From complexity to clarity: Downing Fox’s fund management evolution with Simon Evan-Cook

Transcript

Bella Caridade-Ferreira

Hello everyone and welcome to Compare the Platform’s Cut Through the Noise podcast where we bring you content that matters to you, the adviser, and of course your clients. So with me in the studio today, I have Simon Evan-Cook.

Simon Evan-Cook

Hi, Bella. Very pleased to be here.

Bella Caridade-Ferreira

Lovely to have you here. Simon is a multi manager, multi-asset fund manager, analyst and I’m going to say columnist as well, because he writes columns for Citywire, for himself and that’s certainly how I came across your work and your fabulous drawings and diagrams, Simon. So welcome, welcome to the studio.

Simon Evan-Cook

Yeah, lovely to be here. Thank you for having me.

Bella Caridade-Ferreira

No problem at all. I want to kick off with a little bit of background on your career. You know, you were at Premier Miton for a very long time. You’ve gone off and set up Downing Fox, which is part of Downing fund managers. Tell me a little bit more about that and how that all works.

Simon Evan-Cook

Yeah. So I joined Downing about two years ago and we’re now up and running. We’ve set up a range of four funds of funds and they’re up and running and doing very well, and before that running some money for a financial adviser up in Edinburgh.

It’s probably useful to talk about the history of how we got there and why I joined Downing. Effectively, part of the reason for joining Downing is it’s a very entrepreneurial type of environment, very sort of progressive company and they gave me a clean sheet of paper, which is brilliant because that’s exactly what I wanted, because all the time I was at Premier Miton, we were doing, I think, a pretty good job for financial advisers with the fund of funds we were running there, but I had slight frustrations, things that we could have done maybe slightly better or how the product range could have been tweaked to be more useful to financial advisers.

So joining Downing was my kind of shot at fulfilling the dream, if you like, or relieving the frustrations of being able to set up a fund range that I think is fit for advisers in the 2020s given all the, kind of issues around consumer duty and costs and everything else that there might be.

In terms of my history, when you go back, the key moment for me was my epiphany, if you like, in about 2010. I’d already been at Premier Miton for a few years then, but around about 2010, and having been through the financial crisis and seeing what that did and lived through it, just about through the skin of our teeth. I kind of realised that we’d been, to some extent, making the mistake of making everything we do more complicated, so we’ve been taking what were simple fund of funds and adding new products to them, adding new structures, adding new types of asset classes, different styles and ways of doing things.

Whereas really, I think a more valuable exercise is to do the opposite, it’s to strip complexity out and so I kind of realised 2010, that what would have happened if we just backed amazing active fund managers and didn’t do anything very much more than that.

So everybody really knows the go to active fund managers in any sector, in emerging markets or Japan or UK, wherever it might be. What would have happened if we just constructed a fund simply off those fund managers, and I’ve created that model portfolio, back tested it, and it looked great before the financial crisis. It looked great during the financial crisis, it looked great after the financial crisis. So I just thought, well, why don’t we do this? Why doesn’t anyone do this? And so we’ve got the chance to kind of see that almost in action at Premier. There were a few little bits around the edges which weren’t quite aligned with that, but it worked like a dream.

So the experience at Premier Miton was fantastic and that was driven almost entirely by the selection of amazing active fund managers, and then just as far as possible, just leaving them to get on with their job of picking stocks. And yeah, it was a great success story at Premier. We raised a lot of money. No one needs to buy a Premier Miton fund, it’s not like it was a giant of the industry that people felt the need to buy. So to raise that much money and to win all the awards we did was very gratifying. But now we’ve got a chance at Downing to do it even better, I think, given that we’ve made it even more simple.

Bella Caridade-Ferreira

Well, that’s fantastic. I mean, I’ve got loads and loads of questions just off the back of that. So you know, there’s always been an argument, you’re right, a lot of people go and they just launch more and more funds, more and more products, more and more variations, variants, et cetera. You’re right to say that stripping it back is the right thing to do.

I mean, there’s an argument that really for 80% of the market, Mrs Miggins and co, you probably just need one multi-asset fund. So do you need a whole load of platforms? Do you need lots and lots and lots of different products and funds et cetera? It’s really sort of coming back to what you’re saying about keeping it simple. I’ve got several questions based on what you’ve said; you said active managers. Do you use any passive products and why don’t you use? Why active and not passive?

Simon Evan-Cook

Well, we’re slightly polarised on that. So all of our funds, we basically split into two parts, as equities and non equities. We call this the whisky and water model, and the whisky refers to the equities. That’s the bit where we’re looking to create a fine blend, if you like, of only active fund managers. So when you look at our equity part of our portfolio, it is 100% actively managed funds only. There will never be a tracker in that part of our funds because it absolutely reflects my belief that if you find amazing fund managers and leave them to it, you will get the just rewards for doing that.

