On the future of wealth management, upfront client comms and championing investment trusts
In our regular video series, we interview the wealth sector’s key decision-makers to discover how they think about life, both within the world of investment and beyond it; what brought them into the business and what keeps them here; and what makes them and their companies tick
‘Beware the homogenous splodge’ is pretty solid advice across a wide range of scenarios but here Ben Conway, head of fund management at Hawksmoor Investment Management, is talking about wealth management and, specifically, the best and worst-case scenarios for the sector.
“The regulator gets an awful lot of flak and a lot of it is badly aimed and really unfair,” he tells Wealthwise editorial director Julian Marr in the above video, choosing worst-case first. “I have had some really constructive interactions with the FCA – for example, over cost disclosure with regard to investment companies – and there are some really good people there, trying to do the right thing.”
Conway goes on to pick out Consumer Duty as an example of “a really well-intended set of regulations designed to protect the consumer” but you do sense a ‘but’ coming – or perhaps a ‘however’. “However,” he continues, “it has placed a really significant additional burden onto all types of investment manager and this is one of the factors behind the industry consolidation we are seeing.
“For wealth managers looking to protect margins as compliance costs go up, consolidation and seeking economies of scale is a very natural thing to do. And, in many cases, they are able to pass some of the benefits of economies of scale, in terms of lower fees, on to their clients. All good.
Correlations change and volatilities change and using human judgement, subjectivity and the skill of the manager is really important – and we need a regulatory regime that supports that sort of portfolio construction.”
“The bigger you get as an asset manager or wealth manager, however, the fewer the available investment opportunities there are to you and the greater the demands in terms of the liquidity of the investments you have to access. So we are seeing greater homogeneity of solutions and, whether you go to Wealth Manager A or Wealth Manager B, if you are a lay person and you actually look at what you are being offered, really it is – as I have called it before, quite rudely – a ‘homogeneous splodge’.
“It is just a mix of equities and bonds – sometimes there are some alternatives via long/short structures – and the method of construction is also, generally speaking, very similar. It is modern portfolio theory, it is mean variance optimisation, it is looking at correlation of assets over the past 20 years – where there is available data – and you tend to therefore get quite similar looking portfolios.”
Whereas, turning to how he sees the best-case, Conway envisages a “wealth management ecosystem that supports all types of size of organisation – from the very, very small to the very, very large”. “What I don’t want to sound like I’m saying is that way of managing money using traditional modern portfolio theory and just using liquid assets is wrong,” he adds quickly. “There is a place for that and it can produce good outcomes but we need more – we need other ways of doing things.
“Correlations change and volatilities change and using human judgement, subjectivity and the skill of the manager is really important – and we need a regulatory regime that supports that sort of portfolio construction. At the moment, I think most people think ‘safe’ is using modern portfolio theory and 20-year data – you can say, Look, I have run the data and you can build something that looks nice and scientific – but that is not necessarily the case.”
Counterintuitive approach
Earlier in the conversation, Conway outlines Hawksmoor’s counterintuitive approach to client communications where “we first almost try and dissuade people from investing with us”, explaining: “I think it is beholden upon every single investment manager to be very upfront that they have not ‘solved’ investment, that you cannot guarantee anything is going to work and, most importantly, that your investment process is going to lead to periods of underperformance, or disappointing performance – whatever you want to call it.
“So what we say to our investors in terms of the communications – before they have even invested – is, This is the pattern of performance you might expect. These are the market conditions in which we think we might do well. And we might even suggest that, being aware of that, you might combine us with other fund managers of different flavours.”
As for ongoing communication, Conway is clear that being upfront about any period of poor performance is paramount. “You need to be telling clients you are not performing well – before they have even noticed,” he argues.
“And when you are telling them, hopefully, it is, Yes, we are going through a period of flattish or slightly lacklustre performance – but it is to be expected for these reasons. Equally, it could be that maybe you make a mistake but we are all human beings – and human beings are more likely to forgive you if you are upfront rather than them having to find out for themselves.”
A full transcript of this episode can be found after this box while you can view the whole video by clicking on the picture above. To jump to a specific question, just click on the relevant timecode:
00.00: What excites you about the current investment outlook? What worries you?
