Best of breed: picking winners with Stephen van Eyk

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Stephen van Eyk… ‘we became highly respected because we were willing to make big calls’

Legendary fund researcher Stephen van Eyk may have left the field in 2010 but he’s still studying the form. David Chaplin speaks to him about the art and science of research – the skills which helped build one of the most respected brands in the financial services industry.

Stephen van Eyk has high hopes for his latest crop of two-year olds. “These are the best I’ve bred ever,” van Eyk says.

His optimism about producing the next Golden Slipper champion is, however, tempered by a realistic assessment of the challenges ahead.

“When you breed racehorses, you’re taking every risk there is: it might come out with just three legs; it could be crippled,” van Eyk says. And after the expensive effort of supporting a horse to racing age there’s still a pretty good chance that the nag just won’t run fast enough.

“Most people just buy racehorses at sales and avoid this stage,” he says.

But it’s the breeding that interests van Eyk: how in-depth analysis combined with careful implementation can skew the odds in favour of producing a successful thoroughbred.

It’s difficult to imagine van Eyk without research. “I suppose I have more ability than most to study for hours to work out the underlying factors of complex problems,” he says.

Those skills formed the bedrock of the funds research company he launched in 1990, which evolved into one of the most respected brands in the Australian financial planning industry. At its peak, van Eyk supplied investment research to about 70 per cent of the financial advisory businesses across the country while its founder regularly topped industry publication ‘most influential’ lists.

“I didn’t do any of this alone,” van Eyk says. “Many people at van Eyk Research over the years were much smarter than me and they made huge contributions to its growth. Many of them went on to very successful careers in the industry in their own right.”

The company parlayed that success into funds management, launching the multi-manager Blueprint products in 2003. According to van Eyk, Blueprint funds under management rocketed from zero to about $2 billion within a few years.

“Blueprint was really aimed at people who would turn up at financial planning firms with about $50-60,000 to invest,” he says. “Financial planners wouldn’t want to know them – they couldn’t make money out of them. But we said, here’s a product you can put these investors in that is full of A-rated funds and has good asset allocation behind it.”

Just four years after his exit from the business, almost all the Blueprint products have been wound-up following a well-publicised sub-fund ‘liquidity issue’.

In a quirk of timing, van Eyk Research announced a move into voluntary administration during the interview for this story. The administrator announced yesterday (September 18) that he was calling for expressions of interest to buy the firm as a going concern.

Understandably, van Eyk himself won’t comment on the events unfolding at the firm he cut ties with in 2010. But he says the company has much to be proud of.

“We became a highly-respected research company because we were willing to make big calls,” van Eyk says. “Along the way our research saved people a lot of money.”

Despite a solid record of picking winners at Melbourne Cup industry events, Stephen van Eyk isn’t much of a punter these days (“the breeding is enough, you can’t burn cash at both ends”) – but he’s always known how to recognise luck.

Working as a forex dealer in the late 1980s, van Eyk had a career-defining moment after hearing a speech by a union leader.

“I think it was Bill Kelty talking about how the unions weren’t going to strike anymore but they were going to take control of the superannuation money,” he says.

Soon after, another speech he witnessed on the coming compulsory super regime convinced van Eyk that funds management was the place to be.

“I thought [compulsory super]would mean there was a whole lot of money coming into the investment industry and it would need people to help manage it – I decided I could be one of them,” he says.

Armed with a Securities Institute (now Finsia) qualification van Eyk eventually scored an equity analyst role at the pioneering financial planning firm Godfrey Weston on the recommendation of the group’s co-founder, Max Weston.

At the time, Weston was working at a funds management company that had just knocked back van Eyk’s job application for a similar position.

“Max said I was too good not to be working in the industry,” he says.

It was another happy accident that launched van Eyk into his own business. He was hired by industry stalwart James Purvis to help build and run Australia’s “first fund-of-funds”.

The product was initially backed by an investment bank joint venture featuring the famous Australian political names of Nicholas Whitlam, Malcolm Turnbull and Neville Wran. An industry funds mandate was allegedly lined up too.

“Three weeks after I started Whitlam and Turnbull fell out,” he says, which effectively ended van Eyk’s first job in funds management.

“But I had written all this stuff on a crumpled up bit of cardboard and thought maybe I had something I could sell,” he says.

Of course, transforming those cardboard-scrawled ideas into a leading research business would take many years of hard graft but the van Eyk vision was always focused in front.

“The other research companies [primarily Assirt and ipac at the time]were relying too much on past performance,” van Eyk says. “I thought it was more important to look at what was coming ahead.”

There are a few firm principles underlying the van Eyk decision-making process.

Firstly, he says investors need to be mindful of the destructive potential of market crashes.

“When overvalued markets fall, they can take in excess of 50 per cent of your portfolio – which means you have to make 100 per cent to get back to square one,” he says.

“Therefore, I have always tried to avoid the big losses by being conservative near the end of cycles. When markets are a bit overvalued, say 10 to 15 per cent, I usually introduce some strategies that can still make money but will provide more protection if markets do fall.”

But van Eyk is also a big believer in the power of longer-term themes to boost returns and avoid losses.

He says academics consistently produce “huge insights” based on “thousands of hours into the study of people and their interaction with financial market”.

However, the investment themes are “not often commercialised into portfolio management strategies”.

“Some themes involve a deterioration of a particular sector or country etc, and, when combined with overvalued stocks, produce disasters, while positive themes combined with undervalued opportunities produce outperformance in the long term,” van Eyk says.

He’s also upbeat about the future of funds management, in spite of the rise of direct investment models.

“The demise of funds management products in favour of direct stock portfolios (and platforms) has been predicted for years but it hasn’t happened yet,” van Eyk says. “For my own portfolio, I use fund managers whenever possible to implement strategies. This is particularly the case at the moment when much of my exposure to Australian and international shares is through long/short funds to remove market risk.”

And while ‘set and forget’ has never been a van Eyk motto, he says when markets are “really running” the case for passive investing can be compelling.

“In other periods, say the past four years, active management of portfolios can give huge above-index returns by simply avoiding the wrong sectors,” van Eyk says.

Today, van Eyk is “retired” from investment research, filling his time as “an external director and consultant” and, with the horses, of course.

But he hasn’t scratched himself completely from the research market.

“A lot of people still flatter me that there’s a gap in the market,” van Eyk says. “But if I do come back I would do something less stressful… like consulting.”

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