Fund managers’ stock continues to rise: An overview of Scotland’s fund management sector

By Ian Fraser

Scottish Financial Services Yearbook 2007

November 12th, 2007

Scotland’s fund management businesses have become adept at re-invention and survival in the face of wider pressure. But it is understandable that when a fund management firm gets eaten up by a larger, outside rival, it heralds a period of uncertainty and debate about the viability of home-grown business.

If you need evidence, you just need to look at the fates of Scottish Amicable Asset Management, Stewart Ivory and Ivory & Sime since they were respectively acquired by Prudential, First State and Friends Provident. However Walter Scott & Partners, seems to have bucked the trend with its sale to Pittsburgh-based Mellon Financial.

The Charlotte Square-based global equities boutique, created by former Ivory & Sime director Walter Scott in 1983, was sold to Mellon for around £300 to £400 million in May 2007. Yet the firm has since managed to boost assets under management by more than 18 per cent, from $27 billion at the time of the deal’s completion to $32bn today and it also looks poised for further rapid expansion.

The company’s founder, Dr Walter Scott recognised that the defined-benefit pension scheme space into which the company traditionally sold its investment skills was in terminal decline. He was attracted to the concept of a takeover by Mellon because of the US firm’s well-honed distribution network and experience of the fast-growing defined-contribution pensions market. Alan McFarlane, managing director at Walter Scott & Partners, says: “The single biggest attraction of the deal with Mellon is that our natural, core business is unchanged and we have been able to add distribution.”

After a period in the doldrums that arguably ran from the late 1990s until about 2002-03, Scotland has arguably reaffirmed its position as a thriving fund management centre. A vote of confidence was recently given when London-based firms including Axa Framlington and Fidelity International opted to establish or enlarge their satellite fund management operations in the Scottish capital.

Fidelity, which has had a London presence since the 1970s, is looking to create an office of at least 16 people at its new offices at 10 George Street. The Boston-based group has already appointed Jonathan Cobb from Standard Life Investments, and when he starts on 1st September Cobb will be looking to build a team of UK equity portfolio managers (focusing on the institutional market) to be based in Edinburgh.

Michael Gordon, chief investment officer of Fidelity International, says: “The opening of an office in the city is testimony to Edinburgh’s status as a financial centre. Fidelity hopes, over time, to contribute to the continued growth of the city’s deep pool of investment talent.”

Meanwhile existing players based in Scotland – including Standard Life Investments, Scottish Widows Investment Partnership, Baillie Gifford & Co, Martin Currie and Artemis – are all thriving. They have been massively helped by the bull market in both equities and commercial property funds over the past four years, which has fuelled both assets under management to a record level of more than £550 billion across the Scottish fund management sector.

The remuneration system clearly works in the fund management group’s favour. Basically they receive a percentage (usually 0.3%-2%) of the value of assets they manage, together with additional performance fees for superlative performance on some more esoteric funds, such as hedge funds and private equity funds. This means that, as long as an investment business is reasonably well-managed and has the basics of performance and client service in place, it can reap significant rewards from a bull market. Fund managers, often portrayed as leading gilded lives compared to their harder working confreres in professions such as the law, like to call it “demonstrable scaleability”

The two powerhouses of the sector remain Standard Life Investments and Scottish Widows Investment Partnership. Both have breached the £100bn in recent years, although investment consultants suggest that SLI, which has boosted assets under management to more than £140bn, has achieved better performance across its whole range of funds. The George Street institution was recently named as “global group of the year” at the Investment Week awards.

Keith Skeoch, SLI’s chief executive, says: “We now have clients in 26 countries and extra resource has been allocated to help grow our business in Europe. In addition to the continued success of our core UK equity, fixed income, cash and property expertise, we are building a strong track record in ‘category killer’ products – in particular global equities, global bonds, global property and private equity.

“We currently operate and have offices in the UK, Canada, Ireland, Hong Kong and the USA and have representative offices in France, Germany and South Korea. We also operate in India through a joint venture with HDFC. We share information generated locally and make sure that these local insights connect effectively with and further enhance our investment process.”

Colin McLean, chief executive of SVM Asset Management, which is currently offering strong investment performance following a number of recent fund management hires, believes that Scotland’s investment sector benefits hugely from having bigger life company subsidiaries based in Edinburgh. He says: “The life offices are a big part of why brokers and companies visit Scotland.”

Some observers have questioned Scotland’s ability to innovate in the fund management sector– pointing to the lack of hedge funds and exchange traded funds launched and managed from Scotland. The counter argument is that the current success of the six or seven investment “boutiques” operating from Scotland – including Aberforth, Artemis, Euronova, Edinburgh Partners, Saracen, SVM and Walter Scott & Partners – suggests there is shortage of entrepreneurial spirit among Edinburgh-based fund managers.

Edinburgh Partners, for example, is rapidly winning respect from the investment consultancies such as Hymans Robertson that act as gatekeepers for the institutional market, largely thanks to its “global unconstrained” investment approach.

Sandy Nairn, chief executive of Edinburgh Partners, says assets at the three year old firm have already risen to “between £2 billion and £3bn”. Edinburgh Partners last year put itself on the map by moving into new premises at 12 Charlotte Square and has boosted total staff numbers to about 50. In January 2007 it hired George Ritchie and Christine Montgomery as investment partners from Franklin Templeton.

Alliance Trust has been going through two years of fast-paced change under the leadership of Alan Harden, who took over as chief executive in January 2004.

Critical changes included the merger of the two trusts in June 2006 and the launch of an asset management business offering two Asian Oeics. The trust has also been diversifying into alternative asset classes and has acquired the private equity business Albany Ventures and SIPPs provider Wolanski & Co.

The coup de theatre for Alliance came in early 2007 when Alliance said it was building a new headquarters in Dundee and that it had hired Katherine Garrett-Cox (nicknamed Katherine the Great) from Morley as chief investment officer. She has been asked to reinvent the investment side of Alliance’s business, with a brief to launch new funds and construct a discretionary portfolio management business. However Alliance has come under fire from some activist investors for failing to address the “discount” between the share price and net asset value in its eponymous investment trust.

The biggest uncertainty facing the sector in Scotland hangs over the future of Resolution Asset Management in Glasgow – and to a lesser extent over F&C’s Edinburgh operation (the rump of Ivory & Sime). At the time of going to press, Resolution was seeking a merger with F&C’s majority parent, the London-based life insurer Friends Provident. If this deal proceeds, RAM would almost certainly be subsumed into London-based F&C and its future in Glasgow could come to an end.

An edited version of this article was published in the Scottish Financial Services Yearbook 2007. Although written in August 2007, it was not published until November 2007 owing to delayed printing of the SFS Yearbook

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