Still thriving as a centre of excellence

By Ian Fraser

Scottish Financial Services Yearbook 2006

August 7th, 2006

The bull market in equities, despite a faltering performance in May and June, has ensured that most Scottish based fund-management groups are performing well at the moment. But Anja Balfour, who manages £300 million of Japanese equities for Axa Framlington from a serviced office on Edinburgh’s St Andrew Square, still detects grounds for concern.

She says: “I wouldn’t necessarily say that the whole sector is thriving. It is disappointing for example that there have not been more start-ups, hedge funds and more entrepreneurial people.”

Balfour points out that the most recent major start-ups in the sector were Artemis in 1997 and Edinburgh Partners in 2002. And the only Scottish-based groups currently offering hedge funds are Martin Currie, Artemis and Euronova. Abbey’s Glasgow-based Talorcan hedge fund business was forced to hand all its money back to its investors, while Edinburgh-based hedge fund start-ups Ailsa and Kestrel have both been shut down.

Yet, even with the “correction” of mid-May factored in, most traditional fund managers are making hay at the moment. Three are arguably doing particularly well. These are Artemis, Aberdeen Asset Management and Baillie Gifford & Co. Each, in its own way, illustrates that “focus” – meaning the avoidance of getting sidetracked into striving to be all things to all investors – is a key recipe for long-term success in what remains a highly cyclical sector.

Martin Gilbert, for example, only managed to salvage AAM from the wreckage of the split-capital investment trust scandal by his decision to abandon the retail side of his business and reposition Aberdeen as an institutional-only manager (servicing the needs of, for example, large pension funds). The Harry Houdini of the industry basically recognized that his Granite City-headquartered firm’s name was too sullied by the split-cap debacle to retain any credibility in the retail space.

This shift in emphasis, together with the bargain basement acquisitions of Edinburgh Fund Managers and Deutsche Asset Management, enabled Gilbert to rescue the company which came perilously close to the brink. The company recently demonstrated it had turned a corner when it revealed that pre-tax profits climbed to £17.7m in the six months to March 31, up from £13.2m the previous year, and that assets under management have reached some £75bn. The bulk of the fixed income mandates handled by Deutsche have been retained, even as many of the equity ones ebbed away.

“Most fund management businesses are doing rather well at the moment,” said Mark Tyndall, chief executive of Edinburgh-based Artemis, which has grown its assets under management from a standing start in 1997 to £10.6bn at the end of April. “There’s nothing like a bull market to help people on their way. Revenues are stronger, management has improved; most investment firms are in much better shape than they were two to three years ago.”

Mike Balfour, chief executive of Glasgow Investment Managers believes one of the best things to have happened to the industry is that people from different business backgrounds are increasingly being allowed to run Scottish-based fund management firms.

“Such people are often able to take tough decisions that someone who has been a fund manager with he firm are unable to take”, he says. Examples include Willie Watt at Martin Currie and Gavin Stewart at Glasgow-based Resolution Asset Management. Neither has shirked from taking some tough decisions to ensure their businesses are well positioned for the future.

George Renouf, a director of private client specialists Cornelian, said: “Willie Watt has changed round Martin Currie dramatically; and Gavin Stewart has been doing some interesting things at Resolution.”
Standard Life Investments, managed by former HSBC economist Keith Skeoch, is another group that is performing well at the moment. It has grown funds under management to £124.8 billion, on the back of worldwide investment sales rising 141% to £2.5 billion pounds in its first quarter.

The mere existence of this volume of money being managed from Edinburgh is regarded as good news by other investment managers. For a start it ensures that the chairman and chief executives of global quoted companies bother to pay homage to Scotland-based investors when doing roadshows; and that there is a bigger talent pool from which to poach.

It therefore comes as no surprise that most Scottish based fund managers are keeping their fingers crossed that SLI’s parent company Standard Life manages to avoid the clutches of possible followings its July flotation.

Scottish Widows Investment Partnership, having gone through torrid times following the departure of Sandy Nairn and several other prominent investment staff in 2002, has been stabilised under its chief executive Chris Phillips. Assets under management at the Lloyds TSB subsidiary recently broke through the £100m barrier, on the back of a simplified fund range that has been made more accessible to retail investors.

Among specialist fund managers US-owned Blackrock, institutional boutique Walter Scott & Partners, Martin Currie and small cap specialists Aberforth all appear to be doing extremely well at the moment. And even without any deals, Baillie Gifford & Co, where a new management team was recently installed following the retirement of senior partner Richard Burns, has doubled its funds under management to in excess of £45bn.

What’s more, in the past five years a whole slew of “asset servicing” groups have moved into Scotland, including State Street, Citigroup, JP Morgan, Bank of New York and BNP Paribas.

Companies that are perceived as having had a more difficult 2005 include Colin McLean’s SVM and the Edinburgh arm of F&C Asset Management.

SVM lost about four fund managers during the year, apparently because they were dissatisfied by the founder’s reluctance to offer them equity stakes in the business. And F&C has suffered a string of departures, including that of finance director Ian Paterson-Brown, and fund managers Richard Bell and Stephen Grant, although it did recently strengthen its private equity team in the capital. The recent estimated £360m sale of Walter Scott & Partners, a company launched in 1983, to Pittsburgh-based Mellon Financial demonstrates the value that can be created in the sector.

Altogether, however, the picture is very different from the late 1990s, when Scotland’s fund management sector was in the doldrums. At the time several independent players were snapped up by larger players, with Stewart Ivory becoming part of the Australian group Colonial First State, Ivory & Sime becoming majority-owned by Friends Provident and Edinburgh Fund Managers and Murray Johnstone both becoming offshoots of AAM.

This article was first published in the Scottish Financial Services Yearbook 2006, published by Mediaworks (www.mediaworksltd.co.uk)

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