Award sparks reflection – CIO Talk

Following our latest LSEG Lipper Award, CIO Gary Reynolds reflects on why the Courtiers Funds were created, how decades of market events have shaped our approach, and why diversification and disciplined risk management remain paramount in long-term investing.

Issued by Courtiers Asset Management Limited, CAM0426066. Courtiers Asset Management Limited is Authorised and Regulated by the Financial Conduct Authority – Register No: 616322. Address: 18 Hart Street, Henley on Thames, Oxfordshire RG9 2AU. Tel: 01491 578368. 

Important information

Past performance is not a reliable indicator of future returns. The value of investments, and the income from them, can go down as well as up and is not guaranteed and you may not get back the amount originally invested. Any forecast, projection or target where provided is indicate only and is not guaranteed in any way. Certain types of funds might carry a greater investment risk than other investment funds. Further details of the risks are associated with investing in Courtiers funds can be found in the Key Investor Information Document or Prospectus, copies of which are available on request or at www.courtiers.co.uk.

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This communication is for information purposes only and should not be relied upon in making an investment decision. The views expressed by individuals and the business are based on market conditions at the date of issue and are subject to change without notice. The mention of any stocks or shares should not be taken as recommendation to deal and does not take into account the individual investor’s investment objective or risk profile. Where an investment or security is denominated in a different currency to the investor’s currency of reference, changes in rates of exchange may have an adverse effect on the value, price or income of or from that investment to the investor. Any third party sites, or pages which are linked to the document, have not b...

Transcript

SPEAKER_00 0:06

Chief Investment Officer Gary Reynolds is with me to talk about life in the investment team, not just through the Court's funds, but before and beyond. Gary, congratulations to you and the team. Thanks, yeah. I've spoken to Jake, he's gone into detail about the performance of the team to achieve this award, not only for 10 years of performance, but 10-year awards consistently, demonstrating consistent long-term performance, which we can consider to be reliable for our clients and their long-term investment goals.

SPEAKER_01 0:38

Yes.

SPEAKER_00 0:38

So take us right back. Courtish funds didn't always exist.

SPEAKER_01 0:43

No, they didn't, and the way in which we had run money for clients back in the old days was on an individual basis. So every client would have their own portfolio and they would have a mix of assets depending on what their advisor felt was appropriate. And so we tended to buy funds for people more so than perhaps buying individual securities, because that way you could get a broader spread of assets around the world. And our investors were long-term investors, still are long-term investors.

SPEAKER_00 1:26

So just to be clear, did they have their own advisors or did they find an advice through courtiers?

SPEAKER_01 1:32

They got all their advice through courtiers. And that was just the way it was done. And through the 90s, it was fine for it to work like that, through the 80s and 90s. And then in the late 90s, we had the dot com boom. So there was that little period in the late 90s where equities, stocks and shares were really, really flying. It was really the first technology boom. And if you had dot com in your name, last minute.com or virtually anything.com, it was going up by 30, 40% per annum. And that was fantastic. And then a lot of other clients that were working for tech companies were getting share options. And because their companies were doing very well, those share those share options were often making clients millionaires because they were doing so well in their own right. They were getting seven-figure returns on the share options. And in that environment, as it hit its peak, people didn't want to sell down those assets that had got big gains because they'd have to pay capital gains tax on them. So they held on to them. And what we noted was that it meant that there came a point where you could argue that the clients were exceeding their risk appetite, albeit on inflated asset values, because they had done well, but they weren't able to rebalance without taking a big hit in the form of capital gains tax on their portfolio. And that got Jamie and I think, how do we address this issue?

SPEAKER_00 3:24

Is this an issue that you foresaw something coming based on your experience to that point?

