How can you get an investment edge? If you regularly read the content on our site you will know that we often DISCUSs the benefits of partnering with a discretionary manager (DFM), rather than running your client portfolios in-house.
One such benefit is the access a DFM can provide to market opportunities not usually available to retail clients. Advisers managing their own model portfolios are unlikely to ever gain sight of, or have the bandwidth to evaluate such opportunities.
This week we caught up with Robert Clark of RC Brown to learn more about some of the primary market opportunities they have access to and how this approach offers an ‘investment edge’ for private clients.
The RC Brown investment edge
You may have gathered 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.
Recent examples of direct equity participation benefiting Private Clients
We asked Robert to provide a few recent 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 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 based on a interview with Robert Clark to identify how wholesale market opportunities gives them an investment edge. To find out more about RC Brown please visit their dedicated page here.