Threadneedle searches for the right balance

European financial services institutions, particularly insurance companies, subject to consolidation and increasing cost pressures from the tough economic environment, are becoming more and more likely to outsource management of their assets to external fund houses, believes Threadneedle’s veteran vice-chairman Sarah Arkle.

“We score very highly in beauty parades,” smiles Ms Arkle, who has conducted countless pitches for the various incarnations of the company she has represented since 1983, including stints in Asia. Threadneedle Investments now enjoys a footprint across 16 countries, including offices in the UK, Switzerland, Holland, Australia and Singapore, with Asia earmarked for particular expansion.

But many of the current gains have been closer to home. One of her recent victories was a £9bn (€11bn) balanced and fixed income mandate for insurance company Liverpool & Victoria. “They could see that we are used to managing that sort of money historically. We have handled many of those types of mandates before and are comfortable with the investment proposition,” she says.

There is much more to running balanced mandates, for institutions and increasingly clients of private banks, than just making a quick asset allocation decision between fear-driven fixed income and more risky equity investments. It is all about communication between different teams, who can mix and match assets and exchange investment views, says Ms Arkle. “A lot of our funds are based around that type of collaborative culture,” with a £20bn core of Threadneedle’s £77bn total of client funds now run along balanced lines.

While the balanced philosophy is seen by many as a staid and parochial UK-oriented approach to managing money, discredited after a whole raft of foreign managers infiltrated London during the late 1990s, Ms Arkle believes just the opposite.

As well as her key roles in Asia, and a nine-year stretch as chief investment officer for Threadneedle, Ms Arkle picked up much experience in leading groups such as Allied Dunbar and is convinced that the balanced strategy of the past, suitably adapted, has a central place in the future of investment management.

“We are entering quite a difficult environment going forward, with an increasing polarisation between players going to indexed, passive solutions and those working for a higher alpha,” says Ms Arkle.

But clients are not just faced with a simple choice between the two. “The world is a pretty complex place at the moment. Clients need an ability to look at investment solutions in a whole range of asset classes, rather than just having a passive bucket here and active strategies elsewhere,” she says.

Crucial to preferred models of portfolio management of the future are notions of yield and how it relates to risk appetite, says Ms Arkle, with fixed income historically offering the highest yields and equities the lowest.

“These certainties have now been blown out of the water,” she comments, with only undesirable ‘peripheral Europe’ bonds offering a respectable yield, and even rising economies such as The Philippines yielding just 3 per cent on sovereign debt.

“Some of the equity yields are far more attractive,” believes Ms Arkle, pointing in particular to groups like Vodaphone. Her managers typically opt for those companies which can limit their downside performance, yet offer an attractive yield pick-up.

This is an approach increasingly being adopted by private banks, which previously only looked at valuations. “If I look at my own money, do I want to keep it in fixed income government bonds for the next 10 years? Absolutely not. Glaxo offers a 5 per cent yield and will still be here in 10 years time.”

Admittedly, Ms Arkle’s view has evolved over recent years. “Back in 2009, I was asking if we were going to see an extended period where companies will not pay dividends. But now we are possibly looking towards a new era, where equities will yield more than bonds.”

She says investors need to be offered a service where their managers can pick a combination of securities, be they equity or fixed income related. “Our bond funds also allow us to clearly pick where the opportunities lie. Having the skill-set to do that is far more complex in terms of investment solutions, so I expect to see more consolidation in the industry.”

Players without significant asset under management do not have the resources to build up specialisms in areas such as high yield, where security selection is key to success, believes Ms Arkle. Simply switching to a passive approach does not offer any answers. “Managing a bond portfolio successfully means splitting the bucket between corporate bonds, high yield and sovereigns. Asset allocation is getting much harder, as you need a mix of top down and bottom up skillsets.”

Threadneedle’s model portfolio, with a bias towards opportunities in emerging markets, is currently split between “quality” companies and a combination of fixed income investments which can perform over time.

While private clients may want to use a passive core in their portfolio, which major private banks such as UBS have been recommending in recent years, active managers have a vital role to play, says Ms Arkle.

“Our European equity funds have been outperforming the market by almost embarrassing amounts,” she says, “as we called the European banking sector incredibly well. I would say that as an active manager, but today, more than at any other time, the world is increasingly divided into the good, the bad and the ugly.”

Investors confronted with this shake-out of managers must also make a stark choice, believes Ms Arkle. While many scramble to move their money between a dwindling number of so-called safe havens, she believes it is a time for action rather than inertia.

“You can either say that it’s all too hard, and I’m not going to do anything at all with my money and watch it get eaten away over time, or you can take some moderate risk and try to work out what will happen. When everybody around you is getting unbelievably gloomy, it is the time to ask: ‘Which companies can do well in this environment?’”

CV

Sarah Arkle

Role: Vice chairman, Threadneedle Investments

• Previous roles at Threadneedle:

2001–2010 Chief investment officer

1999–2001 Head of equities and managed funds

1997–1999 Head of international equities

1994–1997 Fund manager

• Career history:

1983–1994 Allied Dunbar Asset Management; Far East and Japan equity manager; director of Allied Dunbar Asset Management

1981–1983 WI Carr, (Overseas Ltd); Japanese equity sales

1978–1981 Save and Prosper; trainee

• Qualifications:

1978 Degree in Management Studies from Cambridge University

The indirect approach to emerging markets

Key to a viable investment strategy is a decision of how to play emerging markets, either through direct investments in Asian and Latin American stocks, or through European companies active in the world’s growth regions, believes Threadneedle’s Ms Arkle.

“There are companies in Europe like Burberry or Swatch, who derive up to 45 per cent of revenue from overseas,” she says, warning against the over-exuberance in emerging stocks which has infected investors since 2011.

“Have a look at companies like BMW, which gets a very large proportion of its earnings from China. Many investors would not put BMW in their emerging markets bucket, but you can get just as good an exposure at home, where BMW is branded as ‘European’ and therefore not very good, but trading on a much better valuation than Asian automotive groups like Tata Motors in India or Toyota in Japan.”

Sarah Arkle, Threadneedle