01.32: What do you most look for in an individual investment? What constitute ‘red flags’?
05.30: To what degree should professional investors be thinking beyond so-called ‘traditional’ investments? Towards what?
08.24: What drives your approach to client communications? Should professional investors aim to attract the ‘right’ type of client?
10.47: What was your path into investment – and, if you hadn’t taken it, what do you think you would be doing now?
14.04: What advice would you have given your younger self on your first day in this business?
15.30: What is the biggest investment mistake you are prepared to admit to – and what did you learn from it?
17.43: Outside of work, what is the strangest thing you have ever seen or done?
19.12: What are your best and worst-case scenarios for the future of wealth in the UK?
23.02: Two Choice Words recommendations, please – one a book; one a free choice?
Transcript of Choice Words Episode 37:
Ben Conway, with Julian Marr
JM: Well, hello and a very warm welcome to another in our series of ‘Choice Words’ videos, where we get to speak to the key decision-makers in the world of UK fund selection and UK fund research. I am Julian Marr, editorial director of Wealthwise Media, and today I am delighted to be talking to Ben Conway, who is head of fund management at Hawksmoor Investment Management. Hello, Ben.
BC: Hi, Julian. Thanks very much for having me.
JM: It is an absolute pleasure. Let’s jump straight in with my first question – looking at the macroeconomic outlook, what excites you? What gives you pause for thought?
BC: Our attitude to these sorts of questions is to be suitably humble and say, We have absolutely no idea! The most certainty we can have is over ‘three to five-year and beyond’ views on the investment outlook and I think the key is that there is plenty to excite us – whatever happens at the macroeconomic level.
The lesson we have always learned is it is very, very difficult to predict macroeconomic outlooks – you may get it right once, but can you do it persistently and repeatedly? So actually, to be completely honest with you, Julian, we can steer well clear of those sorts of things – and that is reflected in the way we invest. We invest portfolios to be robust regardless of what happens in the macroeconomy.
JM: Well, it is a good answer to the first question – although, if your answer to every question is, We have absolutely no idea, this could be a short interview.
BC: Don’t worry, it won’t be!
Valuation is key signal
JM: Good, good – and maybe this is a much wider question for you, then. It sounds more like you are bottom-up investors so what do you most look for in an individual investment? And what do you consider to be red flags?
BC: The key thing is valuation – so can we get a really good handle on the price we are paying so we know it represents good value and there is a margin of safety? Because we are building diversified portfolios, we know that at any one point in time an investment isn’t going to be working – and the definition of ‘not working’ means not making our clients money.
And the definition of ‘making money’ is, for us, a positive real return – so after the impact of inflation and also charges. So what we are looking for in investments is asymmetry – so when it is not working or, dare I say it, we may even be wrong and have to exit, our downside is somewhat limited and our upside is commensurably more than that downside. So, regardless of the risk profile, we are always looking for that upside to be more than the potential downside – and, for us, the key signal is valuations.
That is what we are looking for and so, I suppose, the flipside of this is, What is a red flag? Actually, there are plenty of potential red flags but, basically, it is any investment where we cannot get a handle on that valuation. Sometimes we think we have got a handle on valuation and we haven’t – but that is the sort of red flag we only find out about after the event. But we tend to tend to avoid things where we cannot really establish that asymmetry.
I would say, tangentially, what we tend to be quite wary of is anything where you are not investing in something that has a valuation. A really good example there are strategies – let’s say, long/short funds. There, we have to have a really strong degree of faith in either the skill of the manager or that the strategy itself can deliver sustainable returns because, when you are investing in a strategy, you are not actually investing in an asset – you may be long/short of something.
So it is not like you have a stream of cashflows you can invest in. So that is not really a red flag but it is something where we have particularly high standards when it comes to investing in them. And I would encourage people – when they are looking at absolute return-type investments that rely on strategies – to have a very healthy degree of scepticism and cynicism.
JM: That is interesting. As a clarificatory point, when you talk about an investment ‘not working’, what sort of time period are you talking about? Presumably you are giving it a couple of weeks but, after five years, it might be too long. So, what is that time period?
