Fund managers of the City, brace yourselves. If Terry Smith brings the same pugilistic style of leadership to Fundsmith, his latest venture, as he did to the world of interdealer broking, a sedate corner of the Square Mile is in for a rude awakening.
Next week, Mr Smith will barge his way through the door of the fund management industry, pledging to repair a “broken” sector that he argues is “congested with investment managers; from the mediocre to the downright bad with a mania for charging high fees, thereby eroding returns and seldom beating the index”.
Never one to mince his words, Mr Smith has had the sector in his crosshairs for some time. Top of his list of complaints is the fee model employed by fund managers: in presentations due to take place in the coming days, more than a few jaws will hit the floor as he outlines plans to scrap the traditional template for charging clients altogether.
According to a teaser document circulated among prospective investors ahead of a formal launch of the fund next month, Fundsmith will invest in equities characterised by their high return on operating capital; the high barriers to entry and resilience to change of the sectors in which they operate; an absence of leverage required to generate returns; and growth driven by reinvesting cash flows at high rates of return.
That is likely to mean creating a portfolio of about 20 “high-quality, resilient, global growth companies”, according to people briefed on the new firm’s plans.
Mr Smith intends to address the perennial criticism of fund managers as fickle custodians of clients’ money by committing not to establish another equity fund beyond the initial Fundsmith launch.
In spite of its name, the firm will not only be about its founder. Mr Smith has recruited a senior team to work alongside him, including several former colleagues at Collins Stewart, the stockbroker he built up into one of the City’s largest. I’m also told that Simon Godwin, previously of BNP Paribas and Schroders, will act as the venture’s chief bean-counter.
They may find it difficult to rein in their boss’s enthusiasm. Tackling head-on what he sees as a bloated, usurious industry is a logical next challenge for Mr Smith, who made a name for himself in 1992 when Accounting for Growth, his best-selling book on corporate accounting, got him fired by UBS.
If Fundsmith serves the wider purpose of driving down fees and livening up some of the more indolent fund managers, investors everywhere will owe its founder a debt of gratitude.
After selling his remaining stake in Collins Stewart last week and earmarking the £7m in proceeds for his new firm, nobody could accuse Mr Smith of failing to put his money where his mouth is.
Haunted by Tucker
Mark Tucker’s first act when he took the helm at AIA during the summer was to raid his former employer, Prudential, and recruit his erstwhile secretary.
After this week’s Hong Kong listing of the Asian arm of AIG (which saw a 17 per cent debut share rise) he may soon be targeting more lucrative prizes at the Pru.
AIA’s new chief can reflect on a satisfactory job to date, with almost a trillion dollars of demand chasing the available stock. Friday’s exercise of the green shoe option, making this the world’s third-biggest initial public offering, underlines the vast appetite for Asian growth stories.
People close to the Pru spent Friday arguing that the increase in the AIA share price offered vindication of its four-month pursuit of its Hong Kong-based peer and that the feelgood factor among Mr Tucker’s investors might rub off on it.
They are wrong – for two reasons. First, it could be argued that the soaring initial valuation of AIA only serves to remind the British life assurer of the value-creating opportunity on which it missed out through poor execution.
Second, a rising AIA share price would over the medium term leave the Pru looking increasingly vulnerable to a takeover bid.
Mr Tucker’s long association with Prudential might not yet have reached its final chapter.
This week a significant piece of FTSE 100 broking business changed hands. I understand that Goldman Sachs was hired alongside Bank of America Merrill Lynch as joint corporate broker to InterContinental Hotels Group.
The appointment, which sees Goldman replacing JPMorgan Cazenove on the ticket, says much about the strategy of its London investment banking operations.
Last month, Goldman poached Philip Shelley, UBS’s co-head of corporate broking, to help lead its own business. Sensitive to the suggestion that it has sometimes served its own interests ahead of those of corporate clients, people close to Goldman say it is now accelerating efforts to forge closer relationships with a carefully selected cluster of blue-chip companies.
The bank now has 10 FTSE 100 broking mandates, including Anglo American, Diageo and HSBC. I suspect there will be a concerted effort to increase that number as Goldman attempts to turn the hors d’oeuvres of corporate broking relationships into the main course of more lucrative M&A and capital markets work.
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