November 2009

COMPANY PROFILE: 'what a good crisis'

Senior executives at Martin Currie expect 2009 to be a profitable year for the firm. Fiona Rintoul finds the Scottish fund manager cut bonuses to help control costs...
willie_watt.jpgHappy is the asset management chief executive who can look you in the eye and cheerfully say: “We had a good crisis.” Such a man is Willie Watt (pictured), CEO of Martin Currie Investment Management, the independent asset manager based in Edinburgh.

Martin Currie styles itself as a ‘big boutique’ and runs long-only and hedge funds. Employee-owned, no individual is permitted to have a holding of more than 5%. This proved to be an asset when trouble hit global markets last year.

“Our business model proved itself,” he says. “We weren’t worried about what some subsidiary had done. We didn’t have some bunch of guys in London or New York telling us what to do.”

A diversified client base also helped deal with the crisis because Asia and Australia were less affected than other regions.

“We’ve tried to build a global client base on the basis that they’ll behave in different ways,” says Andy Sowerby, Martin Currie’s joint head of client services, sales and marketing. “As we’re focused entirely on equity management the desire for a globalised client base is key.”

Attention to the company structure has never been more pronounced than at present and downloads of the company’s report and accounts have gone up 600 times since the start of the crisis. “People are looking at the stability of the company,” says Sowerby.

The firm is situated at the foot of Edinburgh’s forbidding Castle Rock, close to other Scottish fund managers – and this is important. Although just 13% of Martin Currie’s assets are invested in the UK and one-third of its clients are in the UK, with the exception of China, all of Martin Currie’s investment management is carried out from these offices.

Martin Currie is at the very active end of the spectrum, and Edinburgh has always been accommodating for managers of
that ilk.

“Edinburgh is the fourth largest centre in the world for equity investment,” says Watt. “The big life companies are here, and so all the CEOs have to come to Edinburgh. When they’re here they’re here, and they meet with independents like us.”

The exception that proves the rule – the China team – is in Shanghai because brokerage coverage is very poor, says Watt.

Otherwise, Martin Currie’s investment process is a question of judgement rather than information and can be conducted from Edinburgh. Of course, the Scottish capital’s reputation as a centre of canny financial excellence took a few knocks during the financial crisis.

“Clearly, mistakes were made in the [Scottish] banking fraternity, but mistakes were made by banks in a lot of other places as well, including major financial centres such as London, Zurich and New York,” Watt says. “I don’t see that Edinburgh’s position in our industry has been impacted negatively at all. In some ways, in terms of compliance, talent and back office staff, the crisis has made it easier for us to grow in Edinburgh than it would have been before.”

Recently, Martin Currie, in common with many other firms, has not been growing. The firm’s assets under management (AuM) plunged from £15.7bn (€21.3bn) at the end of 2007 to £9.9bn at the end of 2008. There were further outflows in the first quarter of 2009 but, crucially, the firm remained profitable and money has since started to come back. Indeed, despite the dramatic falls in AuM in 2008, profits rose in sterling terms to £32.6m from £25.6m the previous year.

“2008 was a bit above trend and 2007 was a bit below trend, so it’s slightly flattering, but it reflects the fact that it’s a very profitable business that we run,” explains Watt. “We expect that 2009 will be substantially profitable too, so we’ve been able to maintain our profitability through the downturn. We obviously don’t know exactly what the numbers for 2009 will be, but we know it will be substantially profitable.”

Maintained profitability is partly the result of an exercise in cost control. The main weapon in the battle to control costs was reduced bonuses.

“The point of variable compensation is that it should be variable,” says Sowerby. “We used the variability of the bonus schemes and by bringing them down as a collective we were able to control the cost base.”

That allowed Martin Currie to maintain the complete fabric of the firm throughout the crisis, giving clients much-needed confidence. There weren’t many job losses at the firm during the crisis. Although some people left, unusually there was also a number of new hires. The client proposition remained sacrosanct and the firm continued to invest on that basis.

“We stuck to our knitting in our investment approach,” says Watt. “That’s an area where you have to have a degree of constancy and keep your nerve, and I think we did that. In some areas we expanded quite effectively.”

Meanwhile, the money that flowed out of Martin Currie in the last quarter of 2008 and the first quarter of 2009 has started to come back. AuM has been growing since mid-March and is now at the £12.5bn mark. The redemptions made in the crisis were often forced because liquidity was an issue and Martin Currie’s equity-only funds remained liquid, and many clients were eager to reinvest as soon as was practical.

“In some areas where the pullback was deepest the bounce has also been strongest,” says Watt. “Europe was an area where there was quite a pullback, but they were pretty decisive in putting the money back in.”

The company also sees the current reinvestment by clients as a vindication of its strategy in the crisis of making it as easy as possible for clients to redeem when they needed to. In many cases, the firm made its funds more liquid in order to facilitate redemptions.

As to the future, the firm is optimistic.

Sowerby says: “We are very aware that there’s been quite a lot of beta businesses expanding since the end of the crisis, but we see ourselves as pretty compatible with beta-based business because we’re at the highly active end of alpha generation,” he says. “When people go passive we tend to do very well out of that because they then have highly active mandates. It’s the people in the middle that have more of an issue.”

Meanwhile, new offices in Australia and Singapore will help to build business in the Asia Pacific region. Although Martin Currie has a long history in the Far East and some 50% of its assets are invested there, its client base in Asia and Australia currently accounts for just 5% of assets.

But as a provider of several hedge funds, the firm is affected by the various regulatory measures aimed at the industry, such as tax changes in the UK which are forecast to create an exodus of managers, and the Alternative Investment Funds Managers (AIFM)  Directive in Europe. Watt says: “AIFM is a piece of draft legislation that we think could be improved upon. But our view is that we have to live with that.”

And on the predicted exodus of UK hedge funds, he adds: “We’re not about to jump ship to Switzerland just because we don’t like a piece of legislation.”

©2009 Funds Europe

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