Active, long-only equities specialist J O Hambro, which saw its trading desk win Best Equity Alpha Generator in the European Markets Choice Awards for 2023, plays by the rule of “best, not biggest”. But with the firm’s parent Pendal recently acquired by Australian rival Perpetual, and with the departure of charismatic long-term head of trading Louis de Kock recently confirmed (and his successor announced), the times they are a’changing. Best Execution sat down with the Hambro trading desk, to explore the future of the firm – and the foundations of its success.
The desk is a four-legged structure (or should that be eight?) – supported at each corner by a quartet of experienced traders with de Kock managing operations from the top. Richard Kenny and John Kingsbury specialise in UK stocks (Kenny has a close affinity with UK fund managers in particular), while Kingsbury also works on Europe. Adam Simmons and Chris Ward also work on Europe, as well as a bit of everything else, while Simmons is also the desk’s resident TCA specialist. The firm has an additional extended team overseas, with two people in Singapore and two in New York.
“Beyond that, we try to keep it high-level and generalist,” said de Kock. “We don’t like to be pigeon-holed – we don’t want things to fall through the gaps just because someone’s gone on holiday.” De Kock is now departing the firm in December 2023, and is to be replaced by Simmons, in a bold move by the group – taking the newest member of the team to the top.
Meet the team
Ward is the glue that holds the history of the desk together. Now in his 17th year with J O Hambro, he started straight out of university and got a job in the back office when it was a small firm of just 60 people and less than GBP1 million under management. He spent a few years working in operations and fund management support, before a management move-around changed up the desk and brought a bunch of new traders into the firm.
“We had all these new people who had experience in trading, but no one to help link together the background of it all, who knew how the systems worked and how the firm functioned. Lucky for me, I was quite friendly with some of the fund managers and they said ‘look, if we get you a job on the desk, you could be the one to link the two’.” The firm was in the process of launching its wealth management arm at the time, and a young new trader willing to do all the ‘itty bitty admin jobs and small trades’ was a godsend. I started out with tiny trades and gradually we’ve just grown and grown. I’ve been sitting here enjoying it ever since.”
Kingsbury is another ‘old-timer’ on the desk, joining over a decade ago in 2011 (just after the firm was acquired by Pendal) after 10 years at Gartmore.
“I’ve seen a lot of change in my time at J O Hambro,” he said. “Back in 2008, working for hedge funds and with the absolute chaos of the financial crisis, I didn’t think we’d ever see things as mad as that again. Then obviously with COVID and the Ukraine war, times have gotten even crazier. Covering the UK and Europe, we’ve seen huge amounts of change.”
Kenny is the ‘new kid on the block’, joining the team in October 2019 just before lockdown. He’d been on the sell side for most of his career, so this was his first foray into the buy-side world – and he’s enjoying it immensely. “It’s the same functions, but a different game. And it needs a very different set of skills. I don’t run positions anymore, I don’t have a P&L, I’m here solely to execute for fund managers.” That being said, he’s still very involved not just in what they are buying and selling, but why – and that’s crucial.
“I can get better execution for my PMs if I actually understand what the investment model is,” he explained. “In terms of career, this has been a brilliant move for me, and I absolutely love my job. I can honestly say that I think this is the best team I’ve ever worked with – there are no political issues, everything is seamless. Everyone backs each other up, you never hear any moaning about someone not pulling their weight. I feel privileged to be a part of such a tight team.”
Simmons is the ‘young’ buck on the desk, joining five years ago with no prior trading experience. “My previous roles were more data intensive, working on data analytics, so the trading scene was fairly new to me.”
Interestingly, however, he has now been tapped on the shoulder for the top job, and is to replace de Kock as head of trading from December. It’s a bold move to inject new blood and new ideas, and Simmons is emphatic in his praise of the team as a whole.
“It’s been a steep learning curve, but it’s such a great team to learn with. It’s unique in that we all get on, we all look after each other, we all supplement each other.”
Simmons’ role within the team focuses on TCA and execution analytics, although he also trades on the European side.
