Close Brothers Asset Management – London

robertRobert Alster joined Close Brothers Asset Management in 2014 as Head of Research. He also is responsible for research coverage of three equity sectors: global autos, aerospace and construction companies.

Prior to joining Close Brothers Asset Management, Robert was head of European and UK Growth Equities at AllianceBernstein, where he worked between 2003 – 2013. Prior to that, he worked at UBS Brinson, American Express Asset Management, and Fleming Investment Management. He also has eight years of experience within industry.

Close Brothers Group plc is a leading UK merchant banking group listed on the London Stock Exchange. The business was founded in 1878 by William Brooks Close, initially providing farm mortgages in Iowa and financing the first railway in Alaska. Its asset management division, Close Brothers Asset Management (CBAM) has AUM of £10billion and manages assets for private clients and their families, institutions, charities and foundations.

Describe Close Brothers Asset Management

“We see ourselves as an active, global, multi-asset private wealth manager, with experienced investment professionals operating within an institutional investment framework.”

What’s AUM split between private clients (bespoke) and funds?

“55% and 45% respectively.”

Do private client and institutional fund managers/analysts collaborate?

“We have a centralized equity and fixed income research function, comprising seven dedicated equity sector analysts and one fixed income analyst. Each sector is covered by both a dedicated analyst and a “sector-specialist” investment manager, so we have double the experience applied to each sector and that provides scope for a properly informed debate. When meeting company management, it is likely that an analyst will attend, together with the relevant sector specialist, and any investment managers who are holders of securities in the company.”

Do you have a recommended list?

“Yes. We call it the Focus List, and it contains around 90 equities that have been agreed and peer-reviewed by the investment team at our monthly investment committee. When there are differences in views, we encourage open and challenging debate. The great thing about this job is that the market will prove who’s right and who’s wrong.”

CBAM employs approximately 55 investment professionals – are they all based in London?

“Apart from a team of six based in Manchester, all investment managers and analysts are based in London. The investment managers are split between bespoke managers who invest on behalf of high net worth individuals and investment managers running funds.”

What is CBAM’s investment philosophy?

“Our philosophy is based on four principles. We are conservative investors. We like shareholder-friendly companies. We have a quality bias and we consider valuation. Some High Net Worth individuals have given us a large proportion of their wealth so, like other private client fund managers, we are bound to have a conservative tilt. This means we wouldn’t invest in companies that are undergoing a complex restructuring or have an extremely stretched balance sheet.

We are interested in above-average dividend yield as part of the total return, which is why we like shareholder friendly companies that also may buy-back shares with their surplus cash.

Because we take at least a 5-year investment view, and favour quality companies, our stock turnover tends to be low. Quality companies means those with quality management, strong balance sheets and good franchises with a sustainable advantage.

We do also pay attention to valuation. If the share price of a company we hold falls below our target price because of a macroeconomic reason – such as Brexit – but the fundamentals remain attractive, we may add to existing holdings. Similarly, if share prices have moved beyond what is justified by fundamentals, we trim.”

CBAM has ~£10 billion in AUM – what’s the equity and geographical split?

“70% in equities, 21% in fixed income, 7% in alternatives and 2% in cash. We are genuinely global multi-asset investors and our geographical exposure is:

UK – 24%

North America – 23%

Continental Europe – 12%

Japan – 4%

Asia (ex Japan) – 4% (via funds)

Emerging markets – 3 % (via funds)

As global investors, when considering a stock in, for example, the Aerospace & Defence sector, we might compare Lockheed Martin, British Aerospace, Thales and Mitsubishi Heavy.”

Which screens do you use?

“We have built a proprietary screen as there are thousands of companies in our investment universe and we need to focus only on the most attractive opportunities.

Imagine a long continuum – attractive companies at one end and unattractive companies at the other. We would look for above-average profitability, faster than average growth, and lower than average risk. The companies that fit these criteria will be in the attractive category.

Our screens use historic and forecast consensus data, such as earnings and dividend yield. Our screen basically is a nudge in the right direction, and our fundamental analysts then do further work by modelling the company, making forecasts, and valuing the cash flows.”

Market cap cut off?

“For Bespoke >£400 million and for funds >£4 billion.”

Average turnover?

“Between 20% – 30% for the firm as a whole. Turnover within the investment funds will be slightly higher than that within the bespoke service.”

Active share ratio?

“We are absolute return investors, as private clients want you to beat inflation plus a return target.”

Any themes you favor?

