Episode 11 - Discretionary Portfolio Management with Lance and Rory Maguire of Fundhouse

We discuss why Cavendish Ware has made the move to Discretionary Portfolio Management, why Fundhouse was selected as a partner and get some insight on Fundhouse from its MD, Rory Maguire, including its investment approach. Rory and Lance also chat through the process that they go through when selecting funds. 

Transcript

Speaker: 0:00

What does it mean in today's investing world to be contrarian and yet a team player? And stick to your guns to find out, Lance and Dave today have Rory McGuire, the co-founder of Funhouse, on the Baseline podcast.

Speaker 1: 0:20

From the studios of NMD Plus comes baseline. Communicate base between wealth management and provide tweet line.

Speaker 2: 0:51

And now is your host, Dave Wallace.

Dave: 0:54

Welcome to today's show. And joining Lance and I today is Rory McGuire. Rory, welcome to the show. Why don't you introduce yourself and tell us a bit about what you do?

Rory: 1:08

Brilliant. Thanks, Dave. It's lovely to be here. Hi, Lance. I am the co-founder of a business called Fundhouse. And I was actually looking at it the other day. Lance, you and I started in the investment industry at the same time, pretty much to the day, actually. Although you look a lot younger than I do.

Lance: 1:23

That's clean living and early night. Clean living.

Rory: 1:29

But I've been in the investment industry for what seems like a long time, through many sort of booms and busts, starting with the tech bubble and the financial crisis and the likes. But most of my background has been in investment management. So sitting on the same side of the table as the fund managers, and most likely running an investment business, a boutique. And when we set fund us up, the idea was to provide the industry with an independent, thoroughly researched investment consulting proposition that offered candid opinions and could align themselves with like-minded clients. So as a business, we provide manager research. So we sit in front of fund managers and we spend a lot of time with them. We provide asset allocation and we provide portfolios, which is a combination of those two things, which is where we work with Lance and Cavendishware. And I'll stop there, Dave.

Dave: 2:23

Thank you. So Lance, I guess the reason we're talking to Rory is because of the move that Cavendishware has made into more discretionary services. Can you give us a bit of background in terms of why you've made that move? And then we can get into why you chose Fundhouse as a partner.

Lance: 2:43

Sure. So a couple of years ago, we realized that for our service to clients and for a business to evolve, we had to move from the advisory framework where we have to seek and get our clients permission to make a portfolio change to discretionary where we don't need to seek prior approval. There were two main drivers of that. One, the advisory process is quite cumbersome, which actually meant there was an implementation drag, which was affecting performance. It's not that we are traders by nature, and as many of our clients know, there can be quite long periods when we don't make a change. But once we decide to make a portfolio change, we should be able to implement it in a very timely fashion. And then there is the efficiency. Running an advisory framework basically was just cumbersome and was for the business becoming a headwind to growth and a headwind to consistency across client portfolios.

Dave: 3:43

Picking up on that, I guess going back a few months, if you wanted to make a change to the portfolios, then you'd have to email everybody and get their permission. And I know there were a few occasions where there were follow-ups, and then those follow-ups could have been days after that email had come through. And I guess there may have been times where by the time that had all gone through, you almost missed the opportunity.

Lance: 4:07

Rarely the opportunity disappears, but certainly the investment return may be reduced. But clients are busy, clients are on holiday, etc. Definitely clients who didn't respond in a timely fashion. And most of our clients are very well behaved and they always said yes. But there was a span of response which sometimes impacted the effectiveness of the investment idea.

Rory: 4:34

There are some wonderful moments actually where usually the market gives you the opportunity for some time. But there have been some moments recently where those opportunities have been days long rather than weeks long. You know, the mini budget that was such a disaster under Liz Trust, guilt yields spiked to a point where they were really attractive for a short period of time. And you really needed those permissions at that moment to capture that high yield. And similarly in 2020, during the coronavirus pandemic, the market dropped so steeply and then recovered so quickly that the buying opportunity was also only there for a very, very short period of time. So there have been quite a few moments that being quick has been very helpful.