De Kock himself misses trading. “I’m a firefighter, I just handle problems all day to create a clear path for these guys to do their job, so they don’t have to worry about admin or politics or regulation or anything else. I take care of the bigger picture: counterparty reviews, management, investment oversight committees – I don’t get to do any of the fun stuff anymore.”
But the important thing for de Kock is the egalitarian nature of the desk, which he believes is unique.
“We don’t have any politics. There’s no hierarchy, it’s a very flat structure – everyone is ready to roll up their sleeves and get to work. We don’t care who does the job as long as it gets done. But the flipside of that is that we don’t monitor each other either. We don’t need to have zoom calls to make sure someone is working from home properly. We treat people like adults and we expect them to behave like adults. And usually, that works!”
Alpha males
The team just won the European Markets Choice Award for best alpha generation, so how do they achieve that, and what tools and strategies do they use to bring best value to their PMs?
“In terms of really adding alpha to the fund managers, for me that’s largely in the small to mid-cap world where things either don’t trade or aren’t traded regularly and aren’t overly liquid,” explained Kenny. “And it’s all about relationships and knowledge.
“You have to find out where the buyers and sellers are, and where the market is. If I’ve got a price onscreen, I’ll always look at the spread and try to identify where the value really sits. If a fund manager tells me he’ll pay one price, but I know there’s a seller who will do it for less, I’ve just produced some powerful notes because I can get it cheaper than it is on the screen. For me, it’s just a case of focusing on the stocks that I know fund managers are interested in, and that they hold, and just trying to work out where the buyers are sitting at any one time. They aren’t always active on a daily basis so it’s a case of remembering and making sure you know where the last lot of volume was traded, and who traded it. Then you know where to go and hopefully, buyers and sellers will still be active.
“The important thing is to remember and to monitor everything that’s going through the market. It’s all about relationships really – it’s about being able to get a better price than you’re seeing onscreen and the only way to do that is by building relationships and maintaining trust. And then by having all the information when I’m negotiating the price – I’ll know how long that person has been waiting to sell, I’ll know what the conditions are, and all that gives me leverage so that I can get the best price possible for my PM.”
Tech support
Kingsbury comes at things from a different angle. “Rich is talking about alpha he generates by being very stock specific and knowing where the bodies are buried. But some of the guys I trade with are far less fussed about the individual stock price but the orders can be very high ADV. So it’s not a question of if you trade, it’s about picking the right moment to trade. We do a lot of pre-trade analysis for some of our fund managers and clients coming in or out of the fund, and they’ll give us a heads up and say look, we’ve got potentially large flow, which is going to have a significant impact on the NAV of the fund. I use online tools for that pre-trade analysis to work out the potential impact and how long it could take to manage the flow. Once it actually goes live, using tools – whether crossing networks or algorithms or just timing certain stocks – can actually add value over using an individual broker.
“For instance, if we get told about flow, the market impact analysis might say that it’s going to take 10 days and you might have to take 2% of impact. But we actually get the trade on the same day we know, using the tools we’ve got. We can get it done in half a day or we can beat a benchmark by x bps. It’s not necessarily stock-specific, it’s around timing. And it’s also around the market structure behind the names we’re trading. For example, Ferguson recently moved its primary listing to the US, so I know I can’t necessarily do anything during the morning session, I’ll have to wait till the US opens. But someone new might try and do 25% of volume from the open, and that’s going to have a significant impact on that name.”
Making TCA pay
Simmons is the desk’s data guy, and he’s excited about the opportunities that this could bring. Having developed their own in-house TCA system three years ago, the team is now deploying that onto the desk for its advancement, and everyone is getting excited about the results.
“We use Bloomberg to provide the data for our TCA analysis right now, and then we use our own in-house tools along with languages like python to supplement the analysis. We’re currently developing out a much wider data project looking at data lakes and warehouses and really delving a lot deeper. I think this is an area where we could provide a far greater source of alpha.
