The old hands among you may recognise the name River & Mercantile. Some of you may even have bought the investment trust many years ago. The name was actually owned by Sir John Beckwith, who retained the rights to it and is the backer behind the new asset management company.
It is still in the recruiting stage but has taken on three managers, Dan Hanbury, Richard Staveley and Hugh Sergeant, to get the ball rolling. Hanbury is known for his success at Investec while Staveley and Sergeant are best known from their time at SocGen.
The UK smaller companies fund will be launched on November 30, managed by Dan Hanbury and Richard Staveley. Just before this, Sergeant’s UK high-alpha fund will be launched.
The aim of the smaller companies fund is to deliver 3 per cent outperformance of the Hoare Govett index each year and to achieve top-quartile performance relative to the peer group over three to five years. The fund’s universe is relatively wide. It will look to run the winners, which inevitably means following them into the FTSE 250, but the fund will invest directly in the bottom end of that index, too. There may also be exposure to Aim and FTSE Fledgling companies.
The philosophy is based on potential, valuation and timing. The R&M managers are looking for shares that offer the ability to create value for shareholders (potential), companies trading at a discount to fair value (valuation) and companies with positive earnings surprises (timing). The core of the research is based on this philosophy of PVT coupled with a process it labels IVR (ideas verification and risk). The process is aimed to be ideas-led.
The team does not cover sectors but all stocks in the universe – some 1,000 – are screened once a week with a system it calls MoneyPenny.
Stocks are screened on the basis of PVT and four categories of potential investment opportunities, which are growth, quality, recovery and asset-backed. The stocks are then ranked according to deciles based on each metric. Once the stocks are ranked, each member of the team will take the process to the next stage, which is verification.
The stocks are researched in greater depth on a qualitative level through meeting company management and generic analysis such as cashflow, quality of management and financial strength. This checks the validity of the PVT thesis.
Finally, they look to identify anomalies and control risk. There are a number of ways they look at risk, both on an absolute and a relative basis. They hope to achieve superior risk-adjusted returns as a result. This is a new approach which, it could be argued, has not been tried and tested but the team have basically tried to extrapolate the best of the processes they used at SGAM and Investec. I believe they have every chance of succeeding.
The fund has no sector constraints but is restricted to plus or minus 4 per cent of the benchmark weighting on individual stocks. Hanbury does not want a long tail of holdings so it is unlikely he will buy into individual positions of less than 1 per cent. The top 10 holdings will typically be in the 1.5 to 3 per cent range.
In addition to this, R&M has stated that it will look to soft-close the small-cap products – that is, this fund plus any segregated mandates it manages in due course – when they reach a total of £500m. That seems eminently sensible to me, since small-cap liquidity can be a big issue. Note that Old Mutual hard-closed its own offshore fund three years ago and is now in the process of doing the same with the onshore fund.
This has an interesting consequence. IFAs who like to wait for three-year track records may find that by the time they have reviewed the fund, it will be closing. I have always been a keen fan of experienced managers and new small company funds. Time and again, it has been proved right to get in on the ground floor rather than wait. I suspect this is the case now. As R&M is a boutique, the managers are owners as well as employees. This suggests there will be real continuity of management. R&M UK smaller companies has everything I am looking for in a fund and I am a buyer.
Mark Dampier is head of research at Hargreaves Lansdown