BC: It just depends on the risk mandate – so, the lower the risk, the shorter the time horizon. Generally speaking, our lowest-risk mandate should have a time horizon of three years. Anything shorter than three years – I mean, say a family member comes to me and asks, I have a one-year time horizon, what should I do with the money? I would say, Well, I would be really wary of investing it – stick it in the bank.
Still, having said that our time horizon is three years, what if something starts going wrong? How long do you wait? How long is your patience? Because it could keep going wrong for the entire three years and you could have cut it sooner. And that is something that is a process of continual iterative improvement. And actually, we have just been looking at something recently – how good are we at cutting our investments? And what happened to that investment subsequently?
And it has been really interesting. Generally, we are quite good at it but there should be some markers along the way. When you are investing with managers, the main thing you have got to look for is a thesis break in the underlying theme and, obviously, deviation from the process. But we are thinking about also introducing some more quantitative factors like tolerance of relative underperformance – you know, after a certain amount of time, we say, We are happy to be patient and happy to suffer some downside, but there should be some constraints around that.
JM: Very good. Note to myself – have a new question along the lines of, How often do you revisit and interrogate your process and look for positives and negatives on that. So, thank you for that.
Fantastic structure for alternatives
JM: You mentioned absolute return and long/short – to what degree do you think investors and their advisers need to be thinking about alternative sources of performance? And how would you define them?
BC: OK, I was going to ask you, How would you define that? Because everyone has a different answer to, What is an alternative investment? We would say an alternative is anything other than fixed income or equity – and I think, most often in our industry, alternatives tend to be represented by those sorts of strategies. But, over the past 10 to 15 years, you can access alternative investments, certainly at the retail fund level and wealth management portfolio level, via the investment company.
And – without wishing to go into at this point, unless you want to, whether these things have been a success or not – the key point is, the investment company structure is a fantastic way to access things like infrastructure, renewable energy, private equity. And they are alternative sources of return that give portfolio diversification beyond equity and bond risk.
So we really like using that structure to access those sorts of assets – not least because we can get some feeling for valuation in a way you cannot through, say, liquid alternatives and long/short and all these kinds of things. I think there is a risk with those sorts of strategies of being to the benefit of the investment manager who is manufacturing them rather than the underlying client.
JM: The investment company as the ‘precision instrument’ of asset allocation seems to me such a sensible way to look at things – but, sadly, not everyone does.
BC: And there are lots of reasons. We are great supporters of the investment company sector but you also have to realise you cannot be too evangelical – there are downsides to the structure and, when you invest in them, you just have to be aware of those downsides. And I think, where problems have occurred, it is where people perhaps are not as aware of some of the pitfalls of the structure and then they get surprised when things go against them.
And then there is also the longer-term structural headwind the sector faces from, well, the key investor constituency: the wealth manager. We are obviously seeing a huge consolidation there and, as those firms get bigger and bigger, the underlying liquidity they require gets greater and greater – and, sadly, the liquidity of the investment company sector has not risen at the same time as the consolidation so you have seen exits. Still, the bottom line is that we are a great champion of the sector and we really look forward to it being reinvigorated in the short term – and there are lots of things going on that could lead to that.
JM: Yes – here’s to the sector rediscovering its mojo.
Upfront communications
JM: It is interesting you are talking about being aware of pitfalls – what drives your approach to client communication at Hawksmoor? And, as an additional question, do you see such a thing as a ‘right’ type of client. By that I mean somebody who understands what they are doing, buys into you at the beginning and then, crucially, stays on the whole investment journey – however long that may be – so they enjoy the full benefit of the Hawksmoor wisdom.
BC: Yes – I love that question! Whenever we see a potential client we have not met before, we almost try and dissuade them from investing with us. That sounds completely counterintuitive but I think it is beholden upon every single fund manager and investment manager to be very upfront that they have not ‘solved’ investment, that you cannot guarantee anything is going to work and, most importantly, that your investment process is going to lead to periods of underperformance, or disappointing performance – whatever you want to call it.
