Scottish asset managers have always had to look beyond their own national market for their business. South of the border has historically been the major market for the managers from Edinburgh and Glasgow, but some have fished successfully further afield, particularly in North America.
Now with the European markets opening up, both retail and institutional, canny Scots are turning there. That the occupational pensions market on the continent alone is estimated to grow from E3.5trn currently to some E17trn by 2020 means that some very shrewd eyes are focusing in on these developments. And as the needs of the European investors moves from their traditional bonds towards equities, so Scottish managers see a broadening of the opportunities for them.
Some managers are already fully aware of the opportunities and are determined to make the most of the opening door in Europe, while others are less sure about crossing the continental threshold. Standard Life Investments is one Edinburgh giant, with assets of E135bn, ready to wrest what business it can there. Heiko Dahse, investment director of Standard Life Investments’ European development team says: “We want to bring our expertise in running pensions money in the UK into the continent.”
The group head of business development, James Aird, points out it is early days for them with just a small team started last autumn to market products into the continent. “Now we have hired Neil McPherson from Citibank to head European business development. The scale of opportunity for us is very significant.”
As part of Standard Life, one of Europe’s major life insurers with operations in Germany, Austria and Switzerland, Standard Life Investments believes it can leverage off the successful activities there. “We see opportunities in the Netherlands, Italy and perhaps Scandinavia for us,” says Aird.
The initial focus is very much on the institutional market, but Standard Life Investments will also be looking out to see what is happening on the retail front, he says. “In the short term much of these retail opportunities are in effect wholesale in nature anyway, being very much about getting into the distribution pipeline, which is quite narrowly focused in a number of European countries.”
Just down the road, Scottish Widows Investment Partnership (SWIP), with assets of E130bn, is very much aware of the need to gain access to the distribution pipelines. As marketing director, Bob Lawson, points out: “For the last two years we have been building up our operations in Europe, particularly in those northern and southern markets that are growing most quickly, as these markets are more open to funds coming from external managers.” He refers to their alliance with Intervalore to extend its Scandinavian business and in Italy, where it has just signed a co-operation agreement with Cofiri to jointly pursue opportunities in the Italian institutional market. “We have a good presence in Switzerland and Spain and other long standing relationships in Italy.”
At independent manager, Martin Currie in Edinburgh, Allan Macleod, who heads up European business development, says of continental business: “We started from a pretty low base, when I joined last year, we had E250m from one client, now we have about E600m, having won E252m in the last three months and we’re pitching currently for about another E800m.” The activity has been mainly in Scandinavia, the Netherlands, Switzerland and Luxembourg for this medium sized manager with E10bn under management. “We are seeing more interest from Germany in recent months. But it’s a big market and with five or six centres it is a difficult one to cover, so we have made the decision not to target it pro-actively, but we have had a number of approaches from there.”
BlackRock is a relative newcomer to the Edinburgh scene, but has some high profile locals on the team, including managing director, Allan McKenzie, who sees real potential in Europe. “We did not have a marketing presence in Europe until about two years ago, and we now have clients there, so our success has been good, we are pleased with the progress we are making.”
Edinburgh is the US group’s international office for Europe and staff numbers have grown from 20 to 70, in two and a half years. “We see our European business as growing, but it will be slow,” says McKenzie.
But there are those players who do not see Europe as a high priority. At Aegon Asset Management Mike Craston, director of institutional business, says some money is run for European clients. They are building selectively in continental markets, such as Italy.“For us the institutional end of the market there would tend to be our focus and ultimately that would be of interest. But the key market for us at the moment is the UK.”
For Edinburgh Fund Managers, the question has been one of getting fully back into the UK market and “turning the tanker around” as the company recovers from a rough period. “Our aim is to become the preferred house in the UK equities institutional market. We think with the team we now have and the changes we have made to process this is certainly a possibility,” says Kevin Milne, institutional marketing manager of the E10.7bn (£7bn) managers.
At Glasgow-based Abbey National Asset Managers, director of institutional business, Vanessa James is adamant: “There is no plan in the short to medium term to be in Europe.” Yet she adds that the group could start doing some factfinding about the possibilities there. “But to say we would expect to get funds in from Europe or anywhere else for the next three years would be optimistic.”
“We have taken a little look at the US market,” James says, pointing to a phenomenon of the Scottish market, the success of local managers in the US. Edinburgh firm Baillie Gifford, with E35bn in assets. is certainly one of those which sees UK and US institutional business as its core market. Partner Nigel Morecroft says there are a number of institutional clients on the continent. “Europe we find pretty fragmented and quite slow to develop, but it is an area where would like to do more business, but we think we can take our time.” He believes that Europe will take time to develop a greater equity culture and institutional investment type culture. He reckons about 2% of assets are sourced there currently, but doubts that will grow proportionately more quickly than the US or the UK.
Even more exceptional is Walter Scott & Partners, the small Edinburgh operation, which sources most of its $4bn assets from North American clients. Says director Allan McFarlane: “We’re a very traditional Scottish company in that we export everything we do. But we’re not traditional in terms of Scottish managers as most of them export what they do south of the border – our client base is largely American and Canadian institutional clients.”
So could the firm look to Europe for business? “We have developed as a specialist global equity firm. What we’re doing in the US and Canada is catching the interest of some people in the Netherlands.” In due course, he says he could see the “the way the North American markets operate would be replicated in the Europe- and the signs are encouraging.” That clearly could be favourable for the firm’s product offering.
It is the specialist manager path that the European market is taking that the Scottish managers see as playing to their strengths, whether in bonds or equities. “The main equity strategies we’re managing for European clients at the moment are pan-European small-cap and pan-European large cap. We’re pretty specialist there,” says Lawson at SWIP. Macleod at Martin Currie concurs that the business is specialist: “It is mainly Japan and Asia where we are strong.”
At Standard Life Investments, the reckoning is that the shift from bonds towards equities will continue. “We want to provide pan-European equity products, but we’re very good in pan-European bonds and within bonds you will see a shift from government to corporate bonds,” says Heiko Dahse, investment director of the European development team.
But the managers are mindful too of the opportunities in alternatives within Europe. Dahse says continental pension funds have perhaps 1 to 2% in alternative assets currently – “this is likely to double over the next couple of years”. So Standard Life Investments is seeing a market for its 25-years of private equity expertise. “Another product we’re launching is a European property fund.” At SWIP, they have recently launched a pan-European SRI equity fund to the Swedish institutional marketplace.
Martin Currie has been attracting assets with its absolute return strategies, with a Japan and a UK product and an Asian launch due this summer. “We have built our hedge business up from scratch and we have set ourselves of a target of $1bn in hedge funds by 2004,” says Macleod. The firm has $200m in private equity and intends building on that too.
“We see Europe as the key area to go to.” Currently just 2% of business comes from the continent, he would like that to be 10 to 15% in five years’ time.
Another Edinburgh manager Scottish Value, with assets of £750m is best known for its hedge fund activities. “We have had our hedge fund in place since 1992 and had European institutional investors. We are pretty well known in Switzerland,” says Sam Batcharj, business development director. More recently, it has done well with a more traditional pan-European equity strategy, but only turned its attention seriously to the UK institutional market last year through a limited number of consultants. Offering a high alpha, stock-picking orientated product, he sees this as being of interest to continental investors, with the Dutch market as one that is likely to be more accessible. “Our next step naturally would be to look to Europe.”