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Why Kames Capital is actively seeking to be ‘middle ground’

Kames Capital is no boutique – too big and no follower  of fashion – but is happy not to be among the giants, claiming it could not deliver as good a service if it were  larger. Now it just needs to become better known.

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While the asset management giants can capture investors’ attention with relative ease, boasting a plethora of funds and the benefit of billions in AUM, and the smaller boutique firms often cater to niche investment requirements, the middle ground can be seen as an unpopular area to operate in.

This is not the case for Kames Capital. The group’s CEO Martin Davis is adamant they are happy being in the middle. For them it is neither a transient phase as they seek to achieve scale nor have they been sidelined there by the competition – it is a choice.

“The boutiques can charge what they want and the big players get the machine going, so the middle can be an uncomfortable place to be, but that is if you are forced there by the market. If you choose to operate there it can be a good place to be,” Davis says.

“I am very comfortable we are there. We are too big to be a specialist boutique and trends come and go. If you are managing three or four billion in specialist funds and are getting high returns then that is fine, but it is a crowded space.

“At the other end of the scale we are not into being a ‘waterfront’ supplier…we don’t have that scale. It is also difficult – for the larger groups it is about acquisition and consolidation, and getting assets in the front door and stopping the assets leaving through the back door. We are as good as the boutiques in the areas we are good at but we have distribution reach.”

He adds: “We manage £60bn which gives us enough scale but we still only employ 300 people. We deliver a service we couldn’t do if we were a larger size.”

“I saw the good the bad and the ugly at Cofunds. I got a good feel for fund groups’ offerings and what customers were interested in.”

Kames’ origins date back to 1998 when life assurance provider Scottish Equitable launched its asset management business. Aegon NV subsequently took full control of Scottish Equitable and a rebrand to Aegon Asset Management duly followed in 2001. The switch to Kames Capital in 2011 was a bid to break away from the insurance business, with the name inspired by Lord Kames, a prominent figure in 18th century Scotland and one of the great thinkers of the Enlightenment movement.

“Sixteen years ago Aegon decided to create a global asset management business, so it broke out of the life company and set up separately,” Davis says. “There were two main aims; firstly to support the life company and secondly to build new sources of revenue and generate asset flows. The Aegon group now has three companies, in the UK, US and the Netherlands – three big entities.”

In the US and the Netherlands, 80 to 90 per cent of the business is still focussed on managing the assets of the insurer while in the UK 60 per cent of assets are managed on behalf of Aegon UK and 40 per cent are third party.

“The third party assets is where all the growth is,” Davis says. “It won’t be too long before we get to a tipping point and more of the assets are external.”

Davis joined the group in October 2013 having previously been CEO at fund supermarket Cofunds, which he claims was  “the best due diligence for joining an asset manager”.

“I saw the good the bad and the ugly at Cofunds,” Davis quips. “I got a good feel for fund groups’ offerings and what customers were interested in. I knew Kames reasonably well. It was very good in a small number of areas, as good as any company, and it was building its franchise out from its core fixed income range, but it hadn’t gained a great deal of traction.”

He continues: “Many people didn’t know about Kames. It had a good brand but it was not known well enough. The business was not broken but it had potential in building third party assets.”

Having identified the firm’s distribution reach and client relationships as areas that needed attention, Davis set about building up the distribution teams, giving them more resources and focusing on operational capability. Indeed customers’ needs are a recurring theme with Davis.

“Our business is not just about investment management. I have tried to balance the focus of our time so that we understand what customers want. I like to think that every CEO is interested in the importance of the customer rather than the league table and growing assets at any cost, and shouting from the rooftops – it is not the way for customers. If all we care about is performance we are all in for a tough time.”

Given the group’s heritage it is unsurprising the cornerstone of its range is the suite of bond funds, comprising 9 of its 23-strong fund range. Two of the best-sellers are the £1.5bn High Yield Bond fund, managed by Philip Milburn and Claire McGuckin, and the £975m Investment Grade Bond fund, run by Stephen Snowden and Euan McNeil. Over the year to 15 December, the funds have returned 2.9 per cent (versus the 1 per cent of the IMA Sterling High Yield sector) and 9.5 per cent (against the 8.8 per cent of the IMA Sterling UK Corporate Bond sector) respectively.

