US managers keep European markets under seige
Rachel Oliver examines the varying fortunes of US groups crossing the Atlantic
The Americans are here. And they come bearing gifts. A wealth of specialist knowledge, quantitative products, branded funds, US equity expertise and several years of DC experience are slowly seeping into the European pensions marketplace. Note the word slowly - as one manager answered when asked about the pace of business this side of the pond, glacial" was deemed a more appropriate desription.
In a market apparently brimming with new opportunities and with the ever possible 'DC Europe' carrot being dangled in front of US asset managers' noses, it is no wonder when you look at who is present in Europe, you are more likely to ask yourself, well who isn't? Global players such as JP Morgan, State Street, Citibank, Fidelity, Capital International, Goldman Sachs and First Quadrant are now well established names in the European marketplace holding around $70bn in European pensions assets between them. Giants in the US, but perhaps lesser well known in Europe are the likes of Northern Trust, Barr Rosenberg, Oppenheim-er Capital and Putnam who are also making inroads. One of the latest additions to the US invasion is Warburg Pincus Counsellors who is targeting the UK, Netherlands and Belgium with global fixed income and emerging markets products. But despite an admirable client base including GE, AT&T and IBM showing it as a worthy competitor, Warburg may be confronted by a problem common to US managers abroad; that progress to date has been stifled by limited markets, established local providers and perhaps a case of too many managers, not enough clients. The resounding call from the US asset management industry is that Europe has been and still is a very difficult nut to crack.
"Accessing any new market is never easy," admits Jenny Paterson, managing director of Barr Rosenberg Eur-ope which currently holds around $500m in combined European pensions assets. "You have to persist. If you have a valid message and the product works and is relevant to the people you are speaking to, it is a matter of persisting and gradually gaining a toe hold. Getting the first client is the most difficult. Subsequent client gains do come easier."
So, what are the Americans bringing to the party? Quite simply, says Charles Anderson, managing director of London-based institutional investment marketing agency, Cygnet Management Services, it is "the complete and detailed knowledge of the largest investment market in equities in the world." Discipline, analysis, structured, in-house research and high tech are also terms associated with US managers.
"Most US firms will approach their investment techniques in a very structured, disciplined way" says Danny Sharp, vice president, investment services at Northern Trust. "Very often approaching it from the bottom up, by analysing individual securities or issuers or companies, looking for companies they can put together to form the overall portfolio where they think those companies will either grow rapidly or produce high profits etc. But they will analyse it down to that level."
While he admits the UK form of investment management, though slightly more creative, has been successful, he adds: "You will see that the US managers measure themselves in a different way and because of that you are more assured that you are going to get consistent return."
US equity knowledge in particular seems to be a common selling point and according to many European pension funds US managers will only really be considered, should the fund diversify into US assets. Independence Investment Associates has made good progress gained from their US equity offerings and currently holds "hundreds of millions" of dollars in pensions assets. However, the market as its stands in Europe does not offer endless opportunities for US equity mandates as Paterson points out.
"They're aren't that many purely US equity searches" she says adding, "In Scandinavia, our first client there is for a global equity brief and it's their first international equity exposure as op-posed to one of our more celebrated clients in the Netherlands, ABP, who have vast experience of equity investment overseas and there it is a single country mandate."
However, while it is very rare for a US manager to be called upon for a European equity or bond mandate, Fiduciary Trust who manages SFr2bn from Geneva, "90%" of which is pensions assets, is an example of a manager who has made the momentous leap.
From an original US small cap mandate, the pension fund client asked Fiduciary if it could do the same for European small caps. Fiduciary now "expects to be involved" in a number of searches for European small caps, as a result of the first appointment.
Maryland-based T Rowe Price is currently targeting the small to mid cap sector of the global equity market, an area Todd Rupert, marketing director thinks is gaining popularity in Europe. "On the continent there is an in-creased demand for global equities and they're being a bit more receptive seeing since its new money allocated to the area, as opposed to some minor allocation changes. Given the underfunded nature of many of the pension plans, they're looking for performance, so they are looking for asset classes in the US that have attractive alpha over time and that is really more on the growth end of the spectrum, small, mid cap even large cap growth."
