Swip slashes strategies and staff in drive for wealth

By: Ian Fraser

Published: Financial Times

Date: April 23rd, 2012

Ten days ago, Scottish Widows Investment Partnership was caught on the hop by a leak. Though not quite Watergate, an informant, assumed to be a disgruntled fund manager at risk of being collateral damage, had leaked news that the group’s equities business was being savagely restructured.

This forced the Lloyds Banking Group subsidiary to bring forward its carefully planned announcement by five days and it went into communications overdrive.

Dean Buckley, chief executive of Swip, says: “We made the announcement exactly as we would have done on the Tuesday (April 17), but did it one hour after receiving the first call on the Thursday afternoon (April 12).”

However, he concedes that the “rushed way” in which the announcement had to be handled caused a “loss of empathy” in terms of how the changes were portrayed. Headlines such as “Lloyds sacks half of fund managers for robots” must have been particularly galling.

Swip, which merged with a part of Insight Investment two years ago, has for some time been planning to streamline its £54bn equities business by shutting down its regional equities desks – UK, US and emerging markets – and focus on managing portfolios using quantitative as well as fundamental techniques, taking account of factor risks.

The announcement of the restructuring comes less than three months after similar surgery at Aviva’s fund management arm. On January 31 Aviva Investors announced it was shedding 12 per cent of its workforce, or 160 people, including its European, emerging markets, global, and sustainable and responsible investments equity desks.

Swip’s overhaul will see the loss of 23 out of its 150 fund management jobs, the termination of 20 strategies, the closure of some equity funds and the handing back of £2bn of the £28.3bn that the group handles for third party investors to clients.

“We’re going to focus our ‘high alpha’ around global equities,” says Mr Buckley. “The ‘high alpha’ around domestic and regional we’re not going to do any more.”

Once the repositioning is complete, Mr Buckley says Swip will manage £52bn of equity assets, of which £5bn will be in “active high alpha”, £7bn in passive funds, and about £40bn will be in quantitatively managed portfolios.

He says the overhaul was triggered by weaker demand from clients for regional equities management and stronger demand for a global investment perspective.

“There are certain things we’re not going to do any more. These were tough decisions but they needed to be taken in the context of the changing demands of our clients,” he says.

Clients have become more sophisticated and have access to a wide range of passive building block and to “high alpha” strategies aiming for high returns, says Mr Buckley. “They have also become more demanding in terms of the trade-off between risk and return and the price they are prepared to pay to access a risk/return profile.”

Since January 2011 Swip has moved £8bn of mostly international equities money into the quantitative investment team, says Mr Buckley. “We’re now completing and moving a significant volume of UK equity assets into that area as well.”

The group’s quant team, launched in 2007, is run by Sean Phayre, a former Aberdeen Asset Management and Edinburgh Fund Managers “quant” who has a PhD in statistics and mathematical modelling. The team’s assets under management will virtually double from their current level of £27bn as a result of the move.

Portfolios will be put together by the quant team using the best ideas from the analysts in the global equities team and “optimised” against the risk/return requirements of the client. “They will have a higher probability of delivering the return objectives of the client,” says Mr Buckley.

Sitting in Swip’s Edinburgh head office with a view of the castle behind him, Mr Buckley says investors are wondering whether “benchmark plus” is an efficient way to manage equity portfolios. He detects growing demand for having an “index tracker” or passive portion, topped by an alpha chasing portfolio, for which he believes investors are willing to pay a premium. “If you put those two things together it creates a better risk-adjusted approach, whilst arguably doing it more cheaply.”

Mr Buckley admits Swip’s persistent underperformance in UK equities influenced the decision to restructure. “Clearly in an environment where there is less demand for a capability, only the best will survive.”

But he denies Swip – which had assets under management of £143bn at February 29, of which 20 per cent is third party business – has any intention of following Legal & General Investment Management and BlackRock down the index-tracking route. “Our clients want active management. This strategy doesn’t move any funds [into] passive.”

Mr Buckley believes the restructuring should ensure Swip is well positioned ahead of the UK’s retail distribution review, which takes effect next January and will ban the payment of commission by product providers to financial advisers. “One of the objectives of RDR is to create much more transparency across the value chain. Customers and fund aggregators will be demanding greater value for money at each point in the value chain. Providers across the value chain will have to demonstrate that they are providing value for money.”

Hargreaves Lansdown senior analyst Meera Patel says: “There are not many life companies that are good at running active retail funds. Swip should be focusing on what it is good at, which may be more institutional-type or benchmark-oriented products.”

There have been suggestions that Swip executives approached senior Lloyds executives about a possible management buyout of the fund management arm earlier this year. But Mr Buckley says Lloyds could not be more committed to continued ownership of Swip, which came into its fold with the acquisition of insurer Scottish Widows in 2000.

“They’ve put the development of the wealth business at the centre of their strategic ambition. But it would be very difficult to be in the wealth business without having a strong investment proposition. Over and above that, we’re capital-light in a banking environment that’s becoming increasingly capital consumptive.”

Despite losing a £2.8bn third party mandate last year, Swip managed to increase its pre-tax profits to £99m in 2011, up 13 per cent on the previous year. Profitability rose from £32m in 2009, to £88m in 2010. Mr Buckley says he is “delighted” with the 2011 figure, especially given the difficult environment, particularly in the second half. “We earned some decent performance fees, revenues were strong and costs were well controlled.”

This article was published in Financial Times (FTfm section) on Monday April 23rd, 2012

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