But conversely, when you look at our non equity part, and our non equity part, we call our defence component, the water if you like, to our whisky. That has got one very clear job and that is to dilute the performance of the equity component in those years when it’s all hitting the fan, when everything is going wrong like it did in ‘22 or in 2020 or in 2008, it really needs to be awake to that and ready for that to go wrong. In that part we use only passives and it’s only government bonds and cash in there as well, so you’ve got a very polarised portfolio, but it does, and has certainly worked very well so far.

Bella Caridade-Ferreira

So you use passive bonds et cetera, but not passive equities.

Simon Evan-Cook

That’s right. Highly active equities. Yeah, it’s not just active equities, they couldn’t be more active.

Bella Caridade-Ferreira

So what would you say to those, you know I’m going to be a little bit challenging here, Simon, and say, what do you say to all those passive evangelists who swear blind that most fund managers, you know, can’t beat the market, et cetera. I’m sure you’ve written about this many times before, but give me your robust denial of that.

Simon Evan-Cook

There’s lots of ways of addressing it. I think over the years as I’ve got older, if you’d have asked me that question 10 years ago, I would have gone off on all sorts of tangents and rants about it. I think over the years what I’ve come to realise is that there’s a lot to admire about how passive works.

Now it’s become popular and part of the reason is because of the charges. For sure, that’s a reason, but I think if there’s one takeaway that I’ve taken from the popularity of the likes of Vanguard, not just the trackers, but also their life strategy funds, it’s the reliability for financial advisers. I think that goes unspoken quite a bit, and what I mean by reliability is if a financial adviser, or even a client ends up buying, you know, a tracker fund, or if they end up buying one of the life strategy funds, what they at least know about that fund is what they’re getting. Not just today, but in 5 years time, 10 years time, 20 years time. But you buy an S&P 500 tracker, in five years time it’s still going to be an S&P 500 tracker.

I think the industry has all sorts of issues, firstly, from in the multi-asset space, people moving the asset allocations around. So one year it’s 60% equity, another year it’s 80%, another year it’s dropped to 50% based on what are quite often no more than kind of macroeconomic political guesses about what the future might hold. I think that causes a lot of damage. But then also within fund management houses, changing the structure of a fund, so turning it from an income fund to a growth fund, or from a growth fund to an absolute return fund to suit the flavour of the month as well.

Bella Caridade-Ferreira

Does that happen a lot? People changing from an income to, changing the flavour of the funds?

Simon Evan-Cook

I think it happens more than you’d know. So it’s, maybe it might be changing it from a growth fund to an income. So quite often it means repurposing a fund that has fallen out of favour for whatever reason and turning it into something that it wasn’t before, now that might be income to growth, or it might be turning it from a value fund to a growth fund because value hasn’t worked for seven years, so you sack the value manager and you bring in someone who’s more growth oriented. All of these little tweaks that happen more often than not to fund that’s off the radar because it’s fallen out of favour. They’re never going to do it to a fund that’s flavour of the month because you wouldn’t fix something that’s not broken. So that’s the bit I’d take from passive that I think is absolutely the bit that the active industry needs to replicate and we’ve built that into Downing Fox a lot because we’ve, if you like, got a similar structure to Vanguard LifeStrategy Funds because we offer fixed equity level.

So we offer the 100%, 80%, 60%, 40% because having tried to do it myself in the past and having seen a lot of multi-asset fund managers attempt to do the same and very rarely if ever add any value, moving in and out of markets, either hiking risk or lowering risk only serves to damage returns, and also to make the financial advisers life a lot harder by changing the risk profile of the fund from what they originally thought it was.

Bella Caridade-Ferreira
So you never change your asset allocation strategy?

Simon Evan-Cook

We don’t. So the only bit that we’ll change, on the equity side, it’s very static. So the overall level of equity stays exactly the same. The geographical weightings change only very slightly and they tend to evolve rather than be changed. The only place where we can or do change the asset allocation tends to be within our defence component and that really means looking at the duration, because again when we looked at where we were when we launched the Downing Fox funds, it was very clear that because of 10, 20, 30 years of long duration bonds performing very well, if we have just put in a portfolio of normal length duration bonds we risked having an absolute nightmare of a first year, so we were able to hold cash in our first year, which is why we’re able to avoid that car crash in ‘22.

Bella Caridade-Ferreira

So you avoided the car crash in 2022 that lots of other fund managers were unable to avoid.