Lance: 5:19

Absolutely. And certainly our clients benefited from the buying opportunity that Liz Truss gave us. The Monday morning after that event, Rory and I were on a call, and it didn't take very long to remodel the portfolios and start buying GILTs for our clients. So that's a very good example of where the ability to, once we make a decision, move in a timely fashion helped client performance. But when we came back to looking at how we move to discretionary permissions, it requires a change of permissions granted by our regulator, the FCA. And there's a number of routes to getting those permissions. The traditional route is you build it yourself and apply for the FCA permissions. And post-COVID, that now is taking about 18 months to two years. As we know, everywhere across bureaucracy and services, there's a huge backlog. The other way is to partner with a firm who's got existing permissions and work under their permissions umbrella. And that's the route we decided to go down. We looked at a number of firms before pointing Fundhouse. It's fair to say the reasons we like Fundhouse is that there's a very strong similarity between Fundhouse's structure and ethos and our approach. It's a private company, so no external shareholders, no private equity driving short-term profit considerations. It's owner managed, so you know, close involvement with day-to-day. It's very client and performance focused, but also really, really important to us. And we'd already started working with Fundhouse when we were still uh working under advisory permissions. We were working with Fundhouse to help broaden our fund due diligence coverage and to get input into our investment committee. Fundhouse's investment philosophy and ethos is very, very similar to ours, which meant that when we started working with Fundhouse on the discretionary permissions, there was an evolution in portfolios, not a revolution. And I think rather than me putting words into Rory's mouth, why don't I let Rory just talk about your investment philosophy and process?

Rory: 7:35

Yeah, thanks, Lance. That was really important to us, Dave, that we were aligned. Because if you consider yourself sitting in an investment committee arguing over things, you really need to have the same investment religion, at least the same guiding principles. Because otherwise you're never going to get anything aligned. And Lance, it's actually quite rare that financial advisors have people with Lance's experience going back decades in markets, a highly credible investor in his own right. And so we have some really strong debates, but 90% of the time we're in agreement with the broad principles around administration. And the way we think is quite contrarian. We call it evidence-led, but ultimately what we're trying to do is allocate capital to those opportunities that we think have got the best prospects. Now, everyone in investing would say that, but I guess we're quite different in an important way, which is we're quite drawn in when market fare is at a height, at a peak, usually when headlines are quite extreme and fearful. So, you know, the headlines at the time when we were helping the Cavendish Ware clients buy guilts was how the guilt market was in turmoil, was a crisis in the guilt market. We also started to hedge Sterling at a time when sterling went as all-time lows, and everyone was saying that the pound was going to keep falling. And when asset prices are really low, usually fear is very high. And it's quite difficult to buy at those times because everyone in the market is clearly selling, because that's how prices go down. There's more sellers than buyers. So we are the sort of business that says, you know what, when the prices are depressed, it might be because of coronavirus, it might be because of an invasion in Ukraine, it might be because of a cost of living crisis. But those are the moments that give you those opportunities to buy assets at cheap prices when the market is overreacting in the short run and hopefully of the long run can lead to good results. So the decisions that we've worked on jointly with Cavendishware are all in that vein. And so that's the way we buy. We like to allocate to assets that we think have got good prospects. And then we also like to avoid assets that are expensive. And that meant that for quite a long period of time, both Cavendishware and Fund House were sitting on lots of cash when you could have lent it to the government at 1%. But there's only one winner in that trade, and that's the government. So when guilts are at 1%, we tend to say to clients, you know, it's not worth taking the risk on this. And for some time we didn't go up as much. But over time, as guilt yields rose, our clients were sitting on the sidelines of that and not going down and sitting on cash. We also like to avoid the really expensive parts of the market as well. And then when those opportunities present themselves to go back in. So we're quite contrarian and quite long term. And anyone who's spent sufficient time with Lance and his investment colleagues, I guess, would say also, I would guess, they would just call them contrarian. And I think there's a really good alignment there.

Dave: 10:30

Can I just ask in terms of the process that you go through? So when you are looking at big decisions, I guess there's a meeting that you have with Lance and the team to kind of go through. So is there an investment committee with Fundhouse included as part of that in terms of the discussion? Are you coming with ideas to Lance? Is Lance coming with ideas to you? You know, how does that kind of process work? And then Fundhouse is doing the buying and selling, is it?

Rory: 11:00

Yes.

Dave: 11:00

Could you just sort of talk through a bit of the end-to-end process that you go through?