“We are looking at possible tax changes to be implemented by the Trump administration and how these may affect asset classes and individual stocks. Our analysts are very aware of growth themes, such as autonomous and electric vehicles. We’re also looking at what the increase in US defense spending will mean and the growth in artificial intelligence.”

Are you bottom up or top down?

“Both, as we seek to add value in two ways: with top down tactical asset allocation and bottom up security selection. In terms of asset allocation, we currently are overweight equities and underweight fixed income.”

Can you discuss some of your holdings?

“Of course, although I must stress that these are investments we have made in the course of our discretionary investment activities and should not be viewed as an investment recommendation nor acted upon. Our Focus List contains approximately 90 equity names. These are our highest conviction names in the UK, Continental Europe, the US and Japan.

Thales is a high conviction European name for us. We think it is going to benefit from the increased spend European countries will have to make to increase their defence expenditure to 2% of GDP (to comply with NATO’s target). The company also benefits from higher defence spending to counteract terrorism in Europe and greater geo-political tensions in the Near East.

In the US we like 3M. Management is high quality and its management understand how to make value enhancing acquisitions. We like the company’s diverse exposure, which includes consumer goods as well as embedded potential in certain areas of manufacturing, such as automation. It has a good new product pipeline in both healthcare and automotive sectors, and the electricification of the power system in the US will be of benefit. We think 3M demonstrates shareholder-friendly use of cash – it carries out share buy-backs and has a reasonable dividend yield. When it does acquire assets, the company does so effectively.

Facebook is also on our Focus List. Our tech analyst has carried out deep analysis on the future of digital advertising, a market that is growing strongly. This is driven by global smartphone ownership, ubiquitous 3G/4G coverage and people spending a larger part of their time online and less in front of a TV screen. Facebook benefits from all these trends, as more than 1 billion people access the platform every day, creating an attractive audience to global advertisers and local businesses.

The “network effect” means that Facebook’s larger scale attracts more users to the platform, which in turn attracts more advertisers, and so forth. This is a market with substantial barriers to entry. Future growth will come from further monetising Instagram, and the messaging apps Messenger and WhatsApp. A nascent area of growth, which is often overlooked, could be virtual reality.”

Buy backs or dividends?

“A significant part of our client base is interested in the annual income component of return, and so we are always cognisant of the yield offered to our clients from our investments. We look for companies where management are shareholder-friendly and likely to utilise surplus cash to implement share buy-backs.”

Is Corporate Governance important?

“Hugely. I cannot overstate this. If you invest in a company where management ignores environmental and social issues, there’s a chance of a future share price shock as a result of these coming to light. We’ve worked through our holdings using our analyst team to put together a database on environmental and social issues, and we now are extending our database to include stocks in the wider market.

We do incorporate corporate governance metrics into our analysis of any company we cover, and we are considering third parties to assist us with a more active voting stance.

We also use an ethical screen to accommodate client mandates with ethical restrictions, such as not investing in tobacco or defence stocks. This output is also incorporated into our research process.”

Do you have to meet management before you buy a stock?

“Yes we do. Our analysts are very experienced with an average 14 years’ investment in the industry. That pays off when you meet to question company management.”

How do you prefer to meet management?

“For a company we haven’t seen before, we’d probably like to see them on a one-to-one basis. For a holding where the investment thesis is working out as expected, and we just want an update, a group meeting suffices. For new idea generation, conferences are very useful, as one can see a large number of companies in a relatively short period of time.”

How will MiFID II affect you? (UK/European legislation affecting research payments and corporate access)

“We have put in a large amount of work to assess how much sell-side research we consume and the value of it. We’ve taken a blank sheet of paper approach to establishing what we need to meet our client’s mandates and have started negotiations with a number of sell-side firms. We also have a significant independent research budget, which has grown in recent years as the quality of independent research has increased and this trend is likely to continue.”

Best companies at IR?

“Lockheed Martin has a very knowledgeable and experienced IR. We also like Peter Durman at Imperial Brands, who’s immensely helpful. In telecoms and media, Evelyne Bull and Jim Davies from the IR team at BT were great at explaining what was happening recently at the company. Also, James Statham from RELX spent time with us on understanding the business better and Conleth Campbell from Croda and Thomas Hill from Johnson Matthey are very approachable. Overall the quality of IR has hugely improved since I first started in the City.”

Why should US corporates target CBAM?

“We are global, fundamental investors, with experienced analysts and investment managers, investing in quality companies for the long term.”

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