Portfolio Adviser • Portfolio Adviser Magazine December 2021 • View from the top

Jerry Wharton, who shortly takes over as CEO of Church House, talks about transparency, fund liquidity, ownership culture and building up long-term money through long-term relationships

Where does money go when it dies? The thought had never really occurred to me – at least not in such terms – until I read the last few words of Jerry Wharton’s ‘Quickfire Q&A’. Sending on his answers later as we ran out of time when we caught up, Church House Investment Management’s joint CIO – who takes over as CEO from the firm’s creator James Mahon on 1 January 2022 – advises: “Embrace the concept of ‘money heaven’.”

Yes, on one level, ‘money heaven’ is just a more poetic way of saying ‘market losses’ – but it goes deeper too. Some professional investors can be pretty casual about losing money, maintaining they can simply make it with a better day tomorrow. ‘Money heaven’ suggests something more permanent – wealth that has gone for good and so you do everything in your power to ensure you and your clients experience it as rarely as possible.

And that seems entirely in keeping with someone about to take over the reins of a firm that has strong private client roots and clearly thinks long and hard before taking on new staff or launching new funds. Of the six-strong fund stable at Church House, only two started life in the past 20 years – the high-profile Tenax Absolute Return Strategies in 2007 and UK Smaller Companies five years later.

“We are different from most asset managers in that we started o entirely with our own client base,” says Wharton.

“When James Mahon set up the firm in 1999/2000, which is when most of our funds were established, the clients were those of a firm of solicitors and we then bought that base in our MBO in 2010. So the origins of our company are not referrals but purely our own contacts – a very loyal, very sticky client base.”

The fund side of the business has evolved rather differently, with Church House first electing to market its Investment Grade Fixed Income strategy to other wealth managers. “These are firms who use that fund in private client portfolios to satisfy their fixed income allocations,” says Wharton. “So they are effectively subcontracting out that part of their private client portfolios.

“When Sam Liddle joined us as sales director in 2014, he saw the opportunity for flows from the intermediary market. And he felt – correctly – the Church House fund most likely to be supported from that perspective was our Tenax Absolute Return Strategies fund. As you know, that operates in a very convoluted space – there are a lot of funds in that notional sector that have nothing to do with absolute return.

“In contrast, Tenax was conceived and is run on a proper absolute return mandate. We started it 14 years ago with a seed investor, who was one of our larger private clients, and some of our own private clients’ money and it has grown from zero, effectively, to more than £500m.

“From inception to now, James Mahon and I have been very much part of the growth of assets, which is unusual for fund managers.

“Most do not go on that kind of journey themselves – they are just parachuted into a pool of capital and told to get on with it. We, on the other hand – and obviously helped by Sam and his team and our external marketing people – have grown these funds ourselves, which means we are keenly aware this is all real people’s money. That adds a different level of responsibility and accountability, which we are very happy to embrace.”

One way the managers demonstrate that extra degree of commitment, says Wharton, is by doing all they can to ensure clients buy their funds for the right reasons. “We put a lot of time into sitting people down and explaining exactly what a fund does and what it is trying to achieve,” he continues. “It might be a function of not being a very large business but, on the other hand, this really means a lot to us.

“Unless we explain everything to people, they might not fully understand what each of our funds does. With Tenax especially, because it strives to follow an absolute return mandate, we feel it is best the fund managers explains things directly. Something I originally started doing with our bond fund is to print out a spreadsheet so I can show people the fund in its entirety. There is nowhere to hide in those spreadsheets.

“I appreciate, for many people, that could be too much information but, on the other hand, it is a level of transparency most people do not oer. We have always thought any existing or potential investor in any of our funds should be able to see under the bonnet – be able to put their finger on a holding and ask, what is that? That is a level of detail investors can often look for but do not so often receive.”

With Wharton having already worked closely with Mahon as co-fund managers, joint CIOs and fellow board directors for a decade and a half, the past few months have effectively been a transition period ahead of the CEO baton officially being handed on at the start of 2022. With a new year and, essentially, a new job, what areas of the business is Wharton expecting to focus on?

“The private client side is very solid – long-term money built up through long-term relationships – but the growth has largely been organic, through our own network or referrals,” he replies.

“Since the fund side of the business has grown rather more quickly, however, we would like to see the same on our private client side so we are actively looking to employ other private client managers from bigger firms.

