Boutique cashes in on the sweet smell of success

By Ian Fraser

Sunday Herald

May 16th, 1999

He may have earned himself a reputation as the enfant terrible of Scottish finance, but Ian Fraser finds Colin McLean unrepentant about his firm’s approach to cashing in on the investment trust sector

FROM his sixth-floor office overlooking Princes Street and the castle, Colin McLean has an unparalleled view of Edinburgh’s city centre. To the west he can see the rooftops of financial players such as Scottish Widows and Standard Life. Their glitzy post-modern buildings afford equally magnificent views of the Edinburgh skyline.

But this is where similarities with the investment boutique that McLean founded in 1990 – Scottish Value Management – appear to end.

McLean, an relatively ascetic 46-year-old, does not have much time for the financial establishment. “He can be a prickly character, and has fallen out with quite a few people,” warns one financier. As a contrarian investor, McLean pursues a different investment path. Rather than follow the herd into the fashionable stocks of the day, he prefers to scrutinise the balance sheets of companies neglected by larger institutions.

For example, to establish how different companies are performing, he likes to closely watch the margin patterns within an industry sector. If McLean and his seven-strong investment team decide that a business’s intrinsic value is not reflected by its share price, they pile in and buy a significant portion of the shares – even if it’s in an unfashionable sector such as investment trusts or small and mid- capitalisation companies.

The approach enabled him to spot the potential of the Asda, soon after Archie Norman’s appointment as chief executive in 1992. The then troubled supermarket chain has turned out to be one of his best investments.

 “We founded this business with aim of taking a value approach to investing,” said McLean. “A lot of other houses, for example Aberforth, had been set up at the time to focus on small cap companies. But our focus is in terms of style rather than size.”

Today, Scottish Value Management has around £650 million under management. Around 10% of these funds are invested in Scottish Value Trust, which McLean founded in 1991 following a stormy extraordinary general meeting in which Bremners, a listed Glasgow department store, was transformed into an investment trust.

McLean has since earned himself a reputation as the enfant terrible of Scottish finance, by shaking-up poorly performing investment trusts and closed-ended funds. This has made him enemies in Scottish financial circles but he believes that SVT has been a force for good, by galvanising change that was long overdue.

SVT’s objective is to cash in on the changes in the investment trust sector – notably the eagerness of institutional investors to get their money out and the embarrassing 10%-20% shortfall between the share values of many investment trusts and their actual asset values.

It was with this in mind that, in the mid-1990s, SVT bought one-quarter of Ivory & Sime’s Enterprise Capital Fund, then lobbied for the management of the trust to be transferred to JO Hambro. The move caused unease among members of the ‘Edinburgh mafia’ but a 20% gain for SVT shareholders.

“The right strategy for any investment trust is to address the problem (of discounts) and not just hope it will go away. Generally, I think we’ve had a positive effect on the sector. It has pretty much grasped the nettle and most trust boards are now alert to the realities of the market place and the exodus of institutional investors.”

McLean believes that many venture capital trusts are undervalued, partly as a result of investors’ concerns about low levels of liquidity. With this in mind, SVT may have set its sights on shaking up Abtrust Scotland – a venture capital trust in which it has a 28.52% stake and Legal & General has 12.08%.

Abtrust is predominantly invested in private companies (including Cala, Grampian Country Foods and John Wood Group). Together, SVT and Legal & General are expected to press for changes ahead of a continuation vote due in 2001.

McLean said enigmatically: “Together with Legal & General we do have a degree of influence… Aberdeen Asset Management has already proved itself to be capable of creating internal solutions.”

His other recent targets have included Mercury European Privatisation trust, which has agreed to an overhaul following pressure from Scottish Value Trust, Advance UK and arbitrageur the Liverpool Partnership.

GIVEN his lack of tolerance for poor performance among investment trusts, how does McLean feel about the discounts in his own? Does this not queer his pitch, given that they’re the very thing that Scottish Value and other “vulture funds” would like to eliminate elsewhere?