Simon Evan-Cook

That’s absolutely right, yeah. So our 40% equity model made money in 2022 and was our best performing of our four, which when you think of what a financial adviser wants, which is to have everything perform in the right order, to have their most nervous clients, the ones with less time until they retire experience, the shallowest falls in a sell-off. That’s what our fund range achieved in 2022 when so many others didn’t, and it was simply by holding cash instead of bonds, and it was nothing more complicated than that. So in terms of keeping it simple, well, there’s a pretty good example of that.

Bella Caridade-Ferreira

I mean I want to come back to one of the points that you said at the beginning, which was about picking good fund managers, and as you know now in the UK, we have lots of gatekeepers controlling model portfolios, fund of funds and some do well and some don’t. So what’s your magic sauce? How do you find your amazing fund managers? What do you do differently that no one else does?

Simon Evan-Cook

It’s hard to know what we’d do exactly differently, but having spoken to fund managers and some of the sales reps as well in terms of our questioning style, I would say we’re a lot more qualitative than what I understand many of our peers are like. If you have a fund manager meeting with us, myself and my colleague Alex Paget, it tends to be very much more about getting the whites of the eyes, if you like, understanding the personality of the fund manager, understanding how that personality fits with their style and their process, understanding what makes them different. I don’t think I could do what I do, if I couldn’t meet the fund managers in person. I think if I had to rely on data and screens and track records, I don’t think I’d be any better than anyone else. Really the magic, if you like, happens for us when we meet the fund managers and we’re really looking for people we can trust. Who’ve got the gumption to be different from the market, who’ve got the ability to stick to their principles when the market is making them look like an idiot for sticking to their principles, so it’s all these soft, human factors, if you like that, I think may be the differentiator for us.

Bella Caridade-Ferreira

Do you use data to narrow the field? I mean you’ve got to start somewhere, right?

Simon Evan-Cook

To some extent.

Bella Caridade-Ferreira

You’re obviously looking for high conviction managers. Do you have limits on, for example, the number of stocks they hold?

Simon Evan-Cook

Not in terms of number of stocks, because in my experience the number of stocks should vary depending on how the fund manager manages their funds, so we’ve held funds with 20 stocks, we’ve held funds with 100 stocks and both of them are excellent, highly active. They’ve just got different ways of doing it. We do use data to make sure that they look active and maybe unlike a lot of fund pickers we’re looking for funds that look very, very different to the market. So we might see a fund being 20-25% behind the market and think ‘oh actually that looks quite interesting.’ Whereas I think a lot of other fund buyers are probably running the opposite direction to that.

Bella Caridade-Ferreira

You’re sort of looking for the outliers, almost the ones who are doing things differently from everyone else.

Simon Evan-Cook

Yeah, I guess where maybe I agree with the pacifists on a lot of things is actually, I agree with them that the average active fund isn’t worth holding. I think if you looked at the sector of maybe, that contained 100 active funds, probably only 10, 15 of them, I think are probably worth looking at.

Bella Caridade-Ferreira

Are truly active and truly sort of independent.

Simon Evan-Cook

Yeah, truly active and actually not necessarily just truly active but have actually got the right stuff to make that work. I mean, you can be active, but if you don’t know what you’re doing, that’s probably a bad thing. If you don’t know what you’re doing, you probably want to look like the benchmark. So we’re really looking for the ones who are truly active and know what they’re doing, and I think maybe that is 10 to 15% who are good enough to justify their fees above the benchmark. There’s a load of stuff, I remember hearing Simon Cowell talk about his time on X Factor and he said the problem’s not with the really bad singers or the really amazing singers. It’s just the vast volume of stuff that’s in the middle and so that’s our real issue is kind of, we meet a lot of fund managers who do the right stuff and they say the right things, but actually do they have that X Factor, if you like, that turns them into one of the greats.

Bella Caridade-Ferreira

This is the big debate, you know, is the act, is that something you can teach? Is it an art or a science? Can you teach a fund manager to have that? Or is it just innate? Is it an intuitive thing?

Simon Evan-Cook

I think if I had to vote for one, I think it is an art more than a science. I think you can improve it through the science and you can use science to add to it. But in terms of can you teach a person to be like that? I’m increasingly thinking, no you can’t.

One of the big problems we come across in the fund selection world is what we call the able lieutenant problem, which is where you’ve had a founder fund manager and we tend to like founder fund managers. So we like fund managers who have established their own fund and maybe then gone off and spun off and started a boutique and done it themselves.

Where we find problems is where that founder has then hired other people to work alongside them, and they have learned how to do it, and they speak the right things, and they say the right stuff. But actually when it maybe when that founder retires or moves on, you find that they just don’t have that ability to add the value, because maybe it’s those exceptional circumstances where you need to tweak the process or flex the process at the edges, that that kind of able lieutenant that very intelligent very, you know, capable person just doesn’t have the ability.

Bella Caridade-Ferreira

Well, they’re probably process driven rather than really being…

Simon Evan-Cook

Rather than gut feel. Yeah, exactly that.

