THE BIG PICTURE: Life company owned fund management businesses have raised the profile and reach of their operations, reports Ian Fraser
Life company-owned fund management businesses in the UK have been seeking to change their spots in recent years. A decade ago, most were “investment divisions” of their parent life companies, where a lack of autonomy and a top-down management style meant they struggled to retain quality talent.
In the past few years, however, many life companies have been taking determined steps to reinvent their fund management arms, often seeking to distance themselves from the culture and identity of their parents and to develop remuneration policies that match those at independently-owned fund managers.
Many have been chasing the holy grail of sustainable long-term investment performance — “high alpha” — in a bid to win recognition from the industry’s gatekeepers, the investment consultants and independent financial advisers.
The insurers have been attracted by the profits that can flow from a fund management business, especially one that is successful in the third-party space.
Roman Cizdyn, analyst at Oriel Securities says: “Having a strong fund management business can be quite important for a life company. They generate cash, which is a lot more tangible than the embedded stuff that a life company makes.”
Another driver is the need to compete internally for their own policyholders’ money, which is a consequence of the widespread switch to wraps and open-architecture systems, as has been the need to justify their existence and bolster their images by winning third-party funds. That need became all the more pressing after Abbey National shut down its fund management operation and outsourced some £27bn of funds to State Street Global Investors in 2004.
Andy Barber, head of European manager research at Mercer, says: “Some still have their hands tied, but most of the life companies have been making efforts to remove the shackles from their fund management businesses. For some this has not been an easy process.”
Standard Life Investments appears to have pulled off the transition better than most. The company started chasing third-party active mandates soon after it was created as a wholly-owned subsidiary of Standard Life back in 1998. The business has since grown its third-party assets to £31.5bn and was recently ranked as the world’s sixth most successful accumulator of non-US assets by Global Money Management.
Keith Skeoch, SLI’s chief executive, believes that Edinburgh-based SLI has come of age. He says the fact that his parent insurer “remained committed”, even as it suffered through the vicissitudes of its own enforced change of status, was critical.
“Sandy Crombie [SLI chief executive until 2004, CEO of Standard Life Group since 2004] recognised that if we wanted to achieve strong investment performance we needed good people, which meant that we had to have a different culture and the ability to pay them the going rate,” says Skeoch.
L&G Investment Management went down a totally different route when it launched a passive management business, offering a commodity-based service at a knockdown price, in 1986. Today, this has £150bn in third party assets which, even at low margins, can prove to be highly profitable. Ronnie Bowie, partner at investment consultant Hymans Robertson, believes that L&G’s decision made sense. “They lacked a compelling active offering, and opted to make a virtue of necessity.”
Mr Bowie says that for any investment house owned by an insurer to have a chance of winning third-party money, its parent must remain consistently committed to playing in this space through thick and thin. Whereas he believes L&G has been committed to LGIM throughout the past 15-20 years, he believes “the jury is still out” on whether Aviva is fully committed to Morley Fund Management.
Some observers have suggested this was what drove Keith Jones to step down as Morley chief executive. However, an Aviva spokeswoman says: “Fund management is integral to what Aviva does. Morley has been building up its third-party investment management business over a long period of time and has had some good successes.”
M&G, the UK’s largest unit trust group, has gone down a different route again. Since it was acquired by Prudential in 1999, the investment company has remained committed to playing in the UK retail market. But at the time of the deal it turned its back on its third-party institutional business, selling £12bn of funds to Deutsche Asset Management.
M&G chief executive Michael McLintock says this was because of a desire to remain focused. He has since decentralised decision-making, creating five business units each with their own boards. “Today we’re delivering great investment performance, attracting record fund flows and delivering very strong profits growth.”
Scottish Widows Investment Partnership (Swip), by contrast, suffered a haemorrhaging of institutional money in the wake of its merger with Hill Samuel Asset Management six years ago, and was further destabilised when Sandy Nairn and a posse of other fund managers walked out in 2003.
However, Andy Frepp, sales and marketing director, says the outflows have been reversed and third party assets have grown in each of the past three years.
The group appears to be performing well in the retail space. A recent report by Feri Fund Market Information ranked it as the UK’s number one for net retail sales in the second quarter, and it also recently won a £150m absolute return mandate from the Manx government. However, Swip has yet to win over all the institutional consultants. One says: “Swip is not currently on any of our buy lists. Lloyds TSB has yet to decide whether it sees fund management as a core business.”
Charles Plowden, joint senior partner of Edinburgh-based investment partnership Baillie Gifford, believes life company fund managers are set to benefit from changes in the way pensions are being managed post the Myners Review.
Plowden says: “Life company-owned fund managers are actually quite well-placed for winning external pensions business at the moment. Their skills in bonds, private equity, property and liability-driven investing match the way the market is evolving.”
At the end of the day, however, retaining quality investors will be critical, as will building structures that permit diverse investment cultures to co-exist under one roof. Mr Cizdyn says: “Unless they find ways of rewarding fund managers appropriately and giving them a share of any success, they will never be able to compete [with the independently-owned fund management groups].”
This article was published in the Financial Times’ FTfm section on 25 September 2006