SPEAKER_01 3:30

No, I didn't foresee the dot-com bubble. Bearing in mind that I'd not really seen a bull market like that. In that's the first one I'd really seen to that extent in my time working in in the financial sector. So that was a bit of a shock. It was almost anything, you know, they say rising tide uh lifts all boats, um, but it was a dot-com tide, lifts all dot-coms, and it was anything was was flying. So that was a bit of a shock. And then the aftermath was that a lot of people got themselves badly burnt. Not our clients, I have to say, because we we were still great believers as we are in diversification, and so we still made sure that our clients weren't 100% invested into just two or three companies. But some investors went down that route thinking the dot com it was going to be different this time round, and dot com was going to carry us forward for the next 20, 30 years. Well, dot com did make a big difference, but it didn't keep pushing up prices. And then, of course, WorldCom went bust with Bernie Ebbers. Then you had Enron, who were trying to also, I mean, the energy company trying to hop onto the back of it of the of the dot-com bubble, also were going through the roof with returns. But as it turned out with Worldcom and Enron, they were dodgy. But if you'd if you'd steered a lot of your capital in that direction, you lost, you lost a stack. Um, and and the problem was that people that were made money very often just didn't want to sell down on those stocks that had done well. And we were struggling with the rebalancing because you were rebalancing and have to justify to clients why they should be paying capital gains tax to bring their risk back in alignment. And so the logical thing to do was to create an environment for clients where you could make the decisions on the underlying assets without passing on any tax consequences. And the sensible way to do that was to for Court is to launch its own funds so that it could make decisions. So, for example, if you own a stock that's got a £100,000 gain on it and you sell it in your own name, that is going to create a capital gains tax liability for you. But if that stock is held in a fund and it's sold, it's sold within the fund, and until you sell down your shares in the fund, you do not get a capital gains tax liability. Which means when we're managing money in a fund, we can always rebalance to the appropriate risk level. Whereas if we're rebat if we're managing money in the name of an individual, we have to be mindful of that individual's tax situation. And if the gains in the fund have pushed their risk levels beyond their tolerance, they have a choice. Stay with an overly aggressive portfolio, which a lot of people chose to do in the dot com era, or sell and accept a capital gains tax liability. But the way around it that we saw was to launch Court's own funds.

SPEAKER_00 6:47

So remind us, when was the dot-com bubble?

SPEAKER_01 6:50

Late 90s. Late 90s. Burst in 2000, 2001.

SPEAKER_00 6:54

So is this a five-year planning and preparation?

SPEAKER_01 6:57

Took a long time. Well, it was, and there were one or two interesting happenings along the way. So we'd been working on this probably for about we'd been thinking about it, and then sort of 94-95 began to think this is perhaps the right way to go. Had got um uh new head of compliance that was um Hillary was working her way through, working on this with us, and we were going to launch funds on a we were gonna hold a multiple asset. So we were gonna have like a fund-of-fund approach. We're still the facility to buy individual assets if we wanted to, individual securities if we wanted to. So you could might hold Vodafone, British Telecom, Shell, BP, you can hold those if you wanted to, but we would also have the facility to hold mainly funds, so you'd get access, you'd get exposure to assets around the world through other funds. But USIC 3, which was the European standard by which funds were regulated, became, I think, launched in the latter part 2005. And USIC 3 allowed funds to express all of their positions through derivatives. Now, derivatives were becoming hugely popular pre-global financial crisis, and in the summer of 2006, we were all ready to launch the multi-asset funds on a fund-to-fund basis. And one day I said to Hillary, I don't think we can do it this way. I think we need to do it through using derivatives.

SPEAKER_00 8:44

Just remind us what derivatives are.

SPEAKER_01 8:46

Well, a derivative is is a um uh a contract that gives you a right to the profit or loss of an asset, but not necessarily holding the asset itself. And uh options are derivatives, so a call option gives you the right to buy something, but not the um not the um you don't have you don't have to do it. So you're not obliged to buy something, but you've got the right to buy it if you want to. So if you don't buy it, you just lose the premium on the call option. But obviously, if you've got if you've got a right to buy a share at 100p a share and the share price goes to 120, you will exercise your right and buy it and make it.

SPEAKER_00 9:32

So you're freezing a buying price.

