Private banks pressed to use ESG lens

While many hedge funds are struggling to attract assets, boutique player RWC Partners, based in London’s staid Victoria district, rather than more fashionable Mayfair, is going against the grain.

RWC’s managed assets have doubled from $2.5bn (€1.9bn) in 2010 to $5bn today, with staff numbers similarly increasing from 45 to 85. Increased resources mean that unlike many hedge groups, RWC does not have to concentrate purely on managing money. They have enough staff to befriend private banks and funds of funds in the same way as traditional asset managers such as Templeton or JP Morgan would.

Getting on the preferred provider list of a private bank running a typical ‘guided architecture’ model is beyond the capacity of many smaller groups, as it requires registration and marketing of funds in a number of key markets, such as France, Germany, Italy and Switzerland.

“Typically you need to be compliant with a raft of regulations, including RDR and Mifid and then you need to fill in 10 variants of data templates for all the markets which the bank operates in,” explains RWC chief executive Peter Harrison, who formed the group together with business development boss Dan Mannix. “Tiny players just can’t cope with these requirements.”

But to think groups such as RWC succeed by sticking to the same strategies and investment beliefs would be a mistake. The original long-short strategy, on which the group was hoping to base its expansion, has been downgraded in terms of importance.

Fast-advancing risk management procedures at private banks no longer identify hedge funds as alternative strategies, but break them down into equity, fixed income and derivative components, to get a truer picture of holdings.

“Many people have concluded long-short equity funds are not a diversifier for equities,” says Mr Harrison, as private clients are advised by banks that investing in this way simply boosts equity allocations.

RWC’s convertible bond strategies have enjoyed more success, going head to head with funds from Lombard Odier for private banking shelf-space.

Currently, RWC is also trying to persuade private banks to change the way they perceive equities by looking at them through an ESG (Environmental, Social and Governance) lens. RWC has $850m invested this way in its European Focus fund, a highly focused 10-15 stock portfolio, which it claims returned 30 per cent in 2012, though 15 per cent down in 2011.

“If you do engage with companies, you can definitely improve returns for shareholders,” says Mr Harrison, admitting many enterprises view ESG compliance as a box-ticking exercise.

“We have to explain to the board and shareholders what to focus on and how to make changes happen,” says Mr Harrison, who prefers to invest in $1bn dollar-sized “sweet-spot” companies, currently unrecognised by the market.

“In really big companies, the ability of top management to get their heads around this concept is limited,” he adds.

Companies can take two to five years to restructure along ethical, sustainable lines with more transparent governance, hampered by pressure to improve earnings from quarter to quarter, says Mr Harrison.

Private banks contribute to short-termism because many prefer liquid, easily-redeemed Ucits-regulated investments.

“At the moment, we can’t give daily liquidity, or even fortnightly, which is a minimum for Ucits,” says Mr Harrison, recognising his own company’s Achilles heel. “If it takes two years for an investment cycle, we have to commit to a company for that period. We are still trying to work out how to best pass that into the liquidity of a fund.”