scalable is to offer it on more platforms as we go forward and due diligence on more platforms will be one of the things we will be looking at closely,’ he says.

The company currently has around £320 million of assets under management (AUM) in its wealth business, with £126 million held in bespoke portfolios and £194 million in its MPS.

The average client portfolio size in its bespoke service is £465,000, compared to £193,000 in the MPS. PMP has a minimum investment level of £60,000, compared to £20,000 for the MPS.

Having the two investment propositions means that Gale & Phillipson can juggle two completely different client types at once, Griffin says.

‘The bespoke is not as scalable as the MPS, but it provides a good option for clients with over £200,000 and legacy issues that mean they don’t fit seamlessly into a model. But this service is by its nature not as scalable as the MPS,’ says Griffin.

The growth in MPS clients has been ‘humbling’, Griffin says, because the service has so far only been marketed to its in-house IFAs.

‘One of the most exciting things about this development was that we were working with a lot more IFAs after the merger. They are very good at their jobs, with some of them having kept their clients for decades,’ he says.

‘For them to impart that trust to us and move that money from your Standard Lifes or Old Mutuals of the world into our MPS is quite humbling and a massive achievement for us.’

The MPS charges 0.75% for the first £500,000 invested which falls, on a tiered basis, to 0.375% for portfolios above £3 million.

The median performance for clients in the cautious, balanced and growth portfolios over three years to the end of June was 9.62%, 17.95% and 20.66%, respectively. In contrast, the ARC cautious, balanced and growth indices returned 8.76%, 14.04% and 20.17%.

Griffin admits that the performance over the last year was ‘disappointing’, with the cautious, balanced and growth returning 0.97%, 1.88% and 3.28%. These numbers lag the benchmark returns of 1.14%, 2.54% and 3.36%. However, he argues that the models remain on target to achieve their longer term target of 4-6% annualised over three years for the balanced model.

‘The last 12 month period has been a little bit disappointing because we made the decision to reduce our equity allocation towards the middle of 2017 and came back into the market too soon in January,’ he explains.

‘In hindsight it was the wrong decision, but we did this for the right reasons and over the longer term we are quite comfortable we are on target achieve our goals.’

The firm makes tactical asset allocation decisions after quarterly meetings and strategic allocation calls after a meeting every two years.

These meetings are overseen by Gale & Phillipson’s 10-strong investment committee, which includes company founder - and one of Wealth Manager's first ever coverstars - Jonathan Fry.

The blend of tactical and strategic views enables the firm to make big changes to the models with high conviction, rather than small tweaks, argues Griffin.

‘The tactical asset allocation is where we generate most of our outperformance,’ he adds.

‘An example of a tactical allocation we made recently is our move out of UK government bonds. We made this decision at a tactical level because we felt that over the short term, yields on government bonds were not appropriate for the level of risk that the bonds had shown.’

The investment committee decided at its biennial strategic asset allocation review that UK gilts would continue to present volatility risk at a strategic level. This led them to instead use short-dated investment grade bonds for their low risk fixed income allocation. 

‘The volatility gilts have presented over the past few years has been such that I don’t believe that you are fairly being rewarded for the level of risk,’ Griffin says.

‘When we see a 10% rally in gilts that’s great if you’re holding it, but that’s not what we want from gilts. We want to be holding that as a hedge for the equity risk. If you’re seeing those kind of changes, no matter how good you are as a manager, there is no way you can manage that kind of volatility risk.’

Griffin admits that the firm is not trying to ‘reinvent the wheel’ when it comes to asset allocation decisions in its MPS.

‘We don’t do anything wildly different to many other MPS out there. But really, if you’re investing the core part of your portfolio it’s okay for it to be boring. In fact if you’re investing your life savings and it’s exciting, you probably should be worried,’ he says.

This leads the firm to focus on more liquid asset classes that have ‘robust’ evidence of yielding the types of returns the models are targeting, rather than the highest-yielding asset classes available.

‘If a client wants a more complex and higher-yielding asset class, for example emerging market equities, we have the ability to cater to them through our PMP service, but in the models we are not afraid to be boring,’ he adds.

The models will only use actively managed funds where it is ‘unavoidable’, such as with commercial property or where the investment committee believes that the fund has a replicable method for achieving outperformance. In some of its fixed income exposure as well, it will invest in active funds, but the majority of the portfolios are held in passive products.

‘For high yield we think it's counter-intuitive, but we think it doesn’t make sense to buy the most indebted, least credit worthy companies, which is what happens when you buy indexes. So we use active management there,’ Griffin says.

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