“It won’t just be an off-the shelf Bloomberg report which separates by groupings and average arrival, average market impact and so on. A lot of asset managers are content with that, and they don’t really see any alpha generation opportunities from it – but that’s because there’s no real analytics. I’m working on going a bit further and developing our own metrics entirely. Not just bog-standard arrival slippage but developing a real best execution score, incorporating a number of different metrics. I’m trying to get one level ahead and then once I’m content with the data and the output, because I’m constantly testing it to check validity, then we can provide this data to traders and actually act upon that information.
“Another thing we’re currently looking into is the capability within Bloomberg and EMS-X. They’re currently rolling out a function where you can have pre-populated fields within your EMS-X suggested trade strategy. A lot of people I know don’t even use that, but it’s quite useful to have. There are all kinds of things in the pipeline that we’re actively looking into – and I think, speaking to my peers, that we’re ahead of the curve on that. For a team that doesn’t have an army of data scientists at its disposal, I think that’s where we’re leveraging to our best advantage.”
A controversial view
Having said that, de Kock has strong feelings about the direction of travel – especially when it comes to automation.
“Our close relationship with our fund managers is crucial to everything we do. We don’t have a hands-off approach and we don’t do any automation. I don’t believe that automation adds benefit or value to our business. Even algowheels are just random – yes, they’re fashionable, but I’d rather look at all my own data to make the call rather than rely on someone else’s logic turret.
“Automation is completely off the table for us. Every order is dealt with on its own merits. We do differentiate between low and high touch but that’s up to the trader, he’ll speak to the fund manager and he’ll go where he thinks the bodies are buried based on his own knowledge, not based on an automated rule.
“Of course, there are areas where it can help. We don’t automate trades and we don’t automate workflows, but we run a hybrid system with data-driven insights to inform and support the wealth of experience on the desk. We’ve got over 150 combined years and we use that knowledge to develop benchmark execution matrixes.”
“We’re in the process of building and testing a machine learning overlay process, using our own data to best predict trading costs and outcomes,” added Simmons. “We think that will optimise a better outcome for the desk.”
The fear around automation is a loss of control. “The markets are changing really quickly at the moment, so you have to keep changing automation along with it. We’ve had nothing but crises over the past few years, liquidity is being sucked out of the market, interest rates are high, so to have to keep tweaking different systems in response would be time consuming and expensive. On our desk we’ve got a very reflexive structure, we can change things straight away without having a long negotiation about it, which allows us to be very responsive. It’s about experience overlaid with data.
“But you always need to retain control. The problem with AI is that it will, by definition, start to think for itself based on the available data. And the problem with data is that it’s always backward-looking
“If you’re a one of the bigger asset managers, with thousands of orders to input, that might be different. But we just don’t have that bandwidth, or that flow, or that budget. It’s different strokes for different folks.”
A buy-side balancing act
The relationship between the buy and sell side is always evolving, and J O Hambro places a strong emphasis on making sure that precarious level of mutual respect is maintained. “The dynamics between us and our counterparties change every day – it’s all about getting the balancing act right,” explained de Kock. “You don’t want to let them think they can roll you over every time, but you don’t want to be those guys that push back on every trade, either. The key is partnership.”
Kenny, with his years of sell-side experience, thinks that the biggest change since he joined has been the greater control the buy side now have in terms of pricing since they introduced the best execution policy.
“The sell side is not really in control. They’re not price-makers anymore. It’s a very competitive market, and it’s still often a race to zero, so the sales side has to get it right in terms of being as cheap as possible, but also providing a meaningful service and investing in technology or in a high touch service. It’s a very difficult balancing act. I think the buy side has done a very good job of getting the price down – possibly even too good, because I do think that the service the sell side gives the buy side is not what it used to be. I think we might have over-extended in the short-term. But there are green shoots, things are beginning to improve. There’s a bit more leeway, and the buy side are starting to realise that if things don’t become a little more fair in terms of pricing, we’re going to lose some of our brokers.”