SPEAKER_01 9:33

Yeah, you're freezing a buying price, and what options give you a chance to do is diversify risk even further. And they give you absolute accuracy in terms of what they're gonna do. So if I pick an option on the FTSE 100 and the FTSE 100 goes up, I get exactly the return I expect to get for that given increase. And that makes them very, very attractive. They were becoming more and more popular with institutions. USIC 3 was designed to make options available within the funds sold to retail investors, so the authorities wanted ordinary investors to benefit from the options market, and so I'd said to Hillary, I think we need to to change this, which she said, you're a you're a uh a project manager's worst nightmare. And the second thing she said was, Who's gonna tell Jamie? And he was off watching um the 2006 World Cup, I think it was in Germany. So I said, I'll tell him when he comes back. So he came back and came into the office and I said we need to go and have a chat. I don't think we can do this on a fund-of-funds basis with other securities. I think we need to do this and have the right to do it through options. And I took, I think it took me four days to convince him, and eventually he he he agreed it was the right way to go. The next thing we had to do was to get the regulator, which was then the FSA, to approve it. And in we went up to see them in October 2006, they were up in Canary Wharf then. Sat down with three regulators. They I got an absolute grilling for an hour, but they were just very inquisitive and very interested.

SPEAKER_00 11:16

So sorry, you'd spent a lot of time planning a certain course of action, yeah. And it was pretty much at the final hour you said to Hillary, I don't think we can do it like this. Yeah, yeah. So is that a lot of hard work out the window?

SPEAKER_01 11:30

Yeah, for her, yeah, it was a stack of hard work out the window. She rolled her eyes, but I think um she said, fine. Jamie took a bit more convincing, but he came round to it in the end, and then we got stuck into getting Caroline was working here at the time, the pair of us went to work on it, and eventually I went up to Canary Wharf to meet the FSA with uh with Hillary, with uh two people from City, our depository, who were also they were brilliant, they were so brilliant, and the FSA were brilliant. The FSA, so the FSA, we got through this grilling, and at one stage they said, Listen, Gary, I know you're getting a lot of questions from all three of us, but you're the first you're the first company to ask to use UCIT 3 with full derivatives, and so we're we're we're we're really interested in in the product.

SPEAKER_00 12:26

I was just thinking that you know the ability to you know you've got so far, you're not fixed in, but this is how we've got to do it. You know, is that is that a quality in investing to be able to keep your mind and options open and not be glued to something because of the amount of work that yourself or a whole team's put into it.

SPEAKER_01 12:46

Yeah, so I'd say I'd say over the years, if we're looking at one of one of my strengths is being prepared to do a lot of blue sky thinking and go down a completely different path. I think you I think you need to be fickle to be good at investment management because you need to be prepared to change course very quickly. Um, if it's not working, don't get wedded to it. You don't have to see it all the way through. Sometimes you've got to say, no, wrong investment, it's not worth, sell it, we're gonna take the hit, on we go. Um so it's a strength, but it's also a weakness because it can you know from a business point of view, it can it can mean you're always wanting to go one one direction, then another, then another. And of course, that from an organisation point of view, that's not always the best way that you should you should be run. Um I think one of the things that Jamie and I have had a benefit of working together over a lot of it's 40 odd years now, um, is that you know it we we we feed off each other quite well um on the projects, and in fairness to him, he he he dug in but then came round to it.

SPEAKER_00 13:55

So you've set the funds up. Yeah, you're they're the first of a kind in the UK, yeah. You're sailing, yeah. Do the advisors now have a new toolkit that they've got to get familiar with, they've got to explain it to the clients. How are the clients informed about this? How are the clients reacting to Courtis has its own funds now, and what did the next 12 months sail like to you?

SPEAKER_01 14:21

I think the clients were were loyal and sort of accepted it was when we explained the reasons we were doing it, that we could disperse the risk even better. And within their own funds, one of the other benefits we had once it was within our funds, and as we moved to just holding more direct securities, we knew exactly what was in the funds at any time. You weren't ever having the worry that another fund manager would suddenly tilt to a different direction, which you'd not picked up, and that their fund would blow up within the portfolio, even when they've got an outstanding track record. You know, that that happened with Woodford Investment Manager uh management. So that uh perpetual, then investment Investgo Perpetual. Um, Neil Woodford had been a star manager for a number of years, but it tilted more towards startups and what you call patient capital trying to do something new in the UK, which wasn't a bad thing, but it was with predominantly retail money, and people weren't really interested in being stuck into illiquid assets for a long period. If you'd not picked that up, then you got a nasty shock when that fund hit problems with performance and then with liquidity. So the benefit of not having a multi-fund approach is that you know at any one time exactly what you've got, and you can stress test the living daylights out of it, which we like to do. Most of the work on fund management team is risk assessment. That's you know, you're the all the good fund managers are obsessive about risk, absolutely obsessive about it. And when you know you've got to get your clients through the next 10 years having their regular income to supplement their their retirement, it's it's a big responsibility. You don't want things to blow up.

