RAB Capital is firmly in the latter camp. It began 2008 with US$7.2 billion in assets under management. But a series of investment mishaps, ill-fated expansion programmes and a whip-saw like reversal in key commodities prices pole-axed the group, leaving it with less than $2 billion in AUM in early 2009.
Symbolic of RAB’s struggle is its flagship Special Situations Fund, run by RAB co-founder Philip Richards. After years of stellar gains, Special Sits had over $2 billion in AUM by early 2008, but the collapse of natural resource prices hit the equity values of the small cap and start-up firms in which Richards specialised. The fund ended the year down 69%.
A further source of misfortune was a somewhat off-piste wager on shares in Northern Rock. Richards committed capital from Special Sits to end up with an 8% stake in the mortgage lending bank – at a seemingly rock bottom price – but saw the stake plunge to zero when Northern Rock was put into administration by the UK government. RAB joined SRM Global, former UBS trader Jon Wood’s Monaco-based hedge fund and Northern Rock’s biggest shareholder, in a shareholder lawsuit for compensation that failed.
Since September, RAB management has fought diligently to overhaul the firm, sharpen its focus and cut costs. The restructuring has featured fund spinoffs, closures and lock-ups, a reshuffling of Richards’ duties as well as the recruitment of new senior executives.
The biggest changes concern Richards who founded the firm with Michael Alen-Buckley, the chairman, in 1999. Since then Richards has run the business as chief executive, overseen a growing range of hedge funds as the chief investment officer and served as senior portfolio manager for RAB’s biggest funds.
In recent months a broad shake-up has ensued. In late January, RAB promoted Charles Kirwan-Taylor to be Chief Investment Officer from his role as the board member with responsibility for marketing. At the same time, John Mattimore, a former buy side risk officer with Gartmore and Old Mutual Asset Management, joined as Chief Risk Officer.
“This is the first time the company has separated the role of CIO from active fund management and emphasises our commitment to reinforce the resources devoted to the investment aspects of our business,” RAB said of the Kirwan-Taylor appointment in a letter to investors. “We believe that this will bring investors in our funds significant benefits in process, in transparency and in investor communications in the future.”
Those changes built on the September appointment of Stephen Couttie as Chief Executive, who had been Chief Operating Officer since mid-2005 and Finance Director since April 2007. That followed the summer appoint of Kirwan-Taylor, a former hedge fund partner and veteran investment banker, as Head of Sales after he joined RAB earlier in 2008.
“RAB always had an unusual structure,” says a long-time observer and admirer of the company. “Philip had so many roles – CIO, CEO, fund manger of the two biggest funds – that it was difficult to see how he could do any of them well.” This view is partially echoed within RAB itself. “We believe that this change to our management structure is a very sensible step,” Alen-Buckley said, commenting on Couttie’s promotion, adding that it “frees up Philip to concentrate on running his funds.”
That’s vital since it is the performance of those hedge funds, and their ability to retain and attract capital, which will go a long way to determining RAB’s future. Special Sits, according to one analyst, needs a period of market stability to establish a base and draw a line under its losses. Other resources funds, too, would benefit from that, as well as an uplift in mining and energy company stocks that might come on the back of firmer commodities prices.
Yet amid the market maelstrom, several RAB funds performed well in 2008. The RAB Cross Europe Fund, an event driven market neutral strategy run by Roddy Campbell, ended up 0.7% - marking its tenth consecutive year of profitability. RAB Gold, run by Steve Ellis, returned 1.7% and continues to attract investor interest. The RAB-Pi Asia Fund, an equity long/short strategy operating across Asian markets, including Japan, significantly outperformed, rising 0.57% during a year when equity indexes in the region plummeted. And while the average fund of funds lost 20%, the RAB External Managers fund fell just 7.25%.
A number of other funds, however, have borne the brunt of CEO Couttie’s move to pare costs. In early February, RAB unveiled plans to spin off the NorthWest business, acquired in 2006. The loss of NorthWest’s three Asian hedge funds will cut AUM by $300 million, but the £1 million sale to Northwest’s founders George Phillips and David Rogers is expected to boost RAB’s operational efficiency and liquidity position.
It leaves the firm with three fund groupings: market neutral, long/short equity and deep value natural resources/energy investing (see Table 1). The overall result of the spin-off and closures of sub-scale funds and three of five funds of hedge funds is to nearly halve the number of funds to 12. At the same time, RAB is closing three regulated funds and has axed plans to build a retail business.
“Effectively RAB is separating firm management from fund management,” says one observer. “Everything is being narrowed down to a focused proposition where there is comparative advantage.”
The resuscitation of Special Sits, meanwhile, is just beginning. In November, its investors sanctioned a three year lock-up. This will give time to either liquidate positions in many of the fund’s small cap resource plays or benefit from a recovery in commodities prices. The quid pro quo is reduced annual management and performance fees of 1% and 15% (from 2% and 20%).
Two other funds, RAB Energy and RAB Octane, have let investors elect to receive redemptions through asset sales via a side-pocket structure, keep existing terms or opt for a long lock-up in return for reduced management fees.
One thing RAB has in its favour is net current assets and investments in excess of £110 million including cash of £55 million – against a market cap of £48 million. This gives it staying power in a difficult economic environment, not to mention the funding to rebuild scale via acquisitions as the hedge fund industry consolidates.
Clearly, it is scale that asset managers, especially publicly listed ones, need. Without it, RAB and other niche firms will struggle to generate the fees to both drive earnings and attract investor interest.