Global fixed income is another area where the Americans are claiming ground. Fischer Francis Trees & Watts has specialised in this asset class with "an institutional focus" and its success in Europe has stemmed from "being in the right place at the right time" says managing director, Liaq-uat Ahamed. To date, its client base includes three pension funds in the UK, with 13 pension fund clients spread across Austria, Belgium, France, Germany, Holland, Sweden and Switzerland, with combined assets of just under $2bn.
"We got in at an early stage in discussing with them what was the right benchmark, what was the most appropriate way of having a global portfolio for a European pension fund" he says.
Not every venture, however, has been a runaway success. Money market funds, for example, though popular on the retail side of the market, has to date found limited success in the institutional arena, even though, according to Northern Trust's Sharp, it is an opportunity most pension funds should be jumping at. "Clients should be flocking to that," says Sharp, "It's an absolute no-lose situation, but they are coming to it very slowly. They really are not quite sure about it." While the likes of Fidelity, Citibank and Chase are offering the funds, in this case, economies of scale, established brand names and offices on the ground are holding little weight. Europe's pension fund industry simply is not that interested.
Reverse engineering techniques, utilised by T Rowe Price is another case of 'great product, bad seller' with the take up in Europe to date set at "zero". The technique is basically utilised in constructing portfolios based on the best of the best performers in that asset class - ideally designed for those who do not want to risk active management but are not satisfied with index tracker vehicles.
"It's a difficult product to explain" says Rupert, "And you need someone with a quantitative grasp who can understand what we are doing. And we just haven't seen as much interest in Europe as we have in the States."
Quantitative techniques, a popular import may impress in terms of efficiency, structured processes and a higher likelihood of consistent re-sults, in comparison to many UK managers' 'eclectic' approach, but there is the danger of over-quantifying, warns Charles Nichols, vice president at Independence. "Black box quantitative approaches have limited appeal" says Nichols. "The application of quantitative methodology and tools is increasingly appreciated but I think there if there is too much black box magic then it is not appreciated."
Rupert agrees with the limited interest in quantitative techniques. "I have spoken with people about it, but I have found that the greatest interest is in the 'give me the highest alpha you can' and that's active management."
Oppenheimer have found the market quite difficult in respect to low demand for specialist services and is in the process of running forums for its economic value-added product, a tool which identifies a company's true economic profit, to gather interest in Europe (See page 31).
Surprisingly, the UK market has proved the most difficult out of all the funded European pensions markets to penetrate with the tendency towards balanced management hampering most attempts by US managers to offer their specialist services. Not only that, but there is a feeling within the industry that investment consultants biases towards UK managers compound the problem tenfold. US managers have prided themselves on their marketing techniques direct to the pension client in the States. But they are finding the consultants in the UK are acting more as a buffer than as an introductory vehicle.
Sharp cites the 1995 Pension Re-form Act as one of the sources of the problem. "One of the problems of the Act is that it makes trustees personally liable for the decisions they take on behalf of the pension funds." he says. "One of the knock-on effects of that is that trustees will not get out of bed in the morning unless their investment consultant tells them how to do it."
As a result the asset management industry feels the consultant industry in the UK has now become "all powerful", tending to promote the services of the big five managers in the UK: Gartmore, Schroders, PDFM, Morgan Grenfell and Mercury Asset Management. "That makes it very difficult for specialist providers, whether they are UK or US specialists," says Sharp.
Continental Europe appears to be the prime hunting ground for the time being and Fischer, Francis, Trees & Watts' Ahamed has found the clients to be "very receptive".
"I think there has been a major change in the European environment," he says, "as you have a whole group of people well-educated in finance and have an understanding of modern portfolio management techniques at the decision making level in a lot of European institutions."
But US managers need to be patient, for while Europe offers promise it is notorious for its insular thinking when it comes to accepting outsiders. And even though the US managers can offer a specialism niche not yet cornered by their European counterparts, the clients themselves have to come around to the same way of thinking before their investment approach can match the products on offer. Some already have, such as pension giant ABP, Belgian medical scheme, Caisse de Prévoyance de Médecin and German fund Hoechst (see panels) but it can be a painfully slow process and often the hardest task is the initial introduction as T Rowe Price's Rupert concludes: "In many cases while there is the drive for better performance there is a slow movement toward the acceptability of specialist mandates" he says, adding "as more and more prominent organisations do it, it will catch steam. But how you do it is first trying to find someone who is receptive to listening to the concept and then taking it from there. But many organisations do turn a deaf ear." IPE"