European asset managers received a heroes' welcome in the mid-to- late 1980s from US pension funds discovering the merits of international diversification. The UK managers in particular displayed impressive global reach and expertise and pension funds happily employed them.
US managers fought back, however, and over the next 10 years, while plan sponsors' levels of sophistication grew, they developed sufficient international equity expertise, or quite simply bought it. In recent years, Europeans have seen the mandates fall from their grip and today the European asset management industry stateside is having to play a little bit of 'catch-up'.
US-based managers are probably being selected more in terms of the international_equity searches than non-US based managers," admits Inga Sweet, consultant at Callan Associates in San Francisco. "When you are looking at a number of factors being anywhere from performance to organisational stability to personnel stability, assets under management, consistency of process, stability of process, I think that US firms have had a bit more success there."
Continental European managers make up only a 'minor' proportion of Callan's international equity database. And they are not alone. The proportion of European managers on Frank Russell's equity list is low, says Lisa Kopp, senior research analyst at Frank Russell in Tacoma, reasoning that continentals are not yet as advanced in their investment expertise and the UK market is very concentrated compared to the US where there are thousands of boutiques. "So even if we liked every one of them disproportionately, they could never comprise the same percentage," she says. William M Mercer's global client base tracking list is more positive, with global equities averaging out at 40/60 in Europe's favour, emerging markets 60/40 slanted towards the US, and global fixed income an approximated 50/50. And in the few cases where European equity has been put forward to US clients, the list has been dominated, quite rightly, by European managers.
European managers have traditionally tended to win on non-US exposure asset classes and in some esoteric areas such as European private equity investment which is steadily growing in popularity in the US. The type of European managers which come into Frank Russell's strategy are currency managers, global and non-US bonds, global and international equity, including developed and emerging market equity and debt.
BGI which recently won a $700m mandate for passive large cap equities for the $8bn Indiana Public Employees Retirement Fund, leads the list of European managers in the US with 107 mandates totalling $71bn under management, according to Mercer figures (see table). BGI is very much viewed as a local manager in the US market and, as Diane Paul at BGI in San Francisco keenly points out, the comparison cannot be drawn between viewing BGI as a European manager versus a US manager when consultants are making recommendations to their clients. "They see us as a US-based manager," she says. The same philosophy of course can be applied to the likes of Dresdner RCM Global Investors, which ranks second with $25bn US pensions assets under management.
However, consultants are keen to point out that the nationality of the manager bears little significance in the eventual choice made by US plan sponsors, which tend to be less insular in their thinking than their European counterparts. Domain is not important - product and performance is. Taking this view into account, there should be more of an open window of opportunity for European managers in the US than for US managers in Europe, where in certain markets, the reliance on the local providers continues to prevail.
The consensus is that the UK firms in general are winning more business based on the sophisticated products and investment techniques offered compared to their continental counterparts. In particular UK firms are winning more EAFE products than global equity mandates. In the latter asset class the US market comprises approximately 40% of the index, warranting a manager with good US equity expertise. "For global mandates, it is getting harder and harder for non-US firms," says Dan Allen at Wilshire Associates in the Netherlands. And for fixed income, in general US plan sponsors have adopted the diversification argument less than on equity, so there is even less opportunity for non-US managers there.
A clear global marketing strategy is another area which, according to consultants, can let down UK and continental European managers alike. "If you are looking at how they come together in a worldwide package, the performance has not been as uniform and the process used in the teams are again different in terms of their quality," says Kopp. "So particular managers seem to have particular areas of expertise that we might see more highly than others."
Eleven European managers are running US equity mandates according to the Mercer 1997 European Pension Fund Managers Guide, with the largest mandates held by Dresdner, ABN AMRO and Fortis, running 52, 41 and 53 mandates respectively. But on a closer look the figures are misleading. Dresdner, with $25bn in US assets under management, got in by buying RCM, which at the time of acquisition held pretty much the same amount in domestic and international equity, fixed income and balanced/ asset allocation products. For ABN AMRO, which maintains its position as the largest foreign bank in the US with assets of $414bn, these mandates represent US equities run on behalf of European subsidiaries of US companies. And Fortis' US equity mandates are run by a US manager called 1838, in which Fortis has a stake.
European managers have made limited inroads into the US on their own. The lack of clear strategy and marketing effort have let them down, according to one consultant, and as a result they are rarely considered or put forward for mandates. Despite the likes of Paribas, which won an account with CALPERS, they are not considered as substantial players in the market.
Continental European managers in general may be failing to come up on the consultants' lists as they are viewed as buying assets as opposed to earning them. "It's been a difficult road to generate growth through their own efforts."
"The continental managers in general are just not as advanced in the state of their investment management products as either the UK or the US firms," says Kopp. "I think some of that is reflected in the recent activity where they are trying to buy expertise elsewhere and use that expertise to help reshape some of their own internal operations."
Consultants feel Baring, Schroder and Morgan Grenfell have done well in the US. Baring's Pacific and Japan-only product has been successful, and the manager is seen to have good EAFE capability. "They bought Endowment Management and Re-search a number of years ago in Bos-ton so they developed investment capabilities in Boston, and in my opinion, the right way," says one consultant. Schroders is also viewed in the US as being strong in Pacific and international equity.
Bank of Ireland is one manager that has really cracked the market. It now runs 45 mandates for US pension funds totalling $5.5bn. "Unique strategy, bottom-up, global attitude - they have done pretty well," says one consultant."So has Baillie Gifford. Long-term business strategy, long-term good performance and they win mandates."
The US is not a closed market for the Europeans. But it is a closed market for managers that do not present a clear enough understanding of the needs of the US pension fund, particularly when the competition within the US is so strong. As Allen at Wilshire Associates says: "There is room for the good continental or UK managers." Rachel Oliver"