Back in the glory days of UK balanced management, Gartmore ranked in the top five managers who contended for practically every piece of pension fund business, while many other asset managers were left out in the cold or having to feed off the crumbs that fell from the golden circle’s table. Then there was the fast fall from grace, precipitated by across the board poor performance by this group and Gartmore was in exterior darkness.
No longer, claims Frances Davies, a Gartmore Investment Management director and head of global institutional business. The firm is ‘Back in contention’ – a slogan that describes “exactly where we believe we are” – she maintains.
Of course, Gartmore is in many places at the same time. It is facing into the post Paul Myners era – he of Myners Report fame. And the aspirations of its US owner, major insurance group Nationwide, which bought Gartmore from NatWest Bank in 2000, have to be met.
But Davies has her own balance sheet. When she joined Gartmore in 2000 from GMO Wooley, she found that while the institutional side was important in terms of assets and revenues (total assets are £50bn (E71.3bn) of which 75% is institutional including the recent addition of Govett with £1bn in assets) not all was as it should or could be.
On the plus side: “I saw much goodwill around from both clients and consultants. In addition, there was a tight management team with short lines of communication.” More important perhaps was that it had a clear strategy about where it wanted to go. “This had already been put into place before I arrived,” she says, pointing to the sale of the firms passive business in 2000 to SSGA.
“On the downside, I was inheriting a business in decline, with poor investment performance, well below median. The team structure on the institutional side looked pretty old-fashioned. Segregated was separate from pooled, the account directors were not sitting with the account managers, and the unit trusts mix was confusing as there were too many of them. Overall the business was badly positioned to regain the leading edge!”
One of the first priorities in her view was to obtain better investment performance, but this had to be delivered in the right products that institutional investors in Europe and elsewhere would want over the next five to 10 years. “So we needed to make some major shifts in terms of our products.” The long overdue move from balanced – the multi-asset mandate measured against the peer group – to specialist had to be engineered.
A sales culture had to be engendered as the business was relying overly on the more comfortable relationship management approach. “We needed to be very clear that we had to go and get new business.
“But above all, we needed to inject a burst of energy back into the division,” Davies declares. “Everything was a little depressed – with people soldiering rather than bouncing along.”
That was the story on the internal side. “Externally we were facing massive challenges at the time,” she says pointing to the appalling markets, FRS 17 and so on. “There is a very radical review of benchmarks going on. Plus a growing appetite for alternative investment products, with hedge funds being viewed as part of the furniture for pension funds.”
Davies set her group to work tackling these areas. “On the investment performance, we transformed the UK equity team, which was the biggest problem area. It was critical to get this right.” With a number of new hires, there was “wholesale changes” on the UK side, she says.
A high alpha platform for the institutional market was created comprising the hedge fund and the focus teams. This has had the right impact on performance and as she sums it up somewhat dryly – “these are now saleable products”.
The European equity team was boosted with a new head and the merging of the pan-Europe and continental teams together. The credit research team has been beefed up and “transformed”.
On the quant strategy side, a new system was brought in called Vision, where Gartmore reckons it is the first European manager to license this. “We use this to understand the risks being undertaken in portfolios better.”
The leadership of the investment division has also been reorganised. “The job of CIO is becoming enormously complicated and we felt Peter Chambers was being spread over too many areas. So we split the role into three components, with an overall Gartmore head of equities in Philadelphia, who is responsible for the performance of the UK-based equity products; we have a head of London equities with responsibility for UK, European, emerging markets and global equities; and the head of fixed income reports directly to the CEO in Philadelphia.”
On the product range, there was a deliberate shift up the risk curve. “Pension funds and other investors appointing an active manager want to see clear daylight between the index and what they are receiving. So we are being asked for anything between 1 and 3% above the index. Sometimes in Europe investors want the aggressive alpha products like the focus funds. We are fortunate as Gartmore has had a good cluster of talented high alpha and long short hedge fund managers from early on.”
While the investment process has a unified approach, Davis says that the group does not fit into any of the style boxes. “We see our role as being able to create performance out of every market condition. Our current mix proves that.” Both the US team and the London team run from a uniform platform, subject to the constraints of particular markets – emerging markets are different to the more developed, she points out. “Our Philadelphia team was originally based in London and moved lock stock and decided to stay there.”
The long-short managers also manage long money. “We find the two disciplines work well together and benefit each other.” Good ideas for hedge funds are welcomed. To date, the hedge group has garnered some $3bn in hedge fund assets. This includes a fund of hedge funds product – Gartmore Riverview, which was bought in June 2002. This has been readied for sales in Europe and is obtaining a good level of interest, Davis claims. “Institutions there are going to include these absolute return products in their benchmarks in future.”
The group did some “market positioning” checks to see what the outside world really thought. “What came back was a great deal of goodwill but a recognition that we still needed to do better in certain areas. Of all the old balanced groups trying to reinvent themselves into a specialist manager, I reckon we are ahead of the pack.”
The global consulting group has been expanded, with four in the UK and one in the US, in order to reach more consultants, particularly the smaller and medium-sized firms. Even in the UK, a drive to have direct relationships with pension funds has proved its worth, despite the dominance of the consultants in the market, she says.
It makes the funds ask their consultants why isn’t Gartmore on their buy list. “In Europe, the approach is through direct sales to pension funds in Austria, Germany and Switzerland, but using consultants where they are active. We are active in Scandinavia, and the Netherlands is somewhere we would like to have a presence and we are working on that,” says Davies. In time, the model is to set up local bases in Europe.
The US sales team works directly and to the consultancy community. The third-party distribution, sub-advisory, white label area is an expanding one too.
In the US, where Nationwide is big in mutual funds, Gartmore is the only asset manager brand in the group. “We represent the asset management business for them, as they don’t have any investment management products. We get distribution there for our retail funds, as there is not much opportunities on the institutional side for funds.” The Japanese like absolute returns and these products are selling there.
But the acid test of progress is new business. Gartmore claims it has won over E3bn in new assets in the past 12 months, with a significant part coming from the continent. “This comes from a broad range of products,” she says. “And the decline in the balanced business is halting. There is always going to be a demand for multi-asset managers from the smaller pension plans.”
The hedge fund business has proved to be something of a hedge itself against the decline in the traditional equity products and that has helped the revenue streams and the bottom line says Davies. “Our profitability has gone up relative to our peer groups.”
As a big US insurer, the parent group has largely fixed income assets and Gartmore handles a portion of these. “As they move into equities – and they have transferred $4.5bn (E3.7bn) into US equities – we do hope to be their preferred provider.” The loss of the NatWest link did result in an outflow of assets that the Nationwide connection has not yet made up so far. “But there is a lot of interaction between the two of us and we find it a supportive relationship. It certainly helps for US distribution, which would be very difficult otherwise.”
But Davies is relaxed about what the actual shape of the business will be in say three years’ time. “We have our platform set up to operate in the fixed income and all the major equity classes, with a range of hedge funds designed to run through all the capabilities. As the investment team is a large fixed business cost, we have to be open to as many business channels as possible. But as to what determines the mix of the business in future will be a result of market conditions, investment performance and clients’ appetite. So long as we are positioned to do as well as we can in all those channels that is where we want to be.”
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