River and Mercantile Group (R&M) was formed by the merger of the institutional investment consultant and fiduciary manager P-Solve Investments Limited with the asset management business River and Mercantile Asset Management LLP on 27 March 2014. R&M is an advisory and asset management business with a broad range of services, from consulting and advisory to fully-delegated fiduciary and fund management. Its advisory and investment solutions serve a large client base predominantly in the UK, primarily institutional pension schemes, with the remainder being retail financial intermediaries and insurance firms.
Q&A with Hugh Sergeant on River and Mercantile's first Australian-regulated pooled vehicle October 2018
UK-based River and Mercantile made a big splash in the Australian market this year - opening two offices, one in Sydney and one in Brisbane, and recruiting an Australian representative. We talk to Hugh Sergeant, the firm's chief investment officer equities, partner and portfolio manager, about the the launch of their first Australian regulated pooled vehicle - the River and Mercantile Global High Alpha Fund. He also shares his motivation for becoming a fund manager and reveals the job he'd be doing if he wasn't one.
- Why did you decide to launch a fund in Australia?
We have been working with the superannuation market in Australia and New Zealand for the past five years and access to our investment solutions has principally been through segregated mandates. It was clear there was demand from the smaller super market, along with family offices and endowments, for a pooled solution where allocations were unlikely to be of a size that warranted a separate account. The launch of the River and Mercantile Australian Unit Trust platform provides a great opportunity to launch additional funds from the River and Mercantile Group investment stable where we see the opportunity to provide relevant solutions to meet investment need. It is a clear statement of intent that we see the Australian market as a core growth market for the group and we will continue to invest in the region. We recently announced the establishment of two offices in Australia, in Sydney and Brisbane and the recruitment of Tim Horan as Managing Director for our business in the region. We have previously operated on a delegated basis from London, however we believe that it is critical for investment businesses with ambitions to become significant players in this market to make the necessary local investments in personnel and infrastructure to ensure that the emerging client base is properly supported.
We were delighted to work with Willis Towers Watson and Legal Super in the launch of the pooled fund and we are seeing increased demand from our core markets in response. We were equally delighted to work with Equity Trustees as the Responsible Entity who have provided significant support in developing the proposition.
"It was clear there was demand from the smaller super market, along with family offices and endowments, for a pooled solution where allocations were unlikely to be of a size that warranted a separate account."
- Of all your funds, why did you think this fund was the most relevant to the Australian investor?
We manage a range of investment solutions for our client base in the UK, Europe, US and Australia and New Zealand. In the Australian market place it is clear that whilst demand for domestic equities will remain there is growing demand for global solutions. Our Global High Alpha strategy has been the value solution of choice for many of our Institutional and quasi Institutional clients in separate account form and we were keen to make this available in a pooled format. We believe passionately that everything that we provide for our Global client base must be investment relevant and demonstrate investment excellence. Our Global High Alpha strategy meets both of these criteria and in spite of the value headwinds has provided some excellent absolute and relative returns for our clients.
The investment in developing a domestic pooled platform is not insignificant and we will continue to add solutions to this platform as our business and we have a range of strategies including Emerging Market, long only and absolute return, along with Systematic Quality and Global Macro strategies that in time we will make available. In addition we have recently been working with a number of potential investors regarding a lower cost systematic solution to Australian Domestic Smaller Company Equities and whilst capacity is always a consideration this is a strategy that would be perfectly positioned to be available on our unit trust platform for Australian domestic clients whether they be large Superannuation investors or the private individuals looking to drive investment return at a fair price.
- How do you determine alpha?
Alpha describes how much additional performance a fund manager can generate over and above the equity index they are measured against, over a sensible time frame, such as three to five years. It is a measure of how good a fund manager is at their job. Good fund managers can generate 3 per cent per annum more than their index - the very best 6 per cent per annum . This level of outperformance can create significant additional wealth for investors.
- Could you explain your Potential, Valuation and Timing (PVT) investment philosophy?