Rory: 11:05

Of course. We do this for a few clients, and we've got a dedicated investment team of eight people. I guess Lance is a slightly smaller investment team, so we probably, on average, have more time to spend on the topic of investment. And it's fair to say we probably have more, let's say, regular investment committee meetings internally at FundAs. And Lance has attended many of those. But ultimately, we both come up with ideas and we both share them. And when we feel strongly about it, we have joint meetings, and those investment decisions are jointly vetted at a Cavendish Ware investment committee meeting where usually there are at least two people from Fund House present, and I'm almost always one of those. And then quite a few people, but importantly, Lance is present from the Cavendish Ware perspective. So when we were, for example, adding you know Jupiter Global Value as an investment or suggesting it, that would have been an idea brewing for some time at Fund Ouse and equally at Cavendishware. And then that comes into a joint discussion and gets jointly vetted and signed off at the Cavendish Ware investment committee. And your clients, Lance listening to this, might be thinking, well, how similar are the portfolios that you run for Cavendish Ware to our other clients? Because we've got this joint approach with you, and they're very, very similar. So it just talks to how much of an overlap there is between both of us. But ultimately, those decisions get vetted, and then FundAust has the overriding regulatory responsibility to make those investments on the client's behalf. So ultimately, I guess we have the decision-making power. But you would certainly, if you were a fly on the wall in these meetings, see it as a joint exercise.

Lance: 12:49

Yeah, we have a regular investment committee meeting where we jointly prepare a presentation, we put on the table investment ideas, the review of performance, review of what's worked, what hasn't worked, and whether we should be, you know, certainly what hasn't worked, whether we need to make any changes to that. We're not clones of each other. I would say I'm a little bit more market oriented. Rory's a little bit more fundhouse is a little bit more valuation framework orientated. But I passionately believe that investing is a team sport. And in a team, you need complementary players, not all wingers or what other metaphor I'm going to mix up. We also have a framework where we can agree to disagree. Actually, we haven't yet tested it. But in the direction of the portfolios, when we started working with fund house, they were actually very similar. And the changes we've all agreed on. There's a few nuances that are different at the name level, at the fund level. And in some of those, it's not worth making the change just to make everything look all in order. But yeah, they're broadly moving in the same direction. So we're underweight equity risk, we're overweight value, we're overweight emerging markets. I think uh Rory is probably fundhouse standard portfolio is probably had more overweight emerging markets than we are, but we're talking about a percent and a half. We both were very underweight fixed income, which has been closed, but we're still underweight the maturity of the bonds, the duration of the bonds. And within fixed income, both of us are very much in the quality end. So government bonds, high grade credit. So the differences are very, very narrow. And the broad direction, which will explain most of the performance, is very, very similar.

Dave: 14:36

It's really comforting to hear from a client perspective because you know what you don't want is an investment committee where everybody's arguing about the direction of travel. So, you know, I think that's great. I wanted to go back to the Liz Truss catastrophe and the buying of guilt. I mean, there's a smaller boutique business, you're able to respond to things. So I presume that was one where Lance was phoning you up, or you were phoning Lance up and saying there's an opportunity here, let's jump on it. So is that a fair assessment?

Rory: 15:10

Yeah, yeah, very um. And just to add to what Lance was saying, it's really important that those investment meetings we have, it's not a room full of mirrors. We agree in principle, but we certainly disagree enough for those ideas to be refined over time. And on the question of guilt yields, I remember those days very well and the headlines about you know LDI crisis, and there was a period of about three or four days where guilt yields went above US Treasury yields, which typically doesn't happen, but it happened for a very short period of time. We were in a meeting same day, rounded up our investment team. I remember being in the office, getting the people in and saying we need to act on this. Everyone did a bit of work, we came back and had another meeting the same day. We then got in touch with all of our clients, of course, Cavendish Ware being a very important part of that. And within days, in fact, in many instances that evening, investments were adjusted in portfolios. And you're right, I think if we're a big bureaucratic business, having to go through for a start, having to maybe round up 20 people might take a week and a half. It was really clear to us that this was an anomaly that had to be taken advantage of pretty quickly. And so we did. We knew how to execute it and we did it pretty quickly.

Lance: 16:25

And it's also worth mentioning we hold regular scheduled meetings. As Roy said, there are times when markets don't stick to those nice calendar cycles. So you do have to move quickly. But there are also times we had an investment committee meeting uh at the beginning of February. We're underweight equities, and by that time, equities bounce quite a lot, so we're not capturing that upside. And again, entirely a valuation-driven discussion. I joked with Rory about economic forecasts. We're both very skeptical, but I'll ask Rory what his inflation forecast is throughout to Mongolia. We're very conscious that economic forecasting is background noise. I mean, it can give a bit of colour, but markets and economics can do very different things. But what we'd seen was markets overreacting to short-term economic noise. We're on the wrong side of that. And yet a rational discussion is actually we have confidence in our position, we're not going to chase it. And therefore, the decision not to do anything was a conscious active decision, an active decision not to act, rather than you know, rabbits in the headlight or freezing. And that helps with the debate. If it was a smaller group, there isn't that challenge, and there isn't that ability to confirm a decision by debate and challenge. So I think it gives us the whole process, it strengthens the process by depth of experience, by complementary but sometimes challenging views. And you come out with more confidence in the decision.

