Irish managers regroup
The Irish government has opened the gates to asset managers and is about to press Ir£5bn(e6.3bn) into their hands some time this year. The legislation was passed before Christmas and the National Treasury Management Agency (NMTA) is to be the ringmaster of the exercise.
Five commissioners are to be appointed who will oversee the process, by setting the investment agenda, deciding the mandates and then selecting the external managers.
The National Pension Reserve Fund will be as the country’s largest pot of assets, to be used ultimately to meet part of the cost of civil service pensions, unfunded up to now, and to help fund part of the social security first pillar pensions later on.
“Politically, it could be very difficult for the commissioners to hold a significant slice of the equities of Irish companies, if there was a takeover bid for one of the major banks or key Irish groups,” says one Dublin based asset manager. Another observes: “It is definitely not going to be a bonanza for the Irish equity market.”
If it turns out that the Irish component is non-existent or pretty minimal, the Irish managers will go into the selection process on a level basis with major international managers, who are already hovering in the wings.
“Everyone will have the opportunity to present their wares, but we know we will be up against the big international companies with the big brand names and marketing prowess,” points out another Dublin manager.
Much may depend on what investment strategy the commissioners go for. If there is a heavy indexed component, there are now Irish managers with passive capabilities. One commentator sees this as a potential way out for the commissioners. There could be public misunderstanding if a reasonable slice was not given to Irish managers, so giving the passive element to them would leave the commissioners free to go where they wished for the specialist mandates, argues one pundit. “My suspicion is that Irish groups won’t see an awful lot of it on the active side.”
But the commissioners are on something of a hiding to nothing. If they give most of the active portion, assuming there is some, to Irish managers, they may lose credibility as to the fairness of the process. If they award it all outside to non domestic players, they are also passing an almighty vote of no confidence in the Irish managers and provide a signal to local institutional investors that they too had better look further afield than they would have otherwise. Irish asset managers believe they deserve a better fate than that, after all they have achieved.
The industry had been through a tough time 12 or 18 months ago but the equity market has had a good year. Performance has improved for some of the major players, there is less angst about the euro-transition and, most importantly, about the impact this was having on the future of a number of managers who were in play in 1999. Gavin Caldwell, chief executive officer of KBC Asset Management in Dublin, the former UBIM, Ireland’s number three ranking institutional manager with e9bn in assets, outlines the destinies that might have been theirs had they not agreed the deal with one of Belgium’s largest financial groups. Formerly as a subsidiary of an UK clearing bank with other asset managers, it would have been impossible to expand the business outside Ireland. “We could have gone the MBO route, but there was no leverage in that for us,” he says.
The realistic choices were two, he reckons. “They were between a US group to help them develop a European strategy, or a European bank, who would see us as having the culture and experience to work within the more structured pension markets of the Anglo Saxon world.”
The first job is to protect and develop the 20% share of the Irish market with 300 pension fund clients and 100 charities. “We now have to go for the international flank and export those products which are capable of being sold elsewhere. You can only get to such a point in the Irish market” The Irish manager’s performance numbers show that its EAFE product is suitable for the US market and also their overseas equities total returns have showed up well in the UK surveys. “We are recruiting in the UK and looking at the best way to distribute in the US. We also aim to work with KBC Asset Management in Belgium become better known in a number of European countries.”
The ESB Fund Managers found its new home and name, Aberdeen Ireland, within the UK’s Aberdeen Asset Management Group where it looks after Ir£2.5bn assets, including those managed for life insurer Scottish Provident and portion of the ESB pension fund. “ We manage the Irish equity assets here and all the bonds for domestic clients, while Aberdeen handles the overseas equities in London,” says Michael Phelan, chief executive officer at Aberdeen Ireland in Dublin.
The group is gearing up on the institutional side in the UK and wants to build on the established pensions fund base in Ireland. “We are working on a co-ordinated marketing programme, and we expect to win additional funds by year-end,” he says. The aim is to hit both the unitised and segregated market with a balanced product.
The third group to come through is Hibernian Investment Managers, which has seen its assets under management jump from £1.5bn to over £3.5bn, as a result of the local fall out of the merger in the UK of Commercial Union and Norwich Union to form CGNU. In addition, the group poached Pramit Ghose, as chief executive and investment officer, from Friends First in Dublin. Ghose has just repeated a coup he achieved when at Friends First in persuading the UK management to pass back to Dublin the non-Irish assets. In this case as from this year a further Ir£1bn plus will be “repatriated” to Dublin. This will bring the assets there to around Ir£5bn, giving Hibernian credibility in asset terms, but requiring Ghose to repeat another trick from his Friends First repertoire, that of increasing the third party assets under management – the figure was at 40% when he left his former employer, at Hibernian the proportion is less than 5% in third party mandates. “We are targeting the institutional market and we already have won some mandates.”
Hibernian has a wide range of specialist, sector and indexed funds, as well as a balanced product. “We hope to get our fair share of the £20m or so balanced mandate market. If our performance is good we could double external funds managed in a couple of years,” claims Ghose. The median pension fund size in Ireland is in the Ir£10-50m range, according to Irish Association of Pension Funds’ figures.
That these three managers appear to have secured their futures and reaffirmed faith in the marketplace, it does not mean that everyone in the business is out of the woods.
As Caldwell of KBC points out once the Irish equity component within mandates reduces “it begs the question of what they are doing here, unless they are doing international asset management.” He adds: “I am not pessimistic, but it is going to be tough, and probably only a few will make it through as major players here in the future.”
Further market consolidation are seen by Phelan. “Once Irish equities are less important in an overall portfolio context, it naturally follows that the trend will be to include more overseas/Euro-zone equities. It poses the question whether smaller houses can compete and win business against the larger house. Overall I expect the level of competition to increase from overseas fund management houses and that the impact will be negative for the Irish managers unless they adjust quickly in terms of committing additional resources to the new competitive environment”
What seems very uncertain is the rate at which the Irish component is reducing in pension portfolios. An Irish Association of Pension Funds survey found the proportion was predicted to decline to 15% for DB (defined benefit) schemes by end 2003.
Paul O’Faherty of Mercer’s investment consulting practice in Dublin points out that pension funds have reacted in different ways. Some sold out of Irish stocks in 1999, others are sticking with the peer group, while a number have a programme as to where they want to be in a few years. Corporate actions could result in major stocks disappearing over the next few years. “So the transition problem might be solved by the companies not just being there any longer,” says O’Faherty. But with the domestic bias within portfolios, he thinks that perhaps the weighting for Irish equities may get to 5% and never go below this.
With the arrival of the euro, which triggered the Irish equities exodus, mandates have changed, he says, but not quite in the way expected. “We thought we would see Euroland and global ex-Euroland equities mandates emerging as part of typical specialist manager structures, but global ex-Euroland has proved exceptionally thin by way of product providers. Instead what we have seen has been Euroland equity mandates with an Irish bias and/or or transition plan combined with full global equity mandates with a tilt away from Euroland.”
O’Farherty reckons that, while Irish managers may have for the time being a strong franchise in relation to thse specialist Euroland mandates, other trends are presenting new challenges to them. “The market generally is starting to move away from the balanced active model, where they had a structural competitive advantage because of its traditionally high Irish asset bias, towards new approaches including balanced passive (consensus), pure indexation and specialist management.”
Larger pension funds and some multinationals are in the vanguard of the changes that are happenning “Changes that we thought 18 months ago would not appear until 2002 or 2003 are happening on the ground now.” The euro has obviously been a major catalyst but also O’Faherty cites as contributory factors the emergence of tools such as asset liability modelling and style analysis as well as some disillusionment The arrrival of the specialist mandate in particular is opening up the market in a significant way, he says. “The non-domestic players can challenge the Irish managers in this area.”
In the IAPF survey among DB funds with a total of Ir£17bn of assets, active balanced accounted for 70%, active specialist 16% and passive 14%, during 2000. The survey commented on the move by the larger funds to specialist and passive management.
O’Faherty says Mercer handled some Ir£2.7bn in manager searches in 2000, which could account for 15% or more of the available pensions market. “This is a measure of how the market is evolving,” he says. But perhaps more significant in terms of the active passive, specialist debate is the fact that up to Ir£6bn in global custody searches were also undertaken by the firm last year for clients.
Bank of Ireland Asset Management, the country’s largest manager, is in the thick of the specialist swing. “This is confined to the larger funds, say over Ir£100m in assets,” says Tom Finlay, head of Irish institutional business. Referring to core satellite strategies, he queries the number of funds with assets of Ir£500m for which these might be suitable for.
But specialisation can pose a problem for existing balanced managers, he points out. “As a strong equity manager, you can end up with a different mandate from the balanced one you had and with a smaller amount of assets as well. Even if you are good in another asset class, such as fixed income, clients are unlikely to hire you for two headings if they go specialist.”
Over 60% of BIAM’s assets under management are for overseas clients mainly in specialist equity mandates. “We find we are bringing our specialist international products back home.”
On the domestic front, the group’s balanced product has performed better in 2000 than in previous years. “We are more bullish and have picked up some new business recently, though we will be net losers over the year,” says Finlay. The work it has done in client communication and internet service delivery will underpin the improved figures.
Irish Life is one of the established players which has benefited from the indexing trend, particularly for its balanced passive consensus approach. Gerry Keenan business development director says: “Within the institutional end of the market our market share is 70%.” The group’s total indexed funds stand at 34.2bn out of institutional assets of around 39bn.
He also points to the attack on the balanced product. “This is now under attack from both indexation and the specialists providers. We are mirroring the trend in the UK as essentially trustees are trying to find the most efficient way of generating returns within an acceptable level of risk,” says Keenan. Irish Life has also introduced a manager of manager concept, covering the three segments of the market, indexed, balanced active and specialist, giving access to external managers. “Clients can mix these in whatever way they want.”
Montgomery Oppenheim chief executive Paul Montgomery says that last year was another good year for the firm and he sees good opportunities for their balanced product with its active growth approach. “The market is beginning to define itself for the first time in risk profiles.” So the move to consensus has provided the company with the opportunity to differentiate itself in style terms, while it is able through its range of funds to meet specialist needs. “We see ourselves as being able to offer investors a choice. With the move to DC choice is becoming more prevalent in the market.”
AIB Investment Managers with 314bn institutional assets managed out of Dublin is the second largest player in the pensions and charities market. “About 65% of our assets are for pension funds,” says Tony Gargan, head of pensions marketing at AIB Investment Managers in Dublin.
The first Irish asset manager to become GIPS compliant, AIBIM believes in the balanced active product. “Our main product is balanced active. We have built up our sectoral expertise, which allows us both the full active and specialist services for both geographic and sector,” Gargan says. But the group does not see any contradiction in holding a proportion in passive as well.
He adds: “Only a certain number of schemes can go the specialist route at this point because, below a critical size, specialist approach costs too much.”
Gargan say that AIBIM was pleased with the wins last year. “We were awarded a lot of new business last year and have done well over the past three years. Most managers have done well in performance terms in 2000 and you need a significant existing player to have a sustained period of under performance in DB plans for mandates to appear.” A trigger is needed, he says, such as the triennial valuation of a fund, a shift to core satellite or style differentiation. He predicts a smaller flow of DB mandates this year but sees DC mandates continuing to emerge apace.