Bella Caridade-Ferreira

OK. Well, yeah, that’s really interesting and this brings me on to another question. You know that left field thing, doing things differently. You’re doing things differently, Simon, because you’re launching, you’ve launched fund of funds and right now the sexy thing in the market is model portfolios. Why haven’t you launched model portfolios?

Simon Evan-Cook

Well, we’re proudly unsexy, for one, that’s the main reason. Yeah, you’re embracing that. But the real reason is I am something of a perfectionist in this area and I just think that fund of funds are the most appropriate and the best wealth management model for financial advisers. Think of the history of fund of funds, they were established maybe 30, 35 years ago and they were there to solve a whole host of problems that plagued open portfolios and by open portfolios I mean a portfolio that isn’t unitised, i.e. isn’t all wrapped up in a single fund. Administration problems, taxation problems and they did a wonderful job for that, and for about 10 or 15 years, predominantly through the noughties, they were kind of the go to product for financial advisers, and rightly so. But it was the charges issue. I mean they were too expensive and the ones that were good failed to move with the times by reducing charges and the ones that were bad weren’t worth holding anyway, and I think MPS stole a march over the last decade, so from, you know, 2010 onwards, by offering much cheaper fees and that’s why they really took off.

But I think we’re now getting to a point where enough financial advisers have experienced MPS, and seen the administration issues that are associated with them, and particularly now that we’re getting to a point in April coming up where you’re seeing CGT allowances slashed even further, I think more and more are becoming aware of the potential tax issues that causes them and obviously that big issue is that if you’re running an open portfolio like an MPS, every single time you trade a fund, or you sell a fund that is a potentially chargeable event. So if you’re a financial adviser and you put your biggest clients in there, those are the clients who are the ones if they’re outside of a pension or an ISA…

Bella Caridade-Ferreira

Yeah. If they’re outside of a pension or an ISA, they’re going to be…

Simon Evan-Cook
Yeah. The ones who potentially triggered that. In a fund of funds, it’s not an issue. So if I have a fund where I’ve got an issue with it, but we’ve held it for 10 years, got incredible gains from it, just sell it because the fund manager’s left or the fund managers lost the plot or, for whatever reason, it’s now become not the right fund to hold. We just sell it. We don’t have to think about tax liabilities. If you’re an MPS or a DFM that’s not the case.

Bella Caridade-Ferreira

Well, that’s interesting, isn’t it? Because you’re absolutely right, you can get rid of any funds you don’t like, but in a model portfolio, they will have to question, I suppose they have to think about the tax, the tax implications and that could mean that they stay in a fund. So they could end up making the wrong decision for tax reasons.

Simon Evan-Cook

I mean, that’s the conflict of interest, right? So if you held a fund for 10 years, the trouble is, the longer a fund runs the bigger it gets, the bigger it gets, the returns unfortunately tend to get worse. We’ve seen it so many times. If that fund becomes too big or the fund manager becomes too old and wants to retire, then you should probably sell it. But you’ve got a conflict of interest now because actually you think ‘oh God if we sell this we’re going to be going to upset a load of our clients, our financial adviser clients, because their clients are going to be upset, because all these tax bills that are now landing on them that the clients weren’t expecting. So that the temptation is to stay put. Now that’s bad enough for an existing client. But if you realise if you’re running a centralised model and now that model is based on the tax requirements of other clients. So you put a new client into that, and they’re being run on the old model because of somebody else’s tax requirements, that to me is beginning to become…

Bella Caridade-Ferreira

They’re immediately jeopardised, aren’t they?

Simon Evan-Cook

Yeah. Yeah, it’s becoming a consumer duty issue. It’s not treating customers fairly and I think it’s a problem that’s brewing and I think if you’re smart, you’ll try and get ahead of it and try and avoid it as quickly as you can.

Bella Caridade-Ferreira
There are loads of practical, as you know, I write about platforms and one of the things that a lot of DFMs and model portfolio providers struggle with, is running the same model on every platform, because often the same funds aren’t there or they’ve got different share classes et cetera. So they end up having to run slightly different models across the whole range of platforms, which makes it much harder for them to actually run those models and measure them and everything else. But equally, you know, some DFMs have kind of switched on to this and have gone ‘well I’m just going to unitise my model’, because then they don’t have to have minimum restrictions, minimum investments and they can just have that fund on every single platform. But there is still, I think, a perception issue because I think some advisers still want to give their client the view ‘we’re doing so much for you, we’ve got this whole model with lots of different funds, look how clever we are.’ Rather than ‘we’ve just got one bog standard multi-asset’, not necessarily bog standard, but one multi-asset product that can do everything. It’s a perception issue sometimes. Are there other reasons why fund, why advisers don’t use funds of funds but you – know is that your sort of view;  mainly a perception thing or?

