Offshore Business Review
The 2016 Financial Year at J O Hambro Capital Management (JOHCM) was marked by strong net inflows despite a volatile market environment which proved challenging for many active investment management houses.
The year will long be remembered for the decision by the UK electorate to leave the European Union in a referendum on the UK’s EU membership in late June. This shock outcome triggered a sharp fall in the value of the British Pound and turbulence in global financial markets. With considerable uncertainty over the eventual outcome of the UK’s exit negotiations with the EU, the Pound may well remain under pressure in the near term.
JOHCM’s assets under management increased from $38.3 billion in the 2015 Financial Year to $39.9 billion in the 2016 Financial Year. Net inflows amounted to $2.8 billion, a pleasing result given the context of significant equity fund outflows across the market.
The five largest beneficiaries of flows by strategy were International Select, Asia ex Japan, European Select Values, UK Dynamic and Global Emerging Market Opportunities. This broad spread of inflows highlights the demand for JOHCM strategies across the geographical spectrum. Less positively, the Continental European and Japan strategies experienced outflows. The former suffered from investor concerns surrounding the future of the EU following the Brexit vote, while the latter was hurt by the strategy’s challenging performance over the past three years, as well as by apparent investor concern that the reforms undertaken by Prime Minister Abe’s government in Japan to reflate the Japanese economy are failing, a view not shared by the JOHCM Japan investment team.
The US market remains a strategic priority and was a source of considerable asset-raising success in the 2016 Financial Year, with the US mutual funds and Delaware Statutory Trust vehicles accounting for $1.7 billion of net flows. The institutional channel was also fruitful, with total net inflows of $1.3 billion over the 12-month period. In contrast, the UK and Ireland-registered OEIC (open-ended investment company) channel experienced net outflows of $0.2 billion. This outcome stemmed from the effects of weaker investor sentiment following the Brexit vote and was principally a result of redemptions from the Continental European Fund in the immediate wake of the UK’s referendum. Outflows swiftly eased and, in contrast to many peer asset manager houses, overall flows for the business were positive for both the June (containing the Brexit vote) and September quarters. Indeed, it is satisfying to report that JOHCM has now enjoyed 33 consecutive quarters of net inflows.
Looking ahead, the pipeline of institutional business awaiting funding is particularly encouraging, most notably a sizeable mandate for the Global Opportunities strategy that was funded in the first week of November 2016, taking assets in that strategy past £1 billion ($1.7 billion). We also anticipate sustained demand for both the US and UK and Irish-registered fund ranges. This is despite investment performance across the fund range over the 2016 Financial Year being somewhat polarised. Market conditions generally favoured some of the more defensive, quality growth strategies while some value-oriented strategies struggled. JOHCM’s track record of long term outperformance across its various investment strategies nonetheless remains firmly intact: 100 percent of strategies with established track records (three years or greater) are ranked within the top quartile of their respective peer group since launch.
Strategies that achieved notable outperformance, on a net of fees basis, versus their benchmark in 2016 Financial Year included JOHCM European Select Values, JOHCM International Select, JOHCM Emerging Markets Small Cap, JOHCM European Concentrated Value, and JOHCM Global Emerging Markets.
Performance fees for the 2015 calendar year, which are included in the 2016 Financial Year result, were $73.7 million.
Across the Group, we firmly believe that managing excessive assets within a strategy can have adverse consequences for investment performance and therefore for clients. The International Select, UK Equity Income and Japan strategies were already ‘soft-closed’ entering the 2016 Financial Year. Over the course of the year, we ‘soft-closed’ the Global Select and European Select Values strategies after assets in these highly successful strategies reached capacity. In the case of European Select Values (ESV), a highly successful stock picking strategy, ample capacity remains in the European Concentrated Value strategy, managed by the same team. This large cap, concentrated portfolio spin-off of the original ESV strategy has made a solid start in terms of both performance and assets raised since its launch in March 2015.
It was a quiet year for product launches with just one new investment strategy introduced: JOHCM International Opportunities, a Global ex US version of the existing JOHCM Global Opportunities strategy. JOHCM Global Opportunities has established a strong performance record track since its launch in 2012 and has enjoyed sizeable inflows in the past year. The International Opportunities strategy was made available to US investors from the end of September 2016 via a mutual fund. Total capacity for the Global/International Opportunities strategies is US$10 billion, with US$9.6 billion currently remaining. Total estimated remaining capacity across all open strategies is $68.1 billion.
From a regulatory perspective, the past year has marked a period of growing uncertainty, caused by changes of political administration in the UK and the US, leadership flux within key regulators, (being the UK’s Financial Conduct Authority and the SEC) and the potential outcomes of the UK’s Brexit referendum.
The challenge has therefore been to stay focused on ensuring the day-to-day operation of the JOHCM business is in compliance with those requirements that are known, whilst at the same time paying close attention to signals from the regulators and the market so that we can prepare for the future state.
In terms of expected regulatory developments, we have implemented our response to two key pieces of EU legislation that came into force over the past year: UCITS V Directive, with evaluation for the Group well advanced in identifying various policy adjustments needed to comply; and MAD II, ushering in new requirements in respect of market abusive conduct. We have also been working on preparation for MiFID II, the final and arguably most comprehensive piece of post-financial crisis EU regulatory reform.
Effective resourcing is critical to the compliance effort and this year has been one of continued expansion. We hired a highly experienced compliance professional in our Boston office and a second senior lawyer in London. Additional hiring is also underway in this area.
In common with peers, we are working to assess the likely impact of the EU membership vote on the implementation of MiFID II and, indeed, on all other pending EU legislation. We think the FCA has made its expectations clear about regulated firms’ compliance obligations while the UK retains its current EU member status, but what those obligations will be thereafter is less predictable. In navigating this uncertain regulatory environment, the guiding principle is to stand by the core fiduciary duties that have informed the business thus far.
In anticipation of an increased regulatory burden and given the growing size and complexity of the business, we added resources in a number of business areas including legal, compliance and finance.
On the investment side of the business, we added analyst resources to the London-based Global Emerging Markets Opportunities and Global Opportunities teams and to the Prague-based Global Emerging Markets team.
With effect from 3 October 2016, Gavin Rochussen, CEO of JOHCM Group, moved into the role of Group Executive, International. In this newly-created position, Gavin is responsible for implementing BTIM’s offshore growth strategy, with a focus on growing the JOHCM business in the United States and Asia, in particular identifying new investment teams. Gavin continues to report to Emilio Gonzalez and remains based in JOHCM’s head office in London.
Gavin was replaced as CEO of JOHCM Group by Ken Lambden, who has over 30 years’ investment experience across a number of asset management businesses in London and Australia. He previously served as Chief Investment Officer at Baring Asset Management and was Global Head of Equities at Schroders for 10 years, where he led equity teams in UK, European, North and South American and Asian offices.
There are no changes to the structure of any of the investment teams and their investment autonomy is unaffected by these moves.