“I would add we are not looking to recruit from businesses that support our funds – we would see that as an unnecessary act of rudeness – but there are plenty of other firms out there with very good people and attractive books of business. A lot of those people will have had the opportunity last year to question if they were at the right company – whether they need to be working for much bigger machines than we are – and concluded not.

“The way to correct that is to move to a smaller firm that does not overcentralise the investment process and we are in advanced conversations with some high-quality names – when these moves happen, people will take notice. These people do have some pretty strong contracts – which means lead-in times, through notice periods and non-competes, are quite long – but that is fine because we take a long-term view ourselves.

“On the fund side, we want to continue to grow the funds we have. The key thing here is that the majority of them have track records going back to 1999/2000. People can see what these funds are and what they do over that period – and they can see they all do what people expect them to as an asset allocation within the private client portfolio. That is exactly what they were conceived for and how they are run.”

It has clearly been a while since Church House launched a new fund but has Wharton identified any potential additions to the range? “There are one or two possibilities,” he replies. “But what we are not going to do is rush out any new funds to suit the moment. In the same vein, we are not going to rename any of our funds as ‘ESG’ or ‘sustainable’ or whatever.

“They do all score highly from different ratings agencies from an ESG perspective but we are not going to suddenly pretend they are totally ESG-focused funds and use that as an asset-gathering aid. Sometimes it seems as if everyone and their dog is rebadging their funds as ‘ESG’ but we are not about to play that game. Of course, that does not mean to say we cannot launch a fully compliant fund.

“We have, for example, been big supporters of issuance into the green bond space – although we would argue that some green bond funds are potentially not the things to own at the moment. The nature of issuance means a lot of those funds have quite high duration, which at this point in the interest rate cycle is not what you want to have.

“Still, we like to think we have always had a very strong governance element in our investments because we are so transparent. As I say, we never want someone to put a finger on a holding and ask, why on earth have you got that? That is our ultimate test before anything goes into a fund – whether our investor base would expect to see it there – so we would never hide holdings away, as it were, and hope to get away with it.

“And so we do not feel we have to underline that by embracing a particular name for a fund that might appeal to the moment – we believe we have always followed the processes, rules and inclinations that people are trying to encapsulate within ESG policies anyway. We did sign up to the UK Stewardship Code and we are delighted to be among the successful ones. A lot of people were not.”

Looking to the future, how does Wharton see the outlook for the UK’s economy and its asset management sector? “I actually think the UK is going to come out of this very beastly two years much stronger,” he begins. “Indeed, we are already seeing that borne out in the employment numbers. The measures put in place were pretty extraordinary but they seem to have done the job – certainly in saving the financial system.

“Once you look past the pandemic and the Brexit-related issues, you can see the UK has lagged hugely on foreign direct investment and we like to think that is going to return. As we know, the liquidity sloshing around in the system now is o the scale – it is hard to put a number on it and every single bond issue that comes to market these days is hugely oversubscribed – but that should play out in support for asset prices.

“We will have to cope with a normalisation of the rate cycle – this is coming and anyone who thinks otherwise has their head in the sand. Central banks will normalise monetary policy – at the moment, we are still at emergency levels but the emergency is disappearing. I will not say it is over because people are still being deeply affected but we have come a long way and so still to have emergency measures in place does not make sense.

“Remember, these measures go back to 2009, not 2020 – that is the feedback loop you have to get out of. The trouble is that the circularity of QE is just that. I mean, to have the UK Debt Management Office issue bonds and the Bank of England to buy them – how does that really work? If you are looking at the eurozone, the system has become hardwired into asset purchases.

“The pandemic emergency asset-purchase programme will end but another one will follow to keep the system afloat. When you become hardwired into that k ind of life support, it is very hard to get o it. I do think the Monetary Policy Committee is aware of the problem and hopefully, from a sterling perspective, we will begin to normalise quite soon. We only need to get to 0.5% rates, which is the target for scaling back asset purchases.”

As for the future of asset management, Wharton focuses on the appropriate balance between technological and human interaction when dealing with clients.

“Obviously the sector will evolve but I know for certain there are times when our clients still want to talk to a human being,” he says. “They want to ring someone up and ask what is happening in a particular market or how a portfolio is positioned.

“They want to have that conversation with an individual so the idea a central call centre can handle everything is plain wrong, in my view. Of course, asset management will embrace technology more and more as time goes on and maybe, in some cases, that will take over from human beings making decisions. But the idea everything will be run through algorithms is not one I subscribe to.”