The UK is unique in that it has appointed brokers, while many European companies don’t have this, they just go to a bank they have a relationship with when they want to raise money. “That UK broker relationship is actually very valuable, and it’s in danger of dropping away,” warned Kenny. “And it’s a service that is extremely important. So we need to get the balance right.”
Changes afoot
It’s been a bumpy ride the last few years and 2023 has been no exception. The team has faced some tricky challenges, with liquidity a constant theme. “It’s not just about one-off events,” explained Kingsbury. “The liquidity, the spreads, everything has been affected. As a team, the impact has been to make us a lot more connected and a lot more attentive this year, just to try and source the liquidity that we’re looking for – because frankly, it’s bloody hard to find.”
But the biggest change was of course the AU$2.5bn acquisition of parent company Pendal by rival Australian firm Perpetual, with the merger formally completed in January of this year. What changes will this bring for the J O Hambro team?
“There’s obviously cost pressures that everyone in our industry faces,” pointed out de Kock. “Running asset managers has become a lot more expensive, driven by regulation, pricing pressures – the industry is undergoing consolidation and there are lots of smaller managers, us included, that have seen change as a result. There are certainly benefits that will come from the merger, while Perpetual will benefit from obtaining a more global footprint.”
One of the key factors in the Perpetual merger was diversity, with the firm keen to grow its global financial business across asset management, wealth management and trust business. According to J O Hambro management, the new parent wants to grow the asset management arm into a more dominant player, offering a more diversified model and using stable cash flows from the trust and wealth management businesses to grow more secure margin business, and weather cyclicality with a more robust balance sheet. One of the more attractive commercial elements of J O Hambro is its global distribution model, with a US mutual fund structure as well as an Irish (European) fund structure and a UK organisational structure. Between these mutual fund models, the firm is able to cover the globe.
“It will be of huge benefit to Perpetual in terms of globalising their asset management footprint and creating a proper diversified asset manager,” agreed a J O Hambro spokesperson. “That was really the rationale from a corporate perspective.”
Now, the firm is moving into the real nuts and bolts of the integration, and that’s where change could start to happen – where it’s a rejig of individual teams and roles, or a readjustment of broader strategy. Perpetual made a “cast-iron commitment” that the firm would be able to maintain its investment independence and culture as a boutique asset manager, but synergies are still likely to be made across back and middle office operations, even if the front office retains its independence.
“Perpetual’s ambition is to be a leading global multi asset manager. That means having flourishing successful boutiques that are generating alpha for clients, helping them achieve their investment goals, and growing those boutiques and supporting investment teams is absolutely crucial to achieving that outcome,” said the spokesperson. “There will be no outsourcing of the trading function, it’s going to be a growth story.”
“The whole point of the boutique model is client confidence,” added de Kock. “That’s what’s really important, that’s the DNA of the firm. It’s about culture and independence and the ability to make the decisions you want, without a CIO telling you not to. That independence is really important.
“How will the acquisition impact the trading desk directly? We don’t know yet. But the reality is that trading is a part of J O Hambro’s investment proposition. It means our traders sit close to our fund managers and are able to offer best execution via a global platform, around the clock. That is core to what the firm does, and our relationship with the fund managers is a crucial value-add that makes J O Hambro, at the end of the day, a better investor. Why would anyone compromise that?”
Where next?
With the change in ownership will come an inevitable change in management structure, so what material impact might this have on the team?
“It depends what happens at group level, and where they want to take the business,” said de Kock. “I think that’s a movable feast. For my part, I would be happy to build it to the point where I can leave, knowing that it’s in the right place. I’ve hired every single person on this team, no one here is inherited, and that culture has been crucial to our success. I won’t leave until their future is assured.
“Eventually, though, would I like to go back to trading? Yes. I’ve spent 30 years as a trader. It’s my life’s blood. I miss it.”
With Simmons, a notable AI enthusiast and innovator with a tech and TCA background, now at the helm, it will be interesting to see if the Hambro ship now starts to steer in a different direction.
©Markets Media Europe 2023