A recent letter in Investors Chronicle bemoaned the fact that McLean and other star investors were still being lionised in the media “in seeming complete disregard of the mediocre performance of the fund he manages”. McLean, however, seems unrepentant.

“Three or four of our investment trusts trade at discounts but, in all but one, the discounts are coming down. We’ve been proactive, in that we’ve bought in a bigger percentage of equity than anyone else across their group. We’ve sought to epitomise best practice in running trusts, and that could include buy-ins and other things.”

McLean admits, however, that certain of his other savings products have suffered from less than sparkling performance.

“We’ve had more of a focus in small and mid-cap companies, which have lagged the FTSE by 20% and 10% respectively. We were also affected by the illiquidity of some of the asset classes we’re in.”

An ex-business associate said: “Colin used to take a dislike to companies that moved to fancy new offices or had a fountain. “Strangely enough, the downturn in his own fortunes seemed to commence at the time of his own office move.

“He has a terrific sense of humour but – like a lot of very successful people – he has a tendency to believe his own publicity and take himself a wee bit too seriously.”

Observers believe that McLean is now in the process of reinventing his business. “As a protagonist in the sector, he seems to be following his own logic,” said one. “With discounts on the way up he must be questioning the future of his own trusts. Despite buying back a significant number of the shares, the discounts steadfastly remain. He is going to have to allow investors to exit at a price closer to net asset value.”

Some other Scottish Value vehicles have performed better. Last November, SVM’s European Growth Fund came top in a Business Week survey of offshore equity funds.

With a five-year return of 261.2%, it beat off rival funds managed by the likes of Fidelity, Gartmore and Mercury. McLean believes that privatisation and deregulation will continue to power European equities forward.

Earlier this year, SVM launched a specialist hedge fund named Highlander, whose administration, regulation and stock exchange listing are in Ireland. “It’s a hedge fund in the traditional sense. You go long on shares you like but also sell short on shares you believe to be expensive.”

McLean expects that – despite the notorious $3.75 billion collapse of Long Term Capital Management last autumn – Highlander will attract around €100 million. He believes that hedge funds can now earn a place within mainstream institutional portfolios. An observer said: “I suspect that hedge funds – which by their nature are very actively managed products – will become McLean’s new focus.”

ASKED about his intentions for the future, Colin McLean said: “There’s a lot of opportunity to develop as a specialist boutique. I think we have geared up our marketing quite a bit. We recognise that we need to find more private shareholders for the trusts and to market our offshore funds more heavily in Europe.

“We’re looking for steady growth in funds under management and profitability – those are the business issues we look at rather than purely size. There are plenty of fund management groups with between £2 billion and £3 billion under management that make less profit than us … Framlington, for example.”

One secret of McLean’s success is that he runs a minimalist business. Despite £650 million under management, Scottish Value employs just 14 people, seven of whom are investors. The two co- founders are McLean’s wife Margaret Lawson, an experienced investment manager, and Donald Robertson, former head of investment trust administration at Ivory & Sime.

“We use a lot of external distribution, which means we don’t need a huge marketing department. The same things goes for administration, which is outsourced to RBS Trust Bank.”

“The secret is to make sure that most of the people within the business are close to value creation – meaning investment management and client service. The more you restrict staffing elsewhere, or outsource it, and keep the business simple, the more profitable you’ll be.”

Mini profile

Born: October 1, 1952

Educated: Jordanhill College School, Glasgow. MA in economics and statistics, Glasgow University. A contemporary of Andrew Neil and Gerry Malone.

1974: Joined FS Assurance (now Britannia Life)

1982: Established Britannia Investment Management in Glasgow.

1986: Head of investments at Scottish Provident.

1988: Managing director of Templeton’s European operations. Set up Templeton Emerging Markets Trusts, transferred Templeton’s UK operations from London to Edinburgh.

1990: Set up Scottish Value Management

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Posted by Ian Fraser on May 16 1999. Filed under Article Library. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry