Few can claim to have been investing in emerging markets for 130 years. But Martin Currie & Co was helping to finance the North American railroads in the 1880s, when the US occupied the spot that China occupies today. That pioneering spirit lived on; it made its first Japanese investments in the 1960s, opened an office and a fund in China in 1997, and rolled out its first hedge fund - long/short Japan - in 2000. A new strategy partnership with Singapore’s APS Asset Management looks set to be a leading independent A-share active equity business.
High alpha, Asia, emerging markets: with hindsight, all great places to have been through the crises of 2007-09 - but they certainly did not feel that way at the time. Martin Currie’s AUM fell from almost £16bn (€21.7bn) at the end of 2007 to £10bn (€16.8bn) a year later as a collapse in risk appetite sent investors scrambling back to domestic markets and benchmark weightings. Moreover, far from putting up gates - even on relatively illiquid strategies like its China Hedge fund - the firm actually went from 90 to 30 days’ redemption notice on many of its absolute return products. The fact that it performed so well meant that Martin Currie’s $2.5bn hedge fund business alone lost almost two thirds of its assets.
As a result, turnover and profits dropped 30%. Many would have taken their eye off the long-term game and cut investment in a panic about losing ‘star managers’. Martin Currie ploughed ahead, opening offices and acquiring a high-profile global emerging markets and Latin America team from Scottish Widows.
“Our experience of the early 2000s led us to believe that if you didn’t stay focused on what you were trying to do strategically, you were likely to find it taking two or three years to create forward momentum coming out of a crisis,” says CEO Willie Watt. “But of course one of the casualties of these strategic decisions was short-term profitability. We tried to mitigate that by cutting back on bonuses, which we were able to do without making significant numbers redundant.”
In terms of client base, the new offices offer a clue to that strategy: nicely diversified by type, there remains a need to balance away from North America and the UK (66% of assets).
“In the developed world, formalised pension assets are under pressure,” says Watt. “But the experience of a scheme in the UK is very different from that in Australia. Even within Europe, pension schemes in Finland are in a much more positive position for taking investment decisions than the UK’s. And we always felt we needed more clients in Asia: our clients there have tended to be sovereign wealth funds or wealth managers. Pensions will develop longer term, but it will take time for those systems and assets to build up.”
In terms of investment focus, the arrival of the SWIP team points the way. Identifying
its core strengths in 2009, the firm focused on three things: Asia and global emerging markets; high alpha; and a ‘best-of-breed’ ambition.
That trips easily off the tongue - but, pursued seriously, it raises difficult decisions. It was
clear, for example, that the firm’s benchmark-plus UK equities portfolios, underperforming in an over-supplied market, no longer fit the bill, and they were folded into global equities.
“Investors are buying passive or highly active, or going global,” says head of UK institutional and global consultant relations David Townsend. “We could either sit back and watch those assets slowly drift away, or bite the bullet, give people their money back and refocus [our] resources. We gave notice, and the feedback was that many of those clients had been thinking about getting out of UK benchmark-plus-2% for some time.”
It is easy to generate good press by launching fund after fund. Closing them always raises tricky questions. But this was decisive action, and folding UK into global looks like a better fit with Martin Currie’s evolving strategy in any case: 72% of assets is from ex-UK clients and 90% is invested ex-UK; and its ‘one-floor’ model for research is an explicit recognition that it runs global portfolios of global businesses.
The fact that nearly all 57 investment professionals - save the handful in Shanghai - conduct their visits to 3,000 or so companies each year from the same floor in Edinburgh was one reason the new head of investment, John Pickard, joined Martin Currie last October.
“Maybe you garner more information being there on the ground, but you lose a lot of that through transmission to where multi-region portfolio decisions are made,” he says.
A strong focus of research is into the ways region and sector dynamics feed into change around bottom-up factors like quality, value and growth potential. Across each regional team researchers and portfolio managers will look at similar stocks in different parts of the world - underlining the importance of the formal monthly meeting to compare notes.
“Good ideas can be leveraged through a range of different portfolios; work doesn’t get duplicated; and if someone has an idea outside their normal range of expertise, someone else can pick it up and run with it,” says Pickard.
Less formally, the advantages of having all that expertise in one room were evident when the Tohoku earthquake struck on 11 March. Two members of the Japan team were in Tokyo, but Pickard says that the presence of those in Edinburgh was felt even more keenly. “They were all over the floor discussing the implications of global supply-chain disruption based on their intimate knowledge of Japanese industry,” he recalls.
Pickard is a convert to the one-floor model from his days at Phillips & Drew - a culture he feels was lost as that firm was globalised and institutionalised within UBS Global Asset Management. And that exemplifies another long-term trend that Martin Currie is anxious to get the right side of - the popularity of nimble, high-alpha boutiques and big institutional pure-beta providers, and the growing no-man’s land in between.
Its solution is the idea of ‘the big boutique’. Again, that sounds great - as long as it doesn’t translate into the diseconomies of scale of the ‘big’ active bottom-up manager with the lack of client-facing flexibility of the ‘boutique’.
The firm’s approach to the problems of scale is suggested by the pruning of UK equities: keep alpha-generation focused by limiting product proliferation. For every region or sector, there will never be more than three products (‘core’ index-plus; ‘high alpha/unconstrained’ long-only; or long/short ‘absolute return’).
“The GEMs team ran eight different strategies at SWIP,” observes Townsend. “Here they run one core, multi-cap index-plus GEMS portfolio and one high alpha Latin America fund, and can pool all of their alpha in one place and build a phenomenal franchise.”
That poses the danger of the boutique’s ‘build it and they will come’ mindset. Again, pruning UK equities demonstrates adaptation to the market, but Townsend argues that it is just as important to maintain dialogue and an open mind with clients and advisers about how specific strategies might be deployed by different investors.
“Global resources is a good example,” he explains. “I have conversations about that as a long-term growth story, as a real-asset or inflation play, as a next step for those who have pure commodities exposure, or as a carve-out from UK or Australian equities, for example, that can allow investors to split into both a purer country portfolio and a more diversified, globalised resources portfolio.”
Another intriguing example of a product meeting unexpected needs is Asia Long-Term Unconstrained. A low-turnover, 25-30 stock portfolio geared for steady long-term earnings expansion and benchmarked to GDP growth, most of its assets come, predictably, from sovereign funds, family offices and endowments. But its one large UK DB scheme client packages it up with other strategies in an inflation-plus portfolio. Wrap it up with standard index-plus Asian equities and it significantly improves the overall Sharpe ratio, Townsend adds. “Again, we have a strategy, and while we won’t come up with 101 different ways to package it, we will work closely with you to come up with ideas about how to use it in your broader portfolio context.”
Balancing focus with flexibility is easier said than done, but Martin Currie has made its case through good performance and not-so-good. It is the keynote of a strategy to avoid the fate that surely awaits many of its peers in the traditional active equity world.