What we do is we say we have a very disciplined, quite strongly flavoured investment process that we think has a very high probability of delivering really good results through a market cycle – but there are going to be times where we look quite out-of-kilter. So what we say to our investors in terms of the communications – before they have even invested – is, This is the pattern of performance you might expect. These are the market conditions in which we think we might do well. And we might even suggest that, being aware of that, you might combine us with other fund managers of different flavours.
And then, in terms of ongoing communication, you have to be upfront about when you are not performing well – that is the most important thing. You need to be telling clients you are not performing well – before they have even noticed – so that, rather than them coming to you and saying, Hang on. I am pretty displeased with this. What is going on? You have already told them.
And when you are telling them, hopefully, it is, Yes, we are going through a period of flattish or slightly lacklustre performance – but it is to be expected for these reasons. Equally, it could be that maybe you make a mistake but we are all humans – and human beings are more likely to forgive you if you are upfront rather than them having to find out for themselves.
Beyond the ‘sugar hit’
JM: It is a good answer. Very interesting. Thank you. A more personal question now – what was your path into investment and, in an alternative universe, if you had not taken that path, what do you think you would be up to now?
BC: I started off in broking. I was speaking to institutional Japanese equity fund managers, some of whom we now invest with. I worked for mainstream investment banks via their graduate programmes on what is called in the jargon the ‘sell side’ – and the reason I did that was because my dad, who is now retired, used to be a fund manager. And he told me at the time, Don’t be a fund manager, they don’t make any money – go and be a broker as they make loads of money and they don’t do much work! I’m paraphrasing!
So I took his advice and, while I think I have ended up in the right place – and I have told him this – I don’t think it was very good advice because my personality was always much more suited to fund management. Broking is sort of a ‘sugar hit world’ – yes, you build long-term relationships with fund managers, but you know your P&L at the end of every single day – whereas fund management is all about building track records.
Again, you are also building relationships with clients over the long term but, really, you are waiting for your investment strategy to play out over many years. So I eventually found fund management, really, by a piece of serendipity. Without wishing to tell your viewers my entire life story and boring them to tears …
JM: Let’s take the risk!
BC: Well, I left broking and went off with my two best mates at the time, in our late 20s, and we said, Let’s take a risk. And we moved to Australia and set up an energy consultancy business – and absolutely loved it. Loved the lifestyle. In the end, I was about to start a family and me and my wife at the time decided we couldn’t do that in Australia – being away from grandparents and so on. So we made the difficult decision to come back.
I sold my bit of the business to my two mates. We just went out for a meal and they paid for it – that was the transaction – and I literally googled ‘fund management jobs outside of London’. I was looking at the Exeter to Cheltenham corridor – because my family were near Cheltenham, and my wife’s family were down in Devon.
And, really naively, I just thought the United Kingdom would be replete with these very civilised boutique fund management companies and I wanted to go into the ‘buy’ side – that, naturally, was what I wanted to do. Anyway, it was pure serendipity. I started at Exeter and found Hawksmoor, which had literally just been incepted, and they were looking for an investment manager. So that was in 2009/10 and the rest is history.
JM: Very good. So, in the alternative universe, you are still in Australia doing energy?
BC: Perhaps! I would really love – in a different life – to be running my own business. I cannot imagine that it would be in any other industry than financial services and investment management – but energy consultancy was a lot of fun. One of my other mates was the expert – he was a combustion engineer – and I was doing the sales and financial side.
Passion play
JM: Brilliant. Let’s stay on the personal side. Normally, I ask what advice you would have given your younger self on your first day in this business. I guess, if you were still on the sell side, it would be ‘Don’t listen to your father’! But on your first day of fund management – what is the best advice you could have given yourself?
BC: I would go one step back and I would say, Follow your passion. Gosh, that sounds so clichéd! But I am actually telling my kids this now – it is a really tough environment. I mean, obviously, AI is the big thing – as has just been quoted in the press. I think [the Standard Chartered CEO] has since rowed back on AI replacing “lower-value human capital’ – but it is a real threat for white-collar graduates.
But I think you are always going to be OK – regardless of what you want to do – if you come across as somebody who has a lot of passion for what they do. If you have got passion and you have a good work ethic, I think you will always go far in whatever field you do.
