Adviser Profile: Mike Deverell

[This article comes from the Spring 2015 edition of ETF Report UK, our quarterly magazine for financial advisers. To read the full issue click here]

Equilibrium Asset Management has grown to £400 million worth of assets by focusing on two aspects: asset allocation and joined-up thinking, according to Mike Deverell, partner and investment manager at the firm.

The advisory and investment specialist firm based in Wilmslow, Manchester, received its discretionary permissions from the Financial Conduct Authority in 2008 and has since been actively advising and managing clients’ money in the firm’s own multi-asset portfolios.

Going Discretionary

“Most of the investment management and financial planning is done in-house to get joined-up thinking,” explained Deverell. “Advisers are also involved in investment decisions and they tailor asset allocations towards the clients, so they have more control over the risk clients are taking and projected returns that we think clients could get.”

The average age of a client at Equilibrium is 65, and they are usually wealthy; therefore, the firm does a lot of work on pensions and inheritance tax.

Having the discretion to manage clients’ money was a big relief for the firm in 2007, as the financial crisis was looming and most of their clients had a healthy proportion of their money in property.

“We were scared, and we thought these funds could drop in value,” said Deverell. “We were still advisory then, and the amount of time and paperwork it took to get our entire client bank out of property funds within a fairly short space of time was a huge burden.”

Equilibrium decided to focus on its status of “investment specialist” and moved to having a full-time investment team.

Post RDR: Calm Waters

The financial crash was not the only major event for financial advisers to contend with in recent years. The Retail Distribution Review (RDR), which came into force in January 2013, banned commission and brought in a higher level of required qualifications, which pushed many advisers and smaller net worth clients out of the market.

“It’s difficult for the adviser to make enough money in smaller portfolios, so naturally people are focusing on the higher net worth clients,” said Deverell. “It will be interesting to see a few years down the line if that [advice] gap might become more apparent.”

Equilibrium Asset Management has not changed regarding its process or client bank since the RDR, however, as it has traditionally been fee based.

The firm charges clients an annual fee of 1.5% for portfolios below £1 million, and 1% above that mark, which includes transaction charges, tax and financial planning, and investment management.

Portfolio Construction

Equilibrium runs four core model portfolios, ranging from very low risk to quite high risk, aimed at clients with less than £600,000 of assets. Higher net worth clients receive bespoke portfolios, which use much of the same asset allocation as the models, but it is tweaked to suit the client in terms of tax treatment and allocations to specific sectors.

“We come up with asset allocation first, equity and fixed income allocations second, then it’s about picking the right funds,” Deverell said.

There are about 25 funds per portfolio, with around a quarter of them in passive, or index tracking structures.

“Our philosophy on active and passive is we don’t really mind; it’s whichever fund fits the job,” he added.

Following a detailed equity analysis by the firm, Deverell found that passive funds were a better fit for US and emerging market equities, whereas active funds were best for European and Japanese stocks.

“People think emerging markets is a strange one, as the perception is that it’s quite an inefficient market, so there should be lots of opportunities for fund managers, but it’s difficult to find consistent active fund performance,” he noted.

Platforms

Whether active or passive, the majority of the firm’s assets are on Nucleus’ and 7IM’s wrap platforms. The choice of platforms is reviewed every few years, and the most recent review was completed in the winter of 2014.

“We go round all the advisory platforms with a due diligence questionnaire, asking about compliance, financial strength and functionality. We input that data and make a spreadsheet to help bring it down to three or four platforms that tick all the boxes,” said Deverell. “Cost is a big decision factor, but all platforms are within reasonable distance of each other these days.”

Deverell said both chosen platforms provide a good range of passive funds. Nucleus is better, he says, with open-ended mutual funds like unit trusts that do daily dealing, and is not so well set up for ETFs. However, on 7IM, investors can trade ETFs intraday without paying specific dealing costs, which are included in annual platform fees.

“We have most core portfolios on Nucleus, which is not set up for intraday trading, so it doesn’t make a lot of difference whether we use a fund or an ETF for passive exposure,” he explained.

ETF Choices

For Deverell, ETFs have a real purpose when it comes to volatility trading on 7IM’s platform. In October 2014 during the market sell-off, the firm bought a FTSE 100 ETF and sold it a few weeks later at 6520 points, making a 5% return. He carried out a similar exercise on Nucleus with a FTSE passive tracker fund and made a slightly lower return, at around 4%.

Currently Deverell is just holding two Vanguard and iShares FTSE 100 ETFs on the 7IM platform. Equilibrium has also used ETFs to track Chinese markets, including the db X-trackers MSCI China UCITS ETF.

On the passive tracker side, Deverell invests in the Vanguard FTSE All Share Index tracker, and a similar fund from HSBC, as well as the Vanguard FTSE UK Equity Income Index Fund.

“There’s no ETF equivalent really,” he said.

Due Diligence

When it comes to picking a fund, Deverell considers the index first, then the provider—“not the other way round”—as well as tracking error, liquidity and bid/offer spread.

Since the RDR came into force, he points out, there is increasing awareness amongst advisers to have a clear central investment proposition. He says many advisers will go passive if they aren’t outsourcing investment, as it reduces the burden of cost and research.

Deverell’s firm carries out a formal review of all funds every quarter, in addition to more regular performance reviews, to see whether their chosen funds are performing in line with expectations and to understand the circumstances behind that performance.

Using Active Funds

For active funds, Deverell leans away from so-called star managers and focuses instead on the fund team’s process and discipline.

“In some funds you would be equally worried if a senior analyst left [as you would by a fund manager departure],” he said. “Don’t make the mistake of looking at one name, as it’s not usually one person who has all the stock ideas.”

One of Deverell’s top active fund picks is the £129 million CF Miton UK Value Opportunities Fund, run by Georgina Hamilton and George Godber. Deverell says the fund has done “exceptionally well” since launch in March 2013, delivering more than 26% for the retail share class (“A”), compared with the sector average, at around 9.3%. The fund’s process is also easy to explain and clear.

“The managers do all the analysis themselves, pretty much, and they’re looking for firms with certain characteristics and which they believe are undervalued,” said Deverell. “They come up with a price target for each company and will buy them substantially below that price.”

The largest allocation in Equilibrium’s Strategic Portfolio is to equity alternatives at 38%

Clarity Of Thought

This clarity of process applies in the passive fund world too. Deverell says the most important thing to understand is which index the fund tracks and how closely, as well as how that underlying index is composed.

“Something I’m hot on at the moment with clients is explaining how a FTSE 100 tracker works,” he said. “BP and Shell can make up to 14%, so if you’re worried about oil, don’t buy the FTSE 100. Even if the fund is passive, look at how the index is made up and what implications that has.”

Deverell is confident that the firm will grow and that the team has found the right mix of passive and active funds to implement its chosen asset allocation. However, he notes that investment is an ongoing process and one that is always subject to change.

“If you’re running investments, you have to be on top of things,” he noted.