Dave: 17:57

It sounds like the guilt's was a real kind of success in terms of the relationship that exists. Since the move to discretionary, are there other sort of highlights that you can give us around success as a way to kind of finish off the podcast?

Lance: 18:13

Yeah, I would say we had an emerging markets manager in the portfolio where the head of the team had retired. We had met the new head of that team, and even though it was a planned succession, we really weren't as confident in the new structure. So we had a discussion with Rory. Who do you like in emerging markets? The intersection of the names in Fundhouse's go-to list and the names in our go-to list was actually Lazard Emerging Markets Fund. Both of us have invested in that manager in the past, know the lead manager, the process, the team, and the firm well. And so that was, dare I say, an easy decision on what to replace that emerging markets fund with. And it's added to value. I mean, they've materially outperformed emerging markets since we put them in the portfolio. Rory mentioned Jupyter. That was technically went into the portfolios under the advisory framework, but again, a name that Fundhouse had been following for some time. I hadn't looked at that strategy for a very long time. So we went away independently and refreshed our due diligence on that and again came to the conclusion that we both like that strategy. And that's also significantly added to performance for our clients. So I mean two very good examples where when we get the intersection of confidence, it's added to client performance.

Rory: 19:43

Yeah, and just to add to that, Dave, those two examples are really fascinating because you had to have a lot of courage, I think, at the time to invest in both. So if you take Lazard, we had met with James Donald, the fund manager, gosh. So many times because his performance had been that bad. And clients usually, I guess, tend to respond in a way that's different to their everyday lives. If Tesco's were to say 20% off tomorrow, there'd be a queue at the door. But if a fund manager is 20% behind, they'd rather you know sell them than invest quite often. And thankfully, we aligned with Cavendish Ware on this, where I think you find these managers that as long as you think you've walked along the road with them, you understand how they invest, there's confidence that what they do is repeatable. If you can catch them in a lull when they are really so far behind, there's an opportunity to capture quite superior returns from them. And that was the case with James Donald at Lazard. That fund, we had so many calls with him, but our confidence remained. And then on the Jupiter side, exactly the same. Ben Whitmore, global value had been beaten up. Remember, we're coming out of 2020 when any stay-at-home stock was just going through the roof. If you were a growth investor, you just bought any tech name, it could have been Peloton or Zoom, and off you went to the races during 2020. They own none of those. And so you were coming into a period with those managers also with severely underperforming portfolios. You really had to know your managers and have a view on them that was positive to capture those sort of superior results that are now coming through for clients. But at the time, those were materially contrarian positions to take. You know, the market was certainly telling investors out there you better watch out for these. When I think we're drawn to those sorts of investments for those sorts of reasons.

Dave: 21:34

It's really fascinating to hear. Look, time's up. You know, I really appreciate your candor and your time today. It's fascinating to hear. I think, Lawrence, we should do another show at some point where we go through the mechanics of actually the whole investment process and talking to fund managers and all the other bits and pieces. I think that sounds like a fascinating kind of area in its own right.

Lance: 21:59

I'd love to. I d love still doing the coalface work of manager due diligence meetings. You get to meet very clever people. And what is so fascinating and frustrating about manager due diligence is sometimes you can get some quite juxtaposed, almost contrarian investment processes and philosophies, and yet over time both can work.

Dave: 22:19

Yeah.

Lance: 22:20

Yeah, it's fascinating.

Dave: 22:21

Fantastic. Well, listen, thank you so much for joining us, Rory.

Rory: 22:25

It's a pleasure.

Dave: 22:25

Great to get your perspective as always, Lawrence.

Rory: 22:28

Brilliant. Thanks for inviting us. Thank you very much. Cheers.

Speaker 2: 22:34

Thanks for tuning in to Baseline, a monthly podcast series dedicated to topics that matter in wealth management. Be sure to check out our podcast archive on SouthCloud. And until next time, have a marvelous week.

Speaker 1: 22:49

You have been listening to Baseline from Cavendishware, an NMD Plus production.