Simon Evan-Cook

I think it is perception. You’re absolutely right. It’s that feeling that if you get a statement which has 30 funds on it, and you see the price, and how much pounds and pennies your clients have invested in every one of those, I don’t know, let’s say there are 20 funds in an MPS or a fund of funds. It just feels better to see 20 different holdings. It looks like more work is being done, even if it isn’t. When you get the fund of funds statement through it just says one thing on there and people naturally feel that’s an all eggs in one basket problem, even if it is effectively exactly the same. So it is something we need to address in the fund of funds world and another great thing about Downing is we have the boffins here who are currently beavering away to create a tech solution for us, where hopefully, fingers crossed, we will be able to drill down into our portfolio and show how many pounds and pence their clients have invested in each of the underlying holdings we have, so hopefully best of both worlds.

Bella Caridade-Ferreira

That would be really good because then that allows your fund of fund to compete directly with that kind of presentational issue, right, that the advisers are looking for.

Simon Evan-Cook

Yeah, exactly that. Yeah, if we can address that, I think the reasons for holding an MPS go away cause we’ve addressed charges as well, cause the other thing to mention about platforms and MPSs not having access to all the funds, is that actually they tend to have particularly limited access to newer funds. Now how we’ve addressed the charges issue, part of the reason we’ve addressed the charges issue, the other one was simply for us to charge less, but the other half of that is that we’re doing a lot of backing of newer funds and newer funds don’t tend to necessarily be a fund manager who’s just left school, they’re a fund manager who’s left the giant insurance company because they hated the red tape and started up their boutique. But because MPSs and DFMs either can’t buy these funds or won’t buy them, they’re available now at very, very attractive founders fees. So you’re getting an incredible fund manager at a far lower fee than you used to get even 3 years ago, but particularly compared to 10 years ago, when you were paying 1.5%, so we’re paying half a percent typically for active equity managers because of that.

Bella Caridade-Ferreira

That’s a really interesting point, cause I want to come back to fees in a little bit, but that’s a good point about scale because you know for the really, really large DFMs, then the size of the fund is always going to be an issue cause you’ve got limits, haven’t you, if you’re running a fund of funds, you can’t put more than, what is it, 20% in each fund?

Simon Evan-Cook

Yeah, without getting too wonky about it. If you’re running, UCITS fund of funds, you have that issue and we are running a couple of white labelled UCITS funds where we do have an issue, that’s where the bulk of our assets are currently, but our Downing Fox funds are what are called NURS funds, which stands for non-usage retail scheme and that system we can hold as much of the fund as we want. So I could own 100% of a new fund and that’s not an issue, people think it might be, but actually if you own 100% of a fund or maybe 95% and the fund manager owns the other 5%, then you’ve got no worries about someone else leaving the fund Woodford style and sparking a liquidity issue, so, as far as I’m concerned, that’s safer. It’s where the regulations, I think have got it slightly wrong.

Bella Caridade-Ferreira

Let’s talk about the fees. How do you, you said, you can negotiate really, really good fees, but we’ve also touched on the fact that funds of funds have, in the past, been expensive. How do they compare, how do fund of funds fees today compare to sort of model portfolio fees?

Simon Evan-Cook

Yeah, so you tend to see that MPS management fees I think are still relatively low. So probably look at a few of them, they might still be lower than we are, but given the issues they face in terms of all the stuff we’ve just discussed, I think actually you’ve got to be wary of the ‘only a rich person can afford cheap shoes’ problem. I think, you know, you’ve really got to pay up a little bit to avoid all the hassle that comes with that. How we’ve been able to do it at Downing, and I think people throw around USPs, as in unique selling points, a lot and quite often they’re not unique. They’re maybe just slightly unusual, but our genuinely unique selling point at Downing Fox is that charging structure, whereby we have that whisky and water thing so back to that, part of the reason we call it that is because we are effectively not charging you for the water in your glass.

Bella Caridade-Ferreira
So you only charge for the equity bits?

Sion Evan-Cook

That’s right.

Bella Caridade-Ferreira

The active equity bit and everything else is effectively free.

Simon Evan-Cook

Yeah, we effectively see that as almost like a free dilution service. So we run the 100% equity fund, which is available as a standalone fund. OCF of 1%, half of which is Downing charges, so that’s us and the other half is the underlying fund manager. So 100% actively managed. But you know, like whisky, some people can’t drink neat whisky, but some people can’t handle neat equities, so we need to offer versions of that, that dilute that down for different risk profiles, and that’s what our defence component does. So we do that bit for free. So our 80% has an OCF of point 8, 60% point 6 and then down to point 4 for the 40% equity fund. So that’s one of the ways that we’ve been able to do that. So a typical IFA has probably got a client with average exposure, 60% equities, so their average OCF with us is going to be about, point 6 of a percent. That’s one of the ways we’ve been able to address that charging issue, which is far, far cheaper than they ever used to be. At Premier Miton our OCF used to be upwards of one and a half, 2%. We were still able to outperform at those levels, but clearly now our handicap at Downing Fox is, you know, even further reduced because we’ve got that lower charges there. So we’re getting into the realm of passives and MPSs. So I think charges now, if you’re charging the way we are, no longer an issue.