SPEAKER_00 16:16

Is it a double-edged sword? You've got great control. But it's a marvel thing, isn't it? Power and responsibility.

SPEAKER_01 16:24

Yeah, I think with with um you with with power comes responsibility. I think that that would be it. Um it's not power in a bad way, it's not you're going round seeking the power, it's just what you do, and then you've got the power to make decisions. Your clients are giving you that. You're constructing it. Yeah, you're putting it together. Yeah. Um, and you're you're doing it in a way in which you hope will be good for the for the client. So when you get an award, it's nice to get that ready. You know, here we are 19 years on after the the funds were launched, because they um they launched eventually in February, March um 2007. So we're 19 years on, 20th anniversary next year. There's a number of awards, and they've worked, they've been really, really successful. Um, more than the returns, they've kept within their risk parameters. Yeah, and those controls have sort of stayed in place. So they've when they have wobbled, they've wobbled within the tolerances.

SPEAKER_00 17:23

We expect them to wobble and that's what they're doing exactly what they're designed to do. And say 16 awards from Lipper alone, LSEG Lipper alone. 16 over 10 years, yeah. Yeah, and many of those for um for for the 10-year performance. Yeah. I went through it all with Jake. And I'm I I I pulled up a quote from yourself when we announced six more of these LIPA awards in 2023, uh, almost to the day, 21st we we published it. You likened value investing to a marathon, not a sprint. And as I said to Jake, I get it, pace yourself. That's what you said, have to pace yourself. But I was then interested in what's the training program to be working like that. And and Jake took me through his response for that. Very interesting stuff. So sticking with the conversation I had with Jake, not to repeat myself too much, but I I said to him ten years. You know, what have we been through in ten years? There's been a significant, a number of significant number of significant global events impacting markets. And Jake explained that a thing you call drawdown, so how much the markets are impacted by a global event, has seemed to decrease since the seventies, while the number of events has increased. So my question to Jake was does it become easier if you've got more frequent global events creating the drawdown, impacting markets, but that impact is less severe over time. Is it easier to be dealing with more and less impact than big impact less often? And he said I should put that to you because his experience only stems back as far as 2008.

SPEAKER_01 19:12

It's definitely easier in this current environment. It's easier because technology gives you more visibility over what you're doing and what is happening at any time. And I'd say that's probably why because the communications of any issues whip round the world so fast, the markets are reacting or anticipating faster than they would have been. You know, go back in the day um uh where there was speculation around the outcome of uh the battle of um Trafalgar, and you're having to wait for messengers on horse horses to come back. You know, now uh a missile's fired off a ship in in the Strait of Hormuz, and somebody's got it on their phone and it's around the world within a few minutes. So everything is known a lot faster. So I you know you go back to the 70s, eighties, 90s, I couldn't pick my iPad up from the side of my bed when I wake up crazy. I I sleep easy, but I wake up early. Um so I grab grab my iPad, and everything, more than everything I need to know is on there instantaneously. And that does make it easy, you feel more connected. It makes it easy to have a holiday because you can tune in if you need to at any time. My worry always being on holiday is when you're on holiday, something goes off, you get a global financial crisis, or you get um a uh a Brexit vote, or something happens, and you've got you need to get back to the office. But these days you can work remotely. So I think it's much easier in the modern world. Technology has been great in in that sense.

SPEAKER_00 21:13

How are the funds aligned with advancement and change? What do they look like 20 years old now?

SPEAKER_01 21:20

Um you there's actually ironically, there's less ex there's less expression of position through options currently than there has been in the past. That's because the markets anticipate these events causing big movements in share prices, and therefore the cost of options has gone up. Technical term is the implied volatility, which you see on that index called the VIX, which is nicknamed the index of fear. But if that's high, then it means the market is very jittery.

SPEAKER_00 21:58

I think James said fear is the greatest fear in. Fear itself.

