I caught up with a contact of mine today, visiting from South Africa, and discussed a challenge many of the larger DFMs face – that of how to differentiate against their similarly-sized peers. Many advisers I speak with say ‘but aren’t all DFMs the same?’.

Here at DISCUS we’ve assembled a collection of DFM partners, all with clear USPs that are distinctly different. If you run a comparison using our Compare tool, you’ll find several lesser known names vs. a line up of the usual suspects (you know the brands I’m referring to).

Differentiation tends to be less of a challenge for the boutique players, who hone their focus or strengths in specific areas. For example, EQ Investors has carved a niche in impact investing, Tacit Investment Management is known for its focus on simplicity.

RC Brown, by contrast, is democratising the use of DFM through it’s low minimums and competitively priced portfolios. Another differentiator is RC Brown’s ability to access market opportunities not usually available to retail clients – giving them an investment edge.

RC Brown’s investment edge

You may have learnt from previous posts that RC Brown’s heritage is in the ‘institutional’ investment arena. This foundation has enabled them to build strong relationships with key brokers in the City who actively approach them with wholesale investment opportunities.

RC Brown can access the “wholesale market” at a discount, via:

» Initial Public Offerings (IPO’s)

» Rights Issues

» Placings by Companies (to raise new share capital)

» Placings by Known Sellers (usually a key person within the company)

As you would expect some investments of this nature can carry greater risk. To manage their exposure, the RC Brown investment team work within clearly defined parameters. They only consider established listed companies with strong balance sheets and viable business plans. Start-ups or ‘back of the envelope’ concepts are avoided.

Even with those criteria in place, RC Brown still decline more opportunities than they participate in, so that they stay true to their core investment strategy and the client’s requirements.

Typically, any purchases are free of stamp duty and offered at 5 to 10% below the prevailing share price. And as RC Brown don’t charge transaction fees, they can buy as much or as little as they deem appropriate for each client.

Diversification as a differentiator

Another distinguishing factor of the RC Brown investment approach is the level of diversification within each portfolio. For example, the UK Equity sector for their ‘bespoke’ client portfolios comprises around 40 individual company shares – most of these companies would have had some of their holding acquired via the wholesale markets.

This is a key differentiator because, as far as we know, RC Brown are one of the only DFMs to share these opportunities across all appropriate Private Client portfolios, as well as their institutional book. This gives RC Brown the investment edge.

Direct equity participation that has benefited Private Clients

We asked Robert to provide a few examples of primary market issuance and secondary placings where their direct equity Private Clients have participated:

» Empiric Student Property. This existing Real Estate Investment Trust (REIT) specialises in high quality, purpose built student accommodation. This issuance raised £100m to further expand their portfolio of properties. Why did RC Brown invest? Given the quality of the assets, strong operational performance, dividend yield of c. 5.5% and clear pipeline of acquisition targets, the investment team felt this was a good opportunity to purchase shares at an attractive discount to the market price.

» Fever-Tree Drinks (if you like your G&Ts, you will recognise this brand. We did!). This stock has performed exceptionally well since the IPO in 2014, so when it was announced that one of the founders was selling part of his stake in the firm at a 7% discount to the prevailing share price, RC Brown were keen to participate. Subsequent company results have been outstanding and continued to exceed market expectations, which has led to a very positive reaction from the share price. The team have therefore reduced the holding into this rally, with the final tranche of shares sold at a gain of over 40%.

» Standard Chartered. This example highlights how the RC Brown investment process can provide attractive opportunities across the entire market capitalisation spectrum. The investment team purchased shares in this FTSE 100 listed bank as part of a sale by a large institutional shareholder.

» Ultra Electronics. Shares in Ultra Electronics were acquired as part of a placing to fund the acquisition of the US defence company Spartan. With defence spending set to rise globally, the team anticipate Ultra to be a beneficiary of this. The shares also offer compelling value compared with BAE Systems.

» Wizz Air. This transaction was a secondary placing by a private equity investor, Indigo Partners, who were looking to sell their entire stake in this fast growing, FTSE 250 listed airline focused on central and eastern European routes. After acquiring the shares at a discount to the prevailing market price prior to the announcement, RC Brown have taken advantage of their recent strong performance. They have gradually reduced the holding and locked in this gain.

As you can see from these examples discretionary managers, particularly boutique managers, can broaden the investment universe available to private clients. Importantly, and where we believe RC Brown deliver a further competitive edge, is the way they apply these investments to their bespoke direct equity portfolios and pass on cost savings in lower overall charges to the client.

This article was created for the DISCUS website to highlight the challenges of differentiation in the DFM market, with a spotlight on RC Brown’s approach. To find out more about RC Brown please visit their dedicated page here.