HEDGE funds, commodities and private equity might sound like the riskier corners of investing, but one wealth manager believes they can make portfolios safer and clients less likely to panic.
Paul Denley, CEO and co-founder of Mayfair-based Oakham Wealth Management, has spent two decades placing greater emphasis on alternative assets than many traditional investment managers.
Rather than using them to chase spectacular returns, Denley says their principal purpose is to reduce volatility by ensuring clients are not entirely dependent on shares and bonds moving in the right direction.
He said: “People often hear ‘hedge fund’ or ‘alternative investment’ and immediately think it means taking more risk.
“For us, the objective is generally the opposite. We are looking for assets that behave differently from conventional markets so the overall portfolio can provide a smoother and less stressful journey.”
Alternative investments are broadly those sitting outside mainstream equities and fixed-income markets. They can include well established investments such as gold, but also commodities, hedge funds, trend-following strategies and exposure to private equity markets.
Paul is careful to distinguish safer alternative investments from speculative, illiquid schemes that may leave clients unable to access their money.
Oakham generally seeks exposure through listed or otherwise liquid investments, allowing clients to benefit from a different asset class without committing money to an obscure property development or long-term vehicle they cannot easily sell.
Paul explained: “Alternative does not have to mean strange, opaque or illiquid.
“There have been investments marketed to private clients involving unusual overseas property schemes and other highly speculative ideas. That is not what we are talking about.
“You can access areas such as private equity through listed vehicles. The aim is to obtain the diversification benefits while retaining appropriate liquidity.”
That philosophy can be traced back to Paul’s early career.
After studying applied economics at university, he worked as a unit-trust analyst before joining Berry Asset Management, now known as Bordier UK.
Philosophy
Working alongside the firm’s marketing, investment and managing directors gave him an unusually broad apprenticeship. His responsibilities ranged from researching hedge funds and visiting clients to creating marketing material and helping develop the company’s website.
Denley later joined Williams de Broë, where he developed his skills in detailed company analysis. He covered sectors including logistics and airlines and was working as an airline analyst when the September 11 attacks occurred.
He said: “My boss advised me not to answer the phone to journalists because anything said about the commercial impact on airlines would have sounded completely inappropriate given that people had just died.
“Airlines are extraordinarily difficult investments because so much is outside their control. Passenger numbers matter, but so do oil prices, geopolitics and events nobody could reasonably predict.”
After leaving Williams de Broë, Denley spent time working for Reuters, before co-founding the business that eventually became Oakham.
The firm received its regulatory authorisation in 2005 and deliberately adopted an investment approach that differed from the traditional model.
A conventional balanced portfolio might place 60% in equities and 40% in bonds. Oakham might for example allocate approximately 60% to equities, 20% to fixed income and 20% to alternatives, depending on market conditions, the client’s circumstances and attitude to risk.
In 2010, it established dedicated equity, fixed-income and alternative funds that could be blended accordingly for different client mandates.
Paul said: “We wanted the allocation to alternatives to be meaningful rather than a token gesture.
“The principle comes back to the idea that diversification is the only free lunch in investing, as nobel laureate Harry Markowitz famously said. If you combine assets that do not all behave in the same way, you should be able to reduce volatility without necessarily sacrificing the long-term objective.”
The importance of that approach became particularly apparent during the bond-market turmoil of 2022.
Years of extremely low interest rates would have left some supposedly defensive portfolios heavily exposed to bonds offering little income and vulnerable to rising rates. When gilt prices fell sharply, investors who believed they had taken relatively little risk could suffer substantial losses.
Oakham’s lower fixed-income allocation meant alternatives could provide another source of diversification rather than relying almost entirely on the traditional relationship between shares and bonds.
Alternatives
Paul added: “At the time, investors were being paid very little for the risk they were taking in fixed income.
“When interest rates moved, parts of the gilt market fell dramatically. In a traditional 60% equity and 40% bond model, lower-risk clients would have experienced an extremely difficult year.
“Alternatives do not protect you from everything, and during an extreme event unrelated assets can sometimes fall together. But continually searching for genuinely uncorrelated returns should leave you better positioned than ignoring them.”
There is also a behavioural reason for trying to produce steadier returns.
Paul has long been interested in behavioural finance and the tendency for investors to make damaging decisions when fear or greed takes over.
A volatile portfolio can encourage clients to sell after markets have fallen or chase fashionable investments after prices have already risen. Reducing the severity of that journey can make it psychologically easier to remain invested.
He said: “The market is a long-term success machine, and time in the market is generally more important than trying to time it.
“If somebody experiences frightening losses and sells at precisely the wrong moment, the investment strategy has failed them regardless of what might eventually have happened.
“A smoother journey makes the process easier for clients and reduces the temptation to react emotionally.”
That does not mean Oakham remains permanently committed to a single investment fashion.
Paul describes himself as a pragmatist and warns that even established styles can remain unpopular for years. Quality companies, for example, have sometimes been overlooked while investors concentrated heavily on American technology stocks.
He believes managers must be willing to adapt without abandoning the long-term discipline underpinning their decisions.
Boutique
Oakham has also deliberately remained a boutique. The business outsources functions including IT and office management, allowing its internal team to concentrate on investment and client relationships.
The compact structure also allows clients to retain a direct relationship with the people making investment decisions rather than separating relationship management from portfolio management. Many have remained with the firm since its early years.
Paul said: “New clients may initially want monthly or quarterly conversations about markets. As trust develops, they generally become more relaxed and tell us to get on with it.
“They still want to meet for coffee or lunch and talk about what is happening, but investing stops being something they feel compelled to monitor constantly. I find that gratifying.”
For Paul, that sense of calm is ultimately what Oakham’s broader approach to asset allocation and risk management is intended to achieve.
He added: “We are not trying to make portfolios complicated for the sake of appearing sophisticated.
“We care about alternatives because shares and bonds do not always provide all the diversification clients need. If another asset can reduce volatility, protect against a particular risk or simply behave differently, it deserves consideration.
“The destination matters, but so does the journey. If we can help clients reach their objectives with fewer shocks and less temptation to make the wrong decision, that is a better investment experience.”
