Dan Higgins, who made a name for himself globally as the CIO of a successful fund of hedge funds manager, has returned to the Australian and New Zealand institutional market through a new third-party distributor, 3PD Pty Ltd.
Higgins, CIO and a founding partner of Marylebone Partners LLP in London, has hooked up with the distribution business launched earlier this year by former BNP Paribas Investment Partners marketers Rob Harrison and Steve Larkin.
The two helped Higgins’ previous firm, Fauchier Partners, raise more than $1 billion from Australia, mostly in the years immediately after the global financial crisis. BNP Paribas Investment Partners, now known as BNP Paribas Asset Management, was a majority shareholder in Fauchier. Harrison and Larkin spent 18 and 15 years, respectively, running institutional distribution for BNP Paribas.
Higgins launched Marylebone in 2013 with several other investment professionals with whom he had worked at either Mercury Asset Management in the 1990s or Fauchier, a fund of hedge funds (FOHFs) manager some years later. Unlike Fauchier, however, Marylebone runs inhouse money as well as outsourced or third-party strategies.
Harrison said last week (December 8): “I have known Dan for a long time, and we think that what he is offering is exciting for the Australian market right now.” He and Larkin believe they can considerably grow Marylebone’s funds under management, currently about US$500 million, by offering its institutional-grade management to an Australian and New Zealand market which had successfully invested with much the same team before.
Marylebone is largely style agnostic, with a focus on both quality and growth, and a tilt towards mid and small caps. Capital preservation has been a prime concern for Higgins throughout his investment career. In the GFC, Fauchier proved its worth in protecting clients from the downturn. The firm delivered positive returns over the 2007-2009 period, with drawdowns never higher than single digits during the worst times for the crisis. Similarly, with COVID during the worst of this year’s volatility, Marylebone’s flagship vehicle was down only 10 per cent when the broader market was down 25 per cent. In the past few months, returns have recovered to be in the “low teens” on a year-to-date basis.
“I don’t accept the label of ‘value versus growth’,” Higgins said. “Probably our best investment over the past seven or eight years has been Microsoft. I see that as a great value investment.”
At the moment, about one-third of the firm’s funds under management are run inhouse and two-thirds externally. The inhouse portfolios all have a quality/growth bias, picking stocks with top-line revenue growth and high levels of profitability. The external managers are specialists, ranging from a small-cap activist manager to biotech, to active engagement in Japan or China-A shares, to a Scandanavian long-only manager.
With the outsourced managers, Higgins said, it was crucial that their processes and philosophies were complementary to those of the inhouse management. There were at least as many long-only managers among them as there were hedge funds. It was also crucial that they were adding value net of fees.
The so-called ‘double fees’ charged by FOHFs was one reason for investors becoming lukewarm to their offerings over the past several years, notwithstanding generally providing good relative performance through and after the GFC. Investors also became “fixated” with de-correlating their portfolios as some of the larger FOHFs tended to contain a lot more equity risk in their portfolios than investors had appreciated. This helps explain why Higgins moved away from that model towards the new hybrid approach. “The whole argument of thinking about hedge funds as an asset class is a lot weaker now,” Higgins said.
Up until now, Marylebone has targeted primarily family offices and other private pools of capital – with one Australian family office as a client. The firm also has quite a few professional investors as clients and has been occasionally labelled “the investor’s investor”.
But as the market structure has changed during COVID, requiring a different style of investment management in future, Higgins believes, so the business model of the firm is moving towards the institutional end of the spectrum.
For Higgins this takes him closer to his roots. He ran the UK equities portfolios for large pension funds at Mercury Asset Management in the early 1990s. He has recently been freed up to concentrate more fully on investment management with the recruitment of Richard Milliken, who also has a background in equities at Mercury and its predecessor Warburg. Milliken, who was also an initial investor in Marylebone’s main fund, has taken on much of the administrative and business management oversight at the firm.
“We think something has changed in the COVID era,” Higgins said. “Now you really have to own the right stocks and get access to the best managers for institutional investors… We are first generation investors (mostly starting out in the early 1990s) with a second-generation proposition which we believe is equipped to work in a world that’s changed.” The two main things which changed this year were:
. The acceleration of change itself across many areas, creating “hugely bifurcated” markets and dispersions both between and within industries. “It’s a very good environment for active managers,” Higgins said, and
. The fact that interest rates had been cut to zero. “So, it’s almost mathematically impossible for traditional equities and bond portfolios to deliver the returns required of a pension fund…
“We differentiate ourselves in a crisis,” Higgins said. “We’ve had the big liquidity rebound but in the next three years investors will have to be more selective… The large growth stocks won’t necessarily drive the market over the next three years.”
Marylebone has a “meaningful exposure” to distressed debt, which also served the team well at Fauchier in the GFC. Higgins said the default rate among companies was likely to pick up due to COVID, offering an opportunity to buy senior secured debt at a discount.
Its largest single allocation to a third-party manager sounds interesting. It is a New York firm which specialises in backing CEOs who go into struggling businesses with a view to turning them around.
Greg Bright is publisher of Investor Strategy News (Australia)