Bella Caridade-Ferreira

You said something about you when you’re at Premier Miton, you’re able to outperform even with those costs. Let’s talk about performance now. We’ve just come through an exercise where we have spent a lot of time looking at model portfolio performance and I was pretty shocked, because most of them underperform the FTSE 100, or the sort of, the average IA sector. So you do kind of question why there is so much, I’m going to  say interest around models, and I think one of the reasons is that it is harder to compare them. You know obviously as a fund of funds, your fund is listed. It’s very easy for advisers or consumers to go and look at the performance of that fund against its sector. Do you have any views on how we should value, you know how we should look at performance in models, and whether that should be compared directly to multi-asset funds?

Simon Evan-Cook

It absolutely should be compared, but the issue, as you rightly point out, is that you can’t compare that. So I mean that makes it hard, I think, to demonstrate that you’ve got, as an adviser, a robust due diligence process. Because how are you comparing one MPS to another when the details quite often aren’t available? I think they are becoming increasingly available now, but MPSs and DFMs particularly, you’re almost relying on the provider to give you their set of numbers. So you’ve got to rely on one, those numbers being correct, because if they’re running hundreds of models, and some do, which ones are you being shown? Are you being shown the ones that did well and the other ones being shuffled to the side? Is there a mistake that’s happened that gets ironed out? These are all issues that with the fund of funds, you just simply can’t do that. You simply can’t, if we make a mistake…

Bella Caridade-Ferreira

You can’t hide behind anything.

Simon Evan-Cook

You can’t hide, you know I’ve always said that we’re like snails, in the sense that you can see our trail that we leave behind, and so my entire career, you can just see exactly where I’ve been. So on performance systems like analytics, you can literally look up my name, see my track record at the funds at Premier Miton that I was officially linked to. If I was running an MPS or a DFM, if I screwed it up, I can just hop off to the next DFM and MPS and you don’t know anymore how my performance was. The fresh air and sunlight that fund of funds and well, not just fund of funds, but any unitised fund are exposed to is so much healthier in all aspects, and that does change behaviour of me as a portfolio manager. I know I’m judged by performance rather than my logo or my service levels. Service levels do matter, but if I know that investments are why people bought the funds at Premier Miton and investment will be why people will buy the Downing Fox ones. That’s what I’m aiming at and that’s why I risk my own reputation and my career backing newer, small funds because I know that’s where the best returns are going to come from. MPSs where you’re not being judged on performance so much that changes the incentive completely to kind of hide in the herd, and when you look at ‘22, that’s why so many did hide in the herd you know, and everybody knew that you shouldn’t hold bonds in ‘22, it was an open joke in the industry, they offered reward free risks. And yet they all still held bonds. Why? I think that’s because they weren’t being judged on performance. I think they are now, because ‘22 was so bad that people have had their eyes open to actually, you didn’t need to go through that. But, yeah, it asks a lot of questions of how MPSs should be judged, should there be tables that are freely available? I think there’s a lot of work to be done here by advisers and the regulator.

Bella Caridade-Ferreira

There’s definitely a lot of work, you know, as I said, we’ve done a massive exercise on model portfolios and we’ve used Morningstar data. Not all model portfolio providers have given data to Morningstar, particularly their competitors, like, you know, Square Mile and others and FE Fund Info. They’ve all refused to hand over their asset allocation. But you know, if I look at the bulk of the market, a significant number underperformed and you do have to quite, and when we took it one step further. We assessed them against the multi-asset funds in the market and found that actually there was absolutely no benefit at all in being in a model portfolio for performance reasons, none at all.

Simon Evan-Cook

And that’s always been the case. Yeah, I don’t think that’s changed over the last, I remember presenting on this four or five years ago, talking about how that lack of transparency changes what you do as a fund manager. In the fund manager world, you have to perform or you have to have a giant name behind you. But yeah, if you don’t have a giant name then it’s all about performance in the fund management world. It’s not the case in the MPS or DFM world.

Bella Caridade-Ferreira

Do you think though, with consumer duty, do you think that will have an impact on the direction of travel, because you know consumer duty, you have to think about client outcomes, it’s absolutely pinned to the mast isn’t it? So what’s your view? Do you think that the market will see maybe more flows into funds of funds where it’s transparent, and easily an adviser will be able to showcase that performance better, or do you think models and DFMS will continue to grow?