QUICKFIRE Q&A

What is the best piece of advice you have ever been given?
From an investment perspective – cut your losses and run your profits.

What single issue should most concern professional investors at present?
The obvious one – inflation and its consequences.

Does anything about your job keep you awake at night?
Not often but running money will always have periods of market stress when one will not sleep easy.

What would be your ‘top tip’ to professional investors to help them run a better business?
Never forget our business is made up of human beings – whether clients or your employees – so respect them as such.

If you were head of the FCA for a day, what is the first thing you would do?
Difficult one – but, being tactful, I am not a regulator so I would start looking for my replacement.

What advice would you give to someone starting out in investment today?
If you do not understand something, always ask; develop a market nose; and embrace the concept of ‘money heaven’.

AVOIDING LOBSTER POTS

Note to self: next time you want to move onto the subject of fund liquidity with an asset management boss who has spent their entire career in fixed income, phrase the question more carefully. “As a credit investor, liquidity is something I think about on a moment-by-moment basis,” says Jerry Wharton with some force. “I have been in over-the-counter markets since 1986 and the Big Bang, so I have seen the ups and downs of it.

“I have seen markets go completely illiquid and people getting stuffed as a result – and indeed we saw that in the first quarter of 2020. So we run all of our funds – but especially those that have credit investments – with liquidity at the very top of our minds. We do not want to pepper funds with a load of ‘lobster pots’ – in other words, assets that are easy to get into but then you cannot get out of them.

“Take our corporate bond fund. This is a pure investment-grade fund, which must maintain a minimum of 25% AAA bonds, which turns it into a completely different pool of credit. By design, it is much higher-quality than most corporate bond funds – it does not even sit in the corporate bond sector. It is a very defined pool of risk because it has a very defined place within a private client portfolio.”

Wharton goes further still on the subject of liquidity, arguing investors should steer clear of any exchange-traded fund that references an illiquid asset class. “They blow up – as we saw in the first quarter of last year,” he adds. “There might be some sort of stabilisation element but, when everyone is trying to get out at the same time, the exit can become pretty small – certainly in an over-the-counter market, such as credit.

“Liquidity is at the top of our minds because these are daily-dealing funds. You might suddenly get a large inflow, you might get a large outflow, but you have to be able to deal with both – and so you have to know where the liquidity lies. In the first quarter of last year, when there was intense selling pressure across the short end and across corporates as a whole, we did not see that pressure ourselves.

“In fact, we were able to take advantage by selling some liquid assets and buying some of the forced assets we saw on sale. So liquidity really is paramount in what we do. It is especially relevant to our corporate bond fund but Tenax has a decent weighting to credit too. The great thing about both these funds is they can move their positioning internally to deal with markets as they evolve – whether in the interest rate cycle or the credit cycle.

“A good illustration of that is the way we have taken down our duration and interest rate sensitivity – especially in the corporate bond fund but also in Tenax – because we see the rate cycle turning and we do not want to suffer the downside that can bring. Most people across the industry own too much duration, in my view, and that is going to prove expensive.”

OWNERSHIP CULTURE

Since the 2010 management buy-out, Church House has been majority owned by its directors, with a further 20% held by the Cayzer Trust Company. “That makes up the vast majority of our equity but we are very keen to encourage an ownership culture,” says Jerry Wharton. “After our first year of private ownership, we gave all our staff a worthwhile allocation of shares so they have an immediate stake in the firm and its future growth.

“Ownership is a very powerful tool to help attract, encourage and retain staff. Among the directors, meanwhile, the equity is fairly well distributed among the majority shareholders so the running of the company has to be a collective decision. We do not have, for example, one punchy majority shareholder, who could be driving the company in potentially the wrong direction.

“Then, looking at it from a client perspective, what we do and the success of it really matters to us, because we have a stake in it. Church House equity has grown significantly in value and that is through the success of the firm and through the funds doing exactly what people expect – and therefore being happy with the outcome. And that is key to us because we want to retain those investors and attract new investors and new flows.

“One leads into the other – the more people are happy with what we do in our funds, the more they are going to support those funds, and the more valuable our company becomes. And that is a very powerful driving force for us to ensure the funds are run properly and that we are as accountable and as transparent as people would like and expect us to be.”