Scotland’s fund management industry is in need of a radical overhaul, with at least three firms on the critical list, according to Alastair Barbour, an Edinburgh-based partner at accountants KPMG.
Last week, KPMG — formed from the 1987 merger of Peat Marwick and Klynveld Main Goerdeler —issued a devastating critique of the global fund management industry, saying it is “a cottage industry in which over-rapid growth concealed many structural weaknesses.
The report, titled “Revolutionary Shifts, Evolutionary Responses: global investment management in the 2000s,” said the worst bear market in living memory has exposed fault lines and shattered consumer confidence.
No Scottish fund management group was prepared for the bear market when it kicked in in March 2000 and they have all been paying the price since, said Barbour.
“The entire industry was running on the back of the expectation of an ever-increasing bull market, which meant insufficient attention was paid to business basics,” he added. “Nobody was prepared for the downturn. And, since it came, the industry has been too slow to tackle its cost base.”
On Scotland’s fund management critical list
Barbour suggests that at least one of the more “troubled” fund management firms based in Scotland may not survive, either through being taken over or broken up. “Some firms in Scotland could disappear,” he said.
Candidates include the beleaguered Edinburgh Fund Managers, and possibly also Glasgow-based Britannic Asset Management and Aberdeen Asset Management.
Last week, industry lobby group Scottish Financial Enterprise revealed that funds managed from Scotland had shrunk to £287.8 billion between January and March — a loss of about £12bn (4%) from late 2002.
Barbour believes one key problem is that the industry remains “blinkered in the way it assesses remuneration”, for example, by handing out bonuses for achievements with no bearing on the bottom line, such as winning investment mandates.
“Bonuses should always be aligned to the needs of the business,” said Barbour. But he said Scottish firms Baillie Gifford, Isis Asset Management and SVM Asset Management are better placed to last out the long bear market. He said: “It’s partly their philosophy, partly the steps they’ve been taking to address things and partly down to luck.”
“Baillie Gifford’s philosophy is less radical than that of many in the industry. They were not diverted into the latest fads and not mesmerised by tech stocks. Instead, they stuck to their knitting,” said Barbour. “I would put SVM Asset Management in a similar category.”
In the KPMG survey, fund managers admitted the industry is blighted by too many inflated egos and an over-emphasis on the “virility symbol” of boosting funds under management, at the expense of customer needs and group earnings. KPMG and think tank Create-Research, which co-authored the report, concluded radical surgery is needed for fund management to have a sustainable future.
The report’s authors said: “Investment professionals developed a hugely inflated sense of self-worth as indices rocketed, with more loyalty to their craft than to customers or employers.” In the survey, fund managers themseleves accused the industry of launching far too many products, with little regard to customer need or whether these would be profitable.
One contributor said: “In the 1990s we sold dreams and delivered nightmares.” Another said: “We’re ripe for a cultural revolution.”
The report also slammed fund managers for doing little more than tracking the main market indices whilst clients were led to believe they were actively managing their portfolios. The report also said fund managers’ yardstick of success or failure — whether they have beaten indices such as the FTSE 100 — must be rethought.
Prof Amin Rajan of Exeter University, who runs Create-Research, said: “I am attacking the cult of the equity. Many of today’s problems have been caused by pension fund trustees who didn’t realise that they were trying to balance long-term liabilities by putting members’ money into a risky class of assets, equities.”
Barbour said among Scottish fund management firms Standard Life Investments was “moving along the right lines” with its recent decision to outsource the investment administration or asset servicing of £70bn of assets to Citigroup. In a deal announced last week, SLI said it had entered three months of “detailed evaluation” with a view to adopting Citigroup as outsourcer.
Around 90 investment administration people from SLI are due to transfer to Citigroup in September. Other firms shortlisted for the deal, believed to be worth around £60m a year, included State Street and JP Morgan Chase.
This article on the state of the fund management sector was published in the Sunday Herald on 29 June 2003