SPEAKER_01 22:01

Yeah, yeah, that's it. We've nothing to fear but fear itself. I forget who said that. Was it Roosevelt or somebody? Yeah. But I think that's I think that's uh that's not entirely true in in the investment market. Um those are the real things to be worried about as well. But um yeah, it does it does play a part. Um I think that there's been one of the interesting things is a lot of the emerging markets that have grown up, places like South Korea and China. I mean, they're still called emerging markets. Are they really still emerging or are they now emerged? It's the way we the way we the the the phrases that we use for different parts of the world these days. I'm not sure that that's quite right. So there's been an opening up of different bits of the world, and though there talks about this reversal of globalisation, particularly under Trump's presidency, um it's still a more connected place than it was 30 years ago. So yeah, I I am old, yeah, I'm 69 next month, so I'm I'm not young. I was just talking to um I was just talking to before I came in for this to uh a couple that have been a client since 1982, 83 when COUTES was launched, um, and they were asking me when I'm gonna retire. And uh I'm not gonna retire, I mean we just decided that there's no point because this is I thoroughly enjoy it, so it's it's really good. It has got easier. A lot of people won't say that, but it has got easier. Technology makes it easier and it expands your reach, doesn't it?

SPEAKER_00 23:43

And yeah, you know what I call the push-pull factor. If you need something, you can go and get it. But if you've got to communicate something out, say to the team at five in the morning when something's going on, you can get to them quick. Yeah, they can pick it up.

SPEAKER_01 23:56

Yeah, and the uh and the other thing it's done, Leo, is the modern technology has made it particularly AI takes a lot of the more difficult parts of the job out. So getting data into a certain format you need, or asking AI to extract data from stuff you load up is so quick. So in the old days, it might have taken you hours to extract certain amounts of data from um big data sources, but AI will get onto that very quickly for you. So you can spend more time thinking about what the data tells you. You do need, I just would add as an aside, you do need methods of checking the data. Absolutely. Because you know, it does hallucinate, it does do odd things. I mean, I we use co-pilot, I love co-pilot. Um, you know, I have a great dialogue with it, I have a great friendship with my co-pilot, it calls me Gary until most of the time. Well, most of the time, until I ask it to put a little schematic together with a diagram. I said, put my name on it, please, and it called me Dave. I have no idea what Dave was that. Except Dave, presumably, is a very popular name, and it's worked out because it's it's probabilistic. I don't know if people listen to this, yeah. It's not deterministic AI, it's probabilistic, which means it works out roughly what it thinks you need within bounds of probabilities. It doesn't have to be certain, it just chucks at you what is most likely. On this particular occasion, it's just thought that oh, Dave's a very popular name for English males. I'll call him Dave because that's got me a reasonably good chance. Oh, I forgot he's called Gary. Yeah, that's that it was hilarious.

SPEAKER_00 25:39

Well, one thing Copilot didn't do was launch the Courtes Ethical Value Equity Fund. No. The youngest Courtiers Fund launched uh late um well early November 2022. How's that been since launch?

SPEAKER_01 25:52

That's been good. Uh it's been good. We we the first priority with that fund is to make sure that you are doing what it says on the tin. So it's what we call a dark green fund, which means it doesn't invest in lots of areas. It doesn't seek to be we don't pretend it's sort of uh uh proactive in any way with changing the the world with regard to its energy strategy or making the climate a lot better, but just says, look, we won't invest in these areas, we won't invest in alcohol, we won't invest in anything that's got a link to pornography, we won't invest in anything that's got a link to um uh carbons, you know, that that that are they're causing pollution.

SPEAKER_00 26:40

So it's to support clients' investment preferences, right?

SPEAKER_01 26:43

It means they can invest with a clear cost.

SPEAKER_00 26:45

Because it's what the it's what it's what the client wants, not what the investment team wants. It's that's it's meeting the client's.

SPEAKER_01 26:52

No, it definitely I mean what's interesting is that they are the investment team are a most um, you know, for a bunch of youngsters, surprisingly enough, you you know think a lot of youngsters would clamber to be changing the world. And when we had to, uh when we had to say, okay, we've got the it's all ready to go, Eve ethical value equity fund, um, and we're on who would like to take the lead on it, nobody put their hand up. So it came on me. I had to do it, um, which I was quite amused by and actually quite pleased by because it meant that you know that they are if I use the word that the investment team are quite a geeky lot, I mean that as a compliment because you don't want people running your money that are not data obsessed and are a lot of data obsessed, more obsessed with the data than they are actually value signalling, and numbers, numbers, numbers, quantitative.