The company: Kames Capital is a specialist investment management business. From Edinburgh and London it manages £53bn (€68bn) on behalf of UK and international clients – including pension funds, government agencies, financial institutions, wealth managers, family offices and financial advisers.

“We are not apologetic that we are fundamentally a fixed income house,” Davis says. “For us it is all about consistency. We are still seeing that our Absolute Return Bond, Investment Grade and High Yield Bond funds are very popular in the market.”

Meanwhile Kames’ ethical funds, managed by Audrey Ryan, are also attracting attention among fund pickers. The Ethical Cautious Managed fund has returned 7 per cent over one year (against the 5 per cent rise in the IMA Mixed Investment 20 per cent to 60 per cent Shares sector) and the Ethical Equity fund is up 3.9 per cent (versus the 2 per cent rise in the IMA UK All Companies sector).

While Davis makes no bones about where Kames’ bread and butter comes from, the group continues to build on its other franchises. The Diversified Income fund and the Property Income fund (Paif) both launched early last year, and have already grown to £241m and £183m respectively.

“The Paif is already on its way to £250m – the fund has grown beyond all expectations,” Davis says. “The Diversified Income fund delivers income on a monthly basis; it is a product which is about what people want, especially if they are opting out of an annuity. It is very difficult to smooth income over a 12-month period, but that is what the fund does.”

Other recent launches include the Dublin-domiciled Equity Market Neutral fund and the Equity Market Neutal Plus  fund, which both launched in December and sit alongside the Absolute Return Bond fund. Indeed, absolute return is an area the group is looking to build on.

“We want to build an absolute return franchise with different flavours and different risk and volatility,” Davis says. “We haven’t closed off product pipeline for the second half of next year.”

In the meantime Davis’ focus is on the group’s brand and continuing to gain recognition.

“The brand was well conceived and looks nice – Kames did the hard work and got on the starting blocks, but they didn’t fire the shotgun. 70 per cent of the market does not know who we are. We don’t want to extend the brand to my granny, but possibly to her adviser.”

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Independent Views

Ben Yearsley Oversized 2012

Ben Yearsley, head of investment research, Charles Stanley Direct

Kames Capital has successfully broken the mantle of being “a mediocre life company fund manager”, although it is fair to say their strengths unsurprisingly lie in the fixed income sector. Their bond team, headed by David Roberts is one of the best around with expertise in investment grade, high yield and absolute return bonds with managers such as Phil Milburn and Stephen Snowden. Audrey Ryan is probably the standout manager on the equities front, though David Griffiths is starting to build a good name as well – both in UK equities. Where Kames are weaker is in overseas equities; they could do with bolstering this team with some quality hires if they really want to compete on all fronts.

seagerscott

Ben Seager-Scott, director, investment strategy, Tilney Bestinvest

Kames Capital is a well-established name in the asset management industry, having successfully rebranded a few years ago. Although the firm is best known for its top-notch fixed income mandates – which include offerings from the highly-regarded David Roberts and Phil Milburn – the firm also has a solid range covering a range of other asset classes. Their recent launch of a Property Income fund highlights that the house is active in developing its product pipeline and is clearly responsive to the needs of its clients. Less well known is the strong proposition in the ethical investment space, where they have good products in both equity and bonds. All in all, a highly respectable fund house.

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Steve Brann, co-founder and fund manager, Apollo Multi Asset Management

Apollo has always had a slight preference to deal with more boutique style groups such as Kames where we have better access to fund managers and with groups who know there areas of specialisation. Kames has a tight range of funds and we have used a number of their funds in our portfolios over the years such as Philip Milburn’s High Yield Bond and have also been impressed with their absolute return capability both in the equity and bond space where we have used both funds.

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