So, if it is in fund management, find a bit of fund management that you really feel passionate about – for me, it is investment companies and active fund management on the open-ended side. Really lean into that. And I think, if you love something, then you have a much higher probability of delivering good results and being successful, regardless of what is going on in the outside world and the state of AI on the jobs market.
Quality of governance
JM: Very good. You mentioned the importance of owning up to mistakes earlier – what is the biggest mistake you are prepared to admit to? And what did you learn from it?
BC: We have made loads of mistakes – probably too many to mention. I could talk about lots – and I think all fund managers must have lots because hit rates of 55% are amazing, right? And, if you are at 60% you are a genius. Still, if I had to pick on one strand that we get quite annoyed about in investment company land, it would be the siren call of a discount – so, thinking that bad news is priced in because you are buying something at such a whopping great discount.
And, for your viewers, an investment company has a portfolio that is valued – often by a third party – and that is your ‘net asset value’. And then you have a separate thing, which is the share price, which is what the market is valuing that portfolio at. And we bought into one investment in particular at a very wide discount, thinking all the bad news was there – and it subsequently sold out for pennies in the pound and a loss of 80% or 85%.
And the lesson – again, I do not want to bore people! But there are lots of lessons you can always take from your mistakes – and this particular one was, partly, thinking the net asset value was indeed what the assets could actually be realised for. But, really, it was all about the corporate governance around it: you cannot just have a ‘margin of safety’ – you cannot just have a share price that is materially below what somebody is telling you the portfolio is worth.
Everything else around it has to be right – so the quality of the manager but also the quality of the governance around it – and I think, in this particular case, it was missing. And so a series of bad decisions led to what was actually – initially – a really fantastic portfolio with a really brilliant asset being completely wasted and they had to sell it at fire-sale prices. I have got plenty more for you – but that one sticks in mind.
Path of most resistance
JM: Thank you. Well, we are zipping along here – what have we got next? Oh, everyone’s favourite question! What is the strangest thing – outside of work – you have ever seen or done?
BC: Well, we were talking about this before and I am slightly wary about appearing to lack humility and just boasting about it! But I think it is quite odd to train for a 55-mile ultra-marathon along a coastal path. I did that with one of my co-managers, Daniel Lockyer, who I have worked with for 17 years – we trained for an ultra-marathon of 55 miles on the South West Coast Path.
And, if you know that area, you will know what I mean about the ‘strange’ bit – because doing an ultra-marathon on the South West Coast Path is something else. It is really jaggedy, it is really steep, there are lots and lots of short, sharp inclines – and, the day we did it, it was gale-force winds and pouring down with rain.
And it was certainly something we won’t repeat because of the amount of commitment we had to put in to train for it – but I am very glad I did it. In fact, the year after we did the event, they cancelled it because there just weren’t enough people doing it.
JM: Well, I think that definitely counts on the basis there are certain answers to that question I can imagine myself doing – but that one is so beyond ‘strange’ to me there is not a hope in heaven I would ever touch it! Well played.
‘Homogeneous splodge’
JM: A more grown-up industry question now – what do you see as the best and worst-case scenarios for the future of wealth in the UK?
BC: Wow – we could talk for hours on that! Let me do the worst – because I think we are sort of going in this direction already. I think the regulator is definitely well-meaning. The FCA gets an awful lot of flak and I think a lot of it is badly aimed and really unfair. I have had some really constructive interactions with the FCA – for example, over cost disclosure with regard to investment companies – and there are some really good people there, trying to do the right thing.
And I think the whole Consumer Duty piece is an example of a really well-intended set of regulations designed to protect the consumer. However … it has placed a really significant additional burden onto all types of investment manager – asset managers, fund managers – and I think it is one of the factors behind the consolidation we are seeing.
For wealth managers looking to protect margins as compliance costs go up, consolidation and seeking economies of scale is a very natural thing to do. And, in many cases, they are able to pass some of the benefits of economies of scale, in terms of lower fees, on to their clients. All good. However, the bigger you get as an asset manager or wealth manager, the fewer the available investment opportunities there are to you and the greater the demands in terms of the liquidity of the investments you have to access.