SPEAKER_00 27:44

Always. This is exactly the point Jake made when it came to scoring companies and who's fit for these kinds of awards.

SPEAKER_01 27:52

Yeah, measure twice, cut once. Never forget that. You use that as a metaphor for life, and generally people will do okay.

SPEAKER_00 28:00

Gary, when Copilot is trawling through all the data and pulling out information that you and the team will be carefully checking, with that energy you don't have to use finding the data. What's going on with your blue sky thinking? What's the next 10, 20 years look like for Courtiers?

SPEAKER_01 28:19

I think the next 10 years or so are quite exciting for the business. Um, there's lots of changes in the industry, lots of changes within the way in which the industry is regulated.

SPEAKER_00 28:30

Well, the world as well, as we can see.

SPEAKER_01 28:34

You know, and I know I know we're going through this this this regulatory audit at the moment. We will come out of this a much better business, and I think that gives us the chance to to grow and grow at uh a good sustainable rate. So I'm quite excited by where the market goes. It's a very, very um, there are lots and lots of participants in in the UK financial services market, so it will go on consolidating, and I think that gives us an opportunity to really really go forward as a business over the next 10-20 years in a in a positive way. I think we will be able to use AI to affect not only just in the investment process but in the way in which court is run, and hopefully that will deliver a better service level to to clients who will be able to access more of what they need online and be more interactive with it, but without ever without us ever failing to to um put a human being in contact with a with a client so they've got they've got a chance to have discussions with real people because for a lot of people that that is incredibly important.

SPEAKER_00 29:43

Absolutely, and also considering the input of AI into fund management on whatever level, it doesn't detract from the true definition of certainty. So whatever goes on, wherever you might implement AI within the investment team, I could speak to you all day and ask you questions about where you might, but the point I want to make is that it's never going to detract from the requirement of certainty in everything that you do managing clients' money. Absolutely, yeah.

SPEAKER_01 30:16

Yeah, that's that's the you you know you the the in a way you're using the right phrase certainty, but what we know on the team is that there is no certainty, and when you recognize there's no certainty, it makes you much more mindful about hedging that risk because you can never be 100% sure of anything. So you I know I go on about this, and and I almost every podcast we do, I end up back with diversification. That's the word I was hoping for. We're coming back to diversification, but it you have to do that because there is no certainty, you know, just take the extreme. Does somebody um take their pension, say, with one and a half million, they they need an income of sixty grand a year, so they need a they want to take a four percent yield on one and a half million and stick it all in NVIDIA because they think NVIDIA would be the best performing stock in the next 10-20 years. You can never be certain about that. So, do you put it in two stocks? Well, that's not that's still not enough. Where'd where do you go? You know, you need broad diversification.

SPEAKER_00 31:38

So to clarify, certainty in say the stocks that you're investing clients' money in. You wouldn't you wouldn't, for example, take your quantitative analysis process and just go, okay, we've built an AI that does all of that and spits out these companies are good to invest in. Oh, okay, let's put the client's money in there. You'd never do that. No, because you wouldn't know.

SPEAKER_01 31:55

No, you wouldn't know for sure. So you you're gonna go and check.

SPEAKER_00 31:59

Yeah, yeah. So it's that that that human input that's absolutely necessary in all those decisions and that ultimate decision, no reason not to invest. No, yeah, Gary, fascinating conversation. Um, before I wrap this up, is there anything you want to say with regards to these awards? Today's award.

SPEAKER_01 32:19

I'd just like to thank the clients who've uh kind of trusted us and trusted us through the funds, and I think that this is as much for them as it is for anybody else. The nice thing about getting the awards is that you know that they're doing the job you wanted the the funds to do, and that is that's the most important aspect of this. So I just say a huge thank you for the people that have invested in growth over the next 10 years, over the last 10 years, and let's hope that in you know we're having another podcast in in what would it be 2036 and we got another award. That'd be quite fun, wouldn't it?

SPEAKER_00 33:00

Absolutely. Well, I look forward to seeing what goes on over the next 10 years and beyond. And Gary, thanks for the insight into the history of courts and the beginning of the funds. Thank you. If you have any questions, please do speech advisor or contact us through the website.

unknown 33:17

Thank you.