Chartered accountants Price Bailey may not be the most obvious choice to manage and invest your money – they are after all primarily an accountancy firm – but its investment management arm now boasts £500 million in assets under management and with nine model portfolios on offer was among the earliest adopters of exchange-traded funds.

James King, Partner and Head of Private Client, Price Bailey

Having used ETFs since 2008 the firm is an old hat at keeping costs down, something it labels as a priority when investing a client’s money. Prior to this, the firm decided the asset allocation but implemented this via third-party multi-asset funds, but this became increasingly expensive and so it decided it would run its own money.

James King, partner at Price Bailey, explained that it has taken an ETF model portfolio approach since 2008, with risk drivers as the main emphasis.

He said: “In 2008 we applied to the Financial Services Authority (FSA) (now the FCA) for discretionary powers to run our own money. We then partnered with UBS to run ETF portfolios on their platform. There were very few platforms running ETFs then and UBS were one of the only choices. However, within six months the bank pulled out, so we had to look for a different platform. We chose Praemium as it was one of the only platforms offering what we wanted at the time and they also aggregate all trades, which helped bring the cost of trading down massively.

“Our aim was to have all the building blocks to be the cheapest and most transparent asset manager. Now, we have nearly all our money in ETFs and index trackers. The main exception is property, where we use an active fund and Japan, where we also run an active fund,” he said.

ETFs or index funds?

While its investment decisions are generally swayed by price, provider, and the market they are looking to access, cost continues to be a major factor for the firm. But, because of this low cost focus, ETFs are not always the first choice.

“If there is a choice between ETFs and index funds it will come down to cost. If they are the same price then we tend to use the ETF, but if the index fund if cheaper then we will use that. We can use index funds happily because we aren’t a business that is trading three or more times a day. Additionally, the tax argument is negligible,” said King.

The firm also takes a positive view on active management when it’s the right approach for the job. It currently uses ETFs and index funds for broad equity and fixed income exposures, and active strategies for real estate, absolute return, natural resource and Japan exposure. But King explained that the firm prefers ETFs and index trackers because on a long-term basis active managers won’t outperform in some of the major markets.

Of the nine model portfolios the firm offers seven are risk rated, labelled 1-7 (with 1 being the lowest risk), with the remaining two further portfolios being Distribution, and Equity Income (which is the firm’s riskiest). In aggregate, they are on average 65% invested in ETFs or index funds and 35% in active strategies.

The equity income portfolio – which is almost entirely made up of ETFs bar two property funds – is its best performing. “We put this together to access highest dividends in certain markets. It was launched in 2009 and has returned 130%,” said King.

Asset allocation and risk

However, it is asset allocation and risk that underpins the firm’s investment strategy. The holdings in its passive model portfolios are generally the same, but according to King it’s the mix and asset allocation that varies.

He explains that most of the firm’s clients are in the lower risk band and so both asset allocation and risk factors are important. “For example, if Japan drops 30% then you’ll lose a lot of money, so it’s a key factor.”

The costs

The service does come at a cost, though. Price Bailey has a minimum investment criteria of £250,000 (most of its investors tend to be from the SME market) and clients can also expect to pay fees.

The average price of a portfolio is 0.50%. Added to this is a management fee of 1% (+VAT) and on top of this a platform fee of 0.25%. “We try to keep the total cost under 2% for everything. Our management fee includes everything, cash flow analysis, financial planning, minimum of £500 tax credit which goes towards the completion of self-assessment return and tax advice, we manage their money, we offer annual reviews and this fee also includes all trading costs,” explains King.

While the model portfolios are the main offering for investors, the firm can accommodate more exotic investors who want to take a specific view on certain markets. This is via a core/satellite approach, which works by using model portfolios as the core holding and the specific investment view tagged on.

King explains: “We offer clients a core/satellite approach if they have a particular view on a certain market. This means that we are able to satisfy certain, more exotic views, however we aren’t able to offer big trading positions, because we just don’t have that scale. Hence we do rely on the model portfolio offering and use this either as a full investment strategy or as a core/satellite approach.”

Plans for this year include growth following the hire of three financial planners to its London city office. The firm now has £137m on the Praemium platform and reviews its portfolios every quarter.