We believe these are the three key criteria that enable us to discover the most promising investment opportunities for our clients, regardless of market conditions.
- The Potential of a company represents its ability to create economic value for shareholders. Economic value is enhanced by a growth in profits, cash flow or asset backing. We look for companies with above average value creation potential.
- Valuation represents the gap between the stock market’s valuation of the company (i.e. its current share price) and its underlying economic worth. This gap is what we call the pricing anomaly.
- Timing addresses the issue of when is the right time to buy and sell. It aims to minimise the risk of being too early into an investment, and to optimise the period of time held, and returns generated, once an investment has been made.
- What is MoneyPenny? (And who came up with that name for the screening tool?)
MoneyPenny is a quantitative analysis tool designed and created here at R&M. MoneyPenny analyses a vast amount of complex data in order to track down and target the best investment opportunities for us to investigate further. It has been designed to study a universe of UK and global equities, and to rank them based on the criteria of Potential, Valuation and Timing.
The name “MoneyPenny” was chosen for our screening tool by the founding members of River and Mercantile Asset Management LLP.
"We believe passionately that everything that we provide for our global client base must be investment relevant and demonstrate investment excellence."
- How important are ESG factors when selecting companies to invest in?
ESG factors are an important component when analysing, and selecting, companies. Apart from gaining an understanding of the business and financial management, we believe it is important to identify potential non-financial risks by assessing management’s behaviour with regard to ESG related factors, such as good governance, shareholders, customers, employees, suppliers and the environment.
We run an ESG Analysis report on a fortnightly basis, which provides a broad overview of the portfolio from an ESG perspective and allows us to identify companies with potential related risks for us to take into account when analysing. In addition, we run a report showing MSCI ESG rating moves both upwards and downwards, including reasons for the change. This brings monitoring of ESG issues arising, and potential improvements within a company, in line with our MoneyPenny fundamental screening tool, which highlights changes in the Potential, Value, Timing (PVT) decile ranking of stocks. We discuss ESG issues and changes in MSCI ESG scores are reviewed during our global equity meetings.
Where the MSCI ESG Rating and/or Carbon Emissions Score is low, this is a signal for further analysis. As part of our monitoring process, when MSCI ESG analysts raise issues, or there is a significant change in the ESG rating, potential risks are assessed. In assessing these issues/risks we may adjust the weighting of a stock in the portfolio, decide to sell an existing holding or not invest in a new idea.
- Do you engage with companies when you have concerns about their ESG practices?
As part of our analysis we will compare a company to its peer group and monitor relative progress, then, where possible, address ‘weak’ areas directly with management or by supporting shareholder proposals at AGMs.
We strongly believe the best process to improve management attitudes is through engagement and peer group pressure, rather than solely excluding a company on ‘ethical’ grounds, unless specifically requested by a client. We mainly engage on governance issues, but will do on ‘E’ and ‘S’ as appropriate.
Even in ‘dirty’ or ‘unethical’ industries, we believe it is important for shareholders to assert pressure on companies to operate in the most ethical manner within the limitations of a particular sector. Only when a company is not addressing such issues, or management is ‘ignorant’ to change, would we consider selling a holding or not investing.
"ESG factors are an important component when analysing, and selecting, companies."
- Why do you like working in funds management?
My key motivation for being a fund manager is to be in a position to exploit what Albert Einstein termed the eighth Wonder of the World, compound returns; benefitting from the power of compounding to create wealth for our clients. And I just love finding investment anomalies, stocks that you believe should gain significant value over the medium term.
- If you could work in any profession (other than funds management) what would you do?
I would like to work outdoors surrounded by the natural beauty of the countryside – I have always said that if I wasn’t a fund manager I would like to be a park ranger!
- What advice would you give somebody who wanted to become a funds manager?
Work hard, think independently, ignore the short term commentary that one is always exposed to and find an investment philosophy that you understand, that makes sense, that has worked in the past and that fits your own DNA. And enjoy!