So I think we are seeing greater homogeneity of solutions. So, whether you go to Wealth Manager A or Wealth Manager B, if you are a lay person and you actually look at what you are being offered, I think really it is – as I have called it before, quite rudely – just a sort of ‘homogeneous splodge’.
It is just a mix of equities and bonds – sometimes there are some alternatives via those long/short structures I talked about – and the method of construction is also, generally speaking, very similar. It is modern portfolio theory, it is mean variance optimisation, it is looking at correlation of assets over the past 20 years – where there is available data – and you tend to therefore get quite similar looking portfolios.
Whereas, turning now to what the best looks like for me, it is a set-up where the wealth management ecosystem supports all types of size of organisation – from the very, very small to the very, very large. Because what I don’t want to sound like I’m saying is that way of managing money using traditional modern portfolio theory and just using liquid assets is wrong. There is a place for that and it can produce good outcomes but we need more – we need other ways of doing things.
So, for example, modern portfolio theory is obviously really sound but the whole point is that the inputs are so important. And often I think the inputs shouldn’t be derived quantitatively – so looking at past 20-year correlations, past 20-year volatility – you have got to look forward.
Correlations change and volatilities change and I think using human judgement, subjectivity and the skill of the manager is really, really important – and we need a regulatory regime that supports that sort of portfolio construction. Because, at the moment, I think most people think ‘safe’ is using modern portfolio theory and 20-year data – you can say, Look, I have run the data and you can build something that looks nice and scientific. But there is a real risk people think there is safety in that type of analysis – and it is not necessarily the case.
JM: Thank you for that. As you said, we could have chatted for a while and I was about to come back with a whole list of follow-ups. But no – people are here to see you, not listen to me, that is for sure.
Hare today, gone exploring tomorrow
JM: Last question, then – we call this series ‘Choice Words’ because of the professional choices you make but we are now after some personal choices. One would be a book – it could be about investment but does not have to be – the other one is a free choice, as long as it is not telling anyone to do an ultra-marathon!
BC: I mean, you don’t need me to tell you what a good investment book is. You have done how many of these now? 30-plus? So the danger is we are all going to say the same three or four books. So I am not going to choose an investment book.
Another reason is because, if you are immersed in this stuff every single day – while I did certainly go through a period of reading loads of investment books and, every now and then, I will pick up a new one; I read one last summer on gold, for example – really nicely written, beautiful fiction is a lovely rest for your mind. I think it makes you a better investor – by resting your mind and not thinking about this stuff.
And I am reading a beautiful book at the moment called Raising Hare by Chloe Dalton. It is a lovely book about somebody who finds a baby hare – a leveret – and it is interesting because it is impossible to domesticate hares. And they are fascinating creatures anyway. It is a really beautiful exposition of that journey – and just takes you away from it all. There is beautiful depiction of the scenery – you know, I live in Devon and I love all that sort of stuff – so this is a beautiful book that takes me away from the investment world completely.
JM: Excellent – and your free choice?
BC: Free choice … look, this is a really boring answer but one of the reasons I moved to Devon was … it is not like I hate London or cities or Manchester or any of these places – I love coming to London, but I love leaving it. And I just love going and visiting often quite random places.
I have three kids, one of whom is really young, so I am not talking about going on long hikes and getting lost across Dartmoor! But what we try and do is, every couple of weeks, pick somewhere on the map and just go and have a look at it and make the effort – and sometimes it is an hour in the car or whatever.
So I don’t just mean get out there into the outdoors – go and specifically find random beautiful features. And you can often have these places to yourself – and there are some wonderful bits of the country. I am really lucky to live in Devon but I am sure the rest of the UK has plenty too. So go on the internet or use ChatGPT or whatever your flavour is and find these places and just go and spend a couple of hours there.
JM: Great stuff. Good ‘Choice Words’ choices, Ben. Thank you so much for those – and thank you so much for coming on Choice Words itself. Great conversation.
BC: Thanks very much for having me – it has been a pleasure.
JM: And thank you very much for watching. Do look out for further Choice Words videos as they are published.
