Michael Kerr-Dineen is one of those financiers whose focus on class and quality can only be overshadowed by his determination to deliver on his promise. He has demonstrated this by walking away from giants such as UBS to prove that business can be done with complete honesty and integrity. As the former Chief Executive Office of UBS Liang & Cruickshank, Michael led 80 bankers out the door when he left UBS to form Cheviot in 2006. In less than five years, Cheviot became one of the UK’s largest independently owned investment firms with over £ 3.8 billion in assets under management.
Before he founded Cheviot Asset Management, Michael’s career path took many interesting turns. He started in the business intelligence department of the Bank of England. Moving to the British National Oil Corporation, he then transferred to the Guinness Peat, Crédit Lyonnais and UBS. Having experienced both French and Swiss bureaucracy, Kerr-Dineen decided to set up a true partnership – Cheviot – embodying qualities of a `class act` as he himself refers to, in his latest venture.
BB: Having been involved with so many prominent financial institutions, would you say it is harder to run your own independent firm now?
MKD: No, it is much easier. Now I think it is traditionally acknowledged that the partnership structure is absolutely the best way to deliver to clients two things they want. One is a genuine personal service – which is what everyone says they offer – but in practice, constraints of big banks mitigate against them being able to do so. Personal service ensures there is absolutely no conflict of interest of any kind and that is even more important on the investment management side where we can be sure that the processes are entirely ours and we are totally independent. There is no forcing into funds. Of course, being independent does not mean you are always right but it gives you a much better chance to get it right and genuinely tailor services to clients’ needs on individualized basis. Second thing is class and quality – which we like to think we are about.
BB: I would like to ask you about your views on the current Euro debt crisis.
MKD: I am very bearish about the whole thing with its political side. Europe was in denial about it for a very long time and I think they are probably just coming out of the denial stage. You just cannot engage in quantitative easing without longer term implications. The fact is, whatever they do in relation to piling money into the economies, the debt simply will not go away.
It is down to Germany who has obviously benefited from the whole situation. They are famous for taking decisions in their own economic interest, almost prepared to subjugate their political freedoms for their economic interest. However, for the first time you see splits within the German elite as to whether this is a good idea or not. It was always unwise to have a single currency without a genuinely integrated fiscal and monetary policy as well. So inherently there was a flaw from day one. Greece, Ireland and Portugal were relatively minor problems. Italy is obviously a big problem, Spain is a big problem, and the French banks too, both in their domestic markets and their sovereign lending. Even without the benefit of hindsight, it was always ridiculous to have a single currency system without integrating fiscal and monetary policies. Interest rates will continue to remain low for the foreseeable future.
BB: The finance industry as a whole has been tarred by the same brush. How do you address that at Cheviot?
MKD: Banks have rightly taken responsibility for a large part of the first bit of the crisis. But that is not all banks’ fault. It is not banks’ fault that the Greeks and Italians have relatively early retirement age. And also there are issues such as over-reporting, overspending and funding. From the asset management perspective it is the big banks that have got the real problem. I think clients now realise that if they want their money properly managed, a private bank is not the best solution. If clients want to go to a private bank to avoid taxes, and keep their money offshore (in bonds or cash) and have someone pay their bills in Monaco, that’s fine. It is a service provided by the private banks. But this service is miles away from genuine management and running of assets in the markets for the purpose of generating the appropriate returns. At Cheviot, we have got a very good partnership structure in place. We have good organic growth and the brand name is strengthening, so we must be getting something right. The equity ownership of Cheviot by our partners is a unique selling point where we have good people willing to put their names and reputation on the line – something which is not found in most firms. Our growth mandate, our balance mandate and our cautious mandate are all in the top deciles in the last, one, three and five years, so there is real substance behind the theory.
BB: What advice would you give people looking to set up their own firm like yourself?
MKD: It is tough. It is perfectly clear that the trend is to move away from big organisations into smaller boutique firms. Part of the reason why it is difficult to start a fund is that you need a brand and a track record. It’s difficult to differentiate yourself from the rest and I think in some ways we have managed to do that at Cheviot. You will also need strong relationships and credible base team to establish a critical mass.
BB: What do you think is the greatest pitfall of the finance sector as a whole? Or the greatest opportunity going forwards?
MKD: The IFA (Independent Financial Advisors) and RDR (Retail Distribution Review) debate will certainly create big opportunities for the discretionary fund managers like us. The IFAs are just bailing out which will create opportunities for us. I think the structure of investment management firms is also important and I like to think that we have got it. There is still a lot of money out there that is not managed by anyone and accessing it through IFAs is a distinct possibility. Most of the inflows we get are generally new money. People are also moving to a more personal approach due to the bad performance of mutual and pension funds. Structural changes in the industry will force private banks and some wealth managers to move up the value chain, quit the market or seek a managed exit.
BB: Just to finish up, can you please tell us a bit about your investment ethos?
MKD: The asset allocation is key. Of course it all depends on the individual clients and the benchmarks they follow. Our investment process combines strong disciplines with flexible asset allocation and stock selection. Our belief is that the best results come from a mix of styles adapted to the market cycle. So I suppose it is more top-down than bottom-up and it really is a matter of a close understanding of our clients individual investment objectives.
Six months after the initial interview was conducted, Michael’s bearish outlook of the European Debt Crisis from the political perspective continues to unfold. Spain and Italy’s borrowing costs continue to soar as the European Central Bank cut interest rates to a record low of 0.75%. The US Federal Reserve is expected to keep short-term interest rates close to zero “at least through to late 2014”. Cheviot Asset Management won the Best Performing Fund Award for its Libero Cautious Fund in March 2012. Cheviot’s Liverpool office, its first office outside of London, attracted £170m of funds under management in its first year.