Simon Evan-Cook

I hope it’s the former. I’m sure MPSs and DFMs will continue to grow for a while, but I do get the sense that the worm is turning a little bit because I think so many advisers have had exactly that experience you’ve outlined of being sold this incredible service. I mean, let’s put this a different way when you think about how a lot of advisers segment their client base, they will put their most valuable clients into a DFM and they’ll put their least valuable clients, in the sense that they’re the ones with the lowest level of money, into something like the Vanguard LifeStrategy Funds, kind of like simple, easy, shove them in there. Look at the performance over the last 10 years, the irony is those clients that kind of, shove them in there, clients and leave them…

Bella Caridade-Ferreira

They’re the ones who’ve got better performance.

Simon Evan-Cook

Yeah, far better performance over that time period. So I’m hoping that the IFA market will move that way because we’re hoping to be, you know, maybe when we start off, we’ll only attract that kind of money, the kind of, let’s shove them into a Downing Fox fund because it’s easy and simple, we don’t have to do a load of work. I think the smart advisers will think, well, hang on a minute. If that’s actually a very good product and we don’t have to do a lot of work, why don’t we just use it across our entire client base? Why are we putting our most valuable clients into the worst product, which requires the most work? When actually we could be saving ourselves time and making our clients more money putting them into a simple fund of fund structure. So I  genuinely hope that the worm is turning on that front, and when we have spoken to advisers about this, the simplicity of what we do only using a couple of asset classes, just keeping it super simple, only having one structure. I think they get it. They’re really smart ones get it, and they just think, well hang on a minute. You know, I’m pushed for time. There’s so much red tape. There’s so much to do. The clients are asking more questions. Technology is taking up more of my time. Why am I making this harder than I need to for myself when I could just buy one simple product, that’s very well diversified and then just run with that? I hope that’s the way we’re going.

Bella Caridade-Ferreira

Well, let’s hope so. I really like the whisky and water message. It’s nice and clean and simple, and I think advisers will understand that, and we all know that the advisers, sorry advisers, if you’re listening to this, but you do have the attention span of a gnat most of the time.

Simon Evan-Cook

Well ironically the ones that made it this far, this won’t be you.

Bella Caridade-Ferreira

Yeah, that’s true. But I just have one last question on performance. Obviously, you know we’ve got the whole growth versus value debate Simon and how do you tackle that in your funds?

Simon Evan-Cook

Yeah, well, that’s interesting as well because we talk about, we’re agnostic on value versus growth. What I mean by that is I think if you look at great investors, Warren Buffett and Anthony Bolton are two great examples. Everyone knows Warren Buffett. But Anthony Bolton, if you’re not of a certain vintage, was kind of the go to value investor in the UK in the sort of, 90s.

Bella Caridade-Ferreira

I notice you’re not going to mention Woodford there.

Simon Evan-Cook

I have to leave that out. I think it’s probably like Voldemort. It’s best we don’t say his name in the industry anymore.

Bella Caridade-Ferreira

Yes, exactly.

Simon Evan-Cook

But there was a time back in the day before ego took over, when actually he was a very, very good, active manager. But then, you know, we all know what happened after that. So Anthony Bolton, take that as a value manager. Warren Buffett I think is actually a quality growth manager, back in the 60s he used to be more of a value manager, but now he’s quality growth, buying the likes of Coca-Cola and Johnson and Johnson.

There’s nothing wrong with either of those styles, they both work very well, but they both work at different times. Now the trouble is, I think the big problem advisers have and clients have with buying active funds is that they don’t struggle to find great funds, they struggle to buy them at the right time.

So take an investment manager like Baillie Gifford who I think are excellent in their field, their field being high growth investing, most clients and advisers tend unfortunately to buy them late on in their period of output, so 3, 5 years in. Which means there’s a greater chance that you then experience the reversal of that performance, which you saw in ‘22, which is quite violent and then you just think, oh, God, what have I done? This isn’t a great fund manager. It’s all just a big con. You either switch to a value manager at that point and then value has the same problem. Or you just say the whole thing is a giant con,  I’m just going to go in with a tracker. The way we describe this is, we talk about the hero’s journey, is our way of describing this.

Now, great fund managers, I think, are on a hero’s journey, which is going to be dramatic. You can have periods when they’re winning. They’re going to have periods when they come very close to death. Now, a hero’s journey is a template that authors use for writing books, it makes it more exciting to have these amazing ups and downs and fund managers almost should have these ups and downs because it’s what comes with following a specific style which all the greats do.

The trouble is, if you’re a financial adviser and you’re taking your clients on this heroic journey and you’re bringing them close to financial death every five years, they’re going to hate you for that. So what we talk about at Downing Fox instead is the unhero’s journey, whereby we try to take your clients on a journey that matches expectations and is very, very dull, if you like. We’re aiming for dullness. So now we’re unsexy and we’re dull.

Bella Caridade-Ferreira

Unsexy and dull. That sounds good.

Simon Evan-Cook

Our sales team love this. This is a hard message to put, but the point being that how we achieve dullness while still actually getting a good outcome is that we buy these amazing fund managers, buy amazing growth managers, buy amazing value managers. But we just buy both, so that when a growth manager is having a nightmare, we’ve got a value fund that’s having an absolutely incredible time. So much as in ‘22, our performance was helped by what our defence component was doing. Actually, our equity component did really well in that year as well because we had about half of that fund invested in value funds and many of those made double digit returns in ‘22 because of what happened in the market. So we are permanently exposed to value, permanently exposed to growth. We are not trying to flip one to the other cause nobody can do that and that again causes advisers problems if they’re having the kind of rug pulled out from under their feet by changing style as much as you’re changing allocation. So that’s the model for us, and so if you just find great fund managers of different stripes and stay with them over 10 years, even if you hold 30 of them, providing they’re all great fund managers, they’re all on different paths. But the average of 30 great funds is still great. So that’s the approach. Again, that’s what I’ve seen work over the years of running fund of funds, both at Premier Miton and now at Downing.

Bella Caridade-Ferreira

So Simon, we’ve been on this call now for about 40 minutes, so advisers will start getting restless, but I just want to have one last question for you and then we can say goodbye. How much of your money do you have in your own funds?

Simon Evan-Cook

The vast, vast majority of it. So I’ve got a couple of, full disclosure, I’ve got a couple of old investment trust holdings, which I have to fill out more forms than I want to, to sell. Other than that, everything I invested in are 100% equity funds and there’s some in the 80% equity funds, so, I believe in eating your own cooking and so that’s exactly where it is, as is Mrs Evan-Cook’s money and my kid’s money, so, yeah, it’s all in there.

Bella Caridade-Ferreira

That’s music to my ears, because I think that that is really what matters, isn’t it? If you’ve got your own money in your own funds, I mean, the number of times I’ve come across fund managers, active fund managers and when you ask them where their money is, it’s all in the LifeSstrategy 80 fund.

Simon Evan-Cook

Yeah, absolutely. None of my money is in that fund, as much as I respect Vanguard and what they do. Yeah, we are very different. In fact, you know, as a kind of footnote to that we tend to sit very well against Vanguard because they’ve got so much exposure to US mega caps, magnificent 7. All that sort of stuff and we’ve got hardly any, then actually a lot of advisers are kind of thinking ‘well actually, the Vanguard-Downing ticket works well’, and actually, when you put the two together, you got a very cheap offering that’s got a lot of active management in there as well as passive. So I think, yeah, a lot of advisers are going down that route with this currently to say actually that there is a potential issue coming up with a magnificent 7 and how large caps have won for so long that if that reverses, you could be in trouble. So yeah, taking an active portfolio that naturally has more mid and small caps in there is, it’s almost like the adviser’s version of that unheroic journey, where they’re kind of backing both horses, when both horses, I think, can do a perfectly good job.

Bella Caridade-Ferreira

Excellent. So there you have it, advisers, we’re going to call them unsexy, dull and…

Simon Evan-Cook

And the last fund you’ll ever buy, let’s work up on a high.

Bella Caridade-Ferreira

I suppose we could summarise that, Simon, as boringly reliable.

Simon Evan-Cook

Yes, that’s exactly what we’re aiming for, for advisers.

Bella Caridade-Ferreira

Boringly reliable. There you go.

Simon Evan-Cook

Just forget you ever bought us and just crack on with running your business.

Bella Caridade-Ferreira

And that’s really what everyone wants, right? An adviser needs to be out there just advising clients on life, not on the actual investment.

Simon Evan-Cook

That’s what these are for. If we can do that then we’ve done a good job.

Bella Caridade-Ferreira

Excellent. Well, Simon, look, absolutely fantastic. Thank you so much for your time and thank you for explaining everything about Downing. How can people find out, are you listed on lots of platforms?

Simon Evan-Cook

Yeah, we’re on all sorts of platforms. Most of the big ones, you can come to our website, the Downing website, find out more about us or, I talk a lot on LinkedIn as well. So drop us a line there. Yeah, all sorts of ways of finding out what we do. Yeah, we’ll be very happy to talk to you.

Bella Caridade-Ferreira

Excellent, great. Well, thank you very much for your time and I look forward to catching up with you later in the year.

Simon Evan-Cook

